The FTC has issued new rules requiring companies to report certain pharmaceutical patent licensing transactions under the Hart-Scott-Rodino Act (HSR). The rule will officially be in effect 30 days after publication in the Federal Register, which is imminent. Important for all, however, is the observation that HSR reporting may apply more broadly to patent licensing even outside the pharmaceutical industry.

The new rule expands HSR reporting requirements to encompass exclusive licenses for pharmaceutical patents, even without a transfer of ownership, and even where the patent holder retains rights of manufacture, or other co-rights. The FTC estimated an annual increase of 30 filings, where all chemical manufacturing HSR filings (of which pharma was a subset) numbered 75 in 2011. The leading pharmaceutical trade association said an increase of 50 percent in the number of filings is a "conservative" estimate.

The HSR Act has always required parties to report a merger or acquisition of companies or assets that meet certain threshold reporting requirements to the FTC and DOJ. The report allows the agencies to review sizeable acquisitions for potential anticompetitive effects, and to then clear it or move to block it.

Similarly, with patent acquisitions, there was little controversy regarding whether the HSR reporting requirements applied. Acquisition of a patent sensibly fell under HSR's requirements since the acquisition of valuable and important patent rights — even though an intangible asset — could result in significant effects in the competitive market. HSR's application to exclusive patent licenses, however, has proved less straightforward and becomes even more controversial when the license is less than a fully exclusive right to make, use and sell.

Thus, pharmaceutical companies licensing the exclusive right to sell and use, but retaining the right to manufacture, typically could conclude that no HSR filing was necessary based on a brief review of the patent license. Now they know that if the other HSR thresholds are met, a filing will be required.

In proposing and adopting the rule, the FTC took the position that pharmaceutical patents in particular require additional scrutiny, and that HSR reporting needed expansion to cover such transactions. The fact of the FTC's targeting only the pharmaceutical industry has not escaped notice. Most visibly, the powerful trade group Pharmaceutical Research and Manufacturers of America — or PhRMA — rejected the need for the expanded reporting requirements and challenged the FTC's authority to expand the rules for a single industry. PhRMA called the adoption of the rule "industry sector discrimination" in its public comments.

But the FTC supports the rule, arguing that the "unique" elements and incentives in the pharmaceutical industry necessitated the attention given to the industry under the new rule. From its perspective, licensing deals that reserve manufacturing for the patent holder, but exclusively license use and sale, are essentially economically indistinguishable from an acquisition transaction otherwise covered under HSR. For similar reasons, an exclusive license that retains co-rights for the patent holder would not remove the transaction from the reporting requirements under the new rule. Combine this with a growing concern regarding competition in the pharmaceutical industry in general, and the recent holding by the Supreme Court that reverse-payment settlements may violate the antitrust laws, and a picture of increasing antitrust scrutiny of the industry emerges.

Notably, the FTC indicated in its submissions supporting the rule that other patent license transactions may be subject to HSR reporting:

• Although the rule is limited to the pharmaceutical industry, to the extent that other industries engage in similar exclusive licensing transactions, such transactions remain potentially reportable events under the Act and existing rules implementing the Act. Parties dealing with the transfer of exclusive rights to a patent or part of a patent in other industries should consult with Premerger Notification Office (NPO) staff to determine whether the arrangement at issue is reportable under the Act and Rules. The Commission will continue to assess the appropriateness of a rule for other industries.

In other words, any doubt about the application of HSR to a patent licensing transaction involving exclusive rights or co-rights will need a double-take from antitrust counsel, even without an industry specific rule.