Category: Intellectual Property

Domain Names and the First Amendment: The Latest Word

The National Law Review recently featured an article regarding Domain Names written by Tim Hyland of Ifrah Law:

 

The intersection of domain names and the First Amendment is not new. Indeed, in the early days of the domain name system, courts considered the issue of whether a domain name registrar could prohibit the registration of domain names on the basis of content – for instance, domain names containing profanities.  See Nat’l A-1 Advertising, Inc. v. Network Solutions, Inc., 121 F. Supp. 2d 156 (D.N.H. 2000); Seven Words LLC v. Network Solutions, Inc., 260 F.3d 1089 (9th Cir. 2001). However, the U.S. Court of Appeals for the Fifth Circuit recently was confronted, in Gibson v. Texas Dep’t of Insurance, with a new twist on the First Amendment as it applies to domain names: whether a particular domain name is pure “commercial speech” (entitled to only limited First Amendment protection) or “expressive speech” (entitled to more extensive protection).

The Texas Labor Code prohibits the use together of the words and phrases “Texas,” and “Workers Compensation,” or similar abbreviations. Nonetheless, Gibson, a workers compensation lawyer in Texas, registered the domain name texasworkerscomplaw.com. On the associated website, Gibson discusses matters relating to Texas workers compensation law and, of course, advertises his law practice. The Texas Department of Insurance took offense to Gibson’s domain name, and sent Gibson a cease and desist letter. Gibson, being a lawyer, sued in federal court, alleging that the Texas Labor Code restrictions violated his constitutional rights.

The Fifth Circuit, in an interesting opinion, addressed the commercial speech/pure speech dichotomy inherent in domain names used by commercial enterprises, but artfully dodged the question of whether the domain name was in fact commercial speech. Instead, the court first analyzed whether, if the domain name was in fact commercial speech (which can under some circumstances be restricted), it was the sort of commercial speech that the Texas Department of Insurance could restrict.

The court found, correctly, that commercial speech can be restricted only if it is “inherently likely to deceive.” The state argued that Gibson’s domain name implied a connection with or approval of the state. The Fifth Circuit dispensed with the state’s argument, noting that since there was nothing to suggest that texasworkerscomplaw.com could not be viewed in a non-deceptive fashion (a truism), the state could not restrict the use of the domain name as commercial speech.

There is a second exception allowing a restriction on commercial speech: A state may regulate non-deceptive commercial speech if the restriction “advances a substantial state interest” and is narrowly tailored to serve that interest. On this issue, the Fifth Circuit sent the case back to the federal district court to develop a factual record. It seems unlikely that the Texas Department of Insurance will prevail in the end, as the statute on which its objection is based is vastly overreaching, and would prohibit anyone providing services relating to workers compensation in Texas from registering domain names that accurately describe what they do. For instance, a physician who performs workers compensation examinations could not register texasworkerscompdoc.com (as of this writing, this domain name is available for the taking).

Obviously, such a domain name is not misleading, and there is no legitimate basis upon which the state can restrict it. Domain names are often a form of speech. Just because they are a relatively new format of expression does not change this fact and give the government a basis to attempt to restrict their use.

© 2012 Ifrah PLLC

Is “Air Force 1” Dismissal Grounded?

On November 7, the Unites States Supreme Court heard oral argument in Already, LLC d/b/a Yums v. Nike, Inc., a trademark infringement case, in which Nike sued Already for infringement of the design of Nike’s Air Force 1 shoe.  The case has become “one to watch” because it poses the following question:  “Whether a federal district court is divested of Article III jurisdiction over a party’s challenge to the validity of a federally registered trademark if the registrant promises not to assert its mark against the party’s then-existing commercial activities.”

In the underlying district court case, Nike asserted its common law trademark rights in and ownership of a U.S. Patent and Trademark Office Registration (No. 3,451,905) for the design of the Air Force 1 shoe (the “Air Force 1 Mark”).  Nike’s complaint asserted that Already sold footwear “bearing a confusingly similar imitation” of the Air Force 1 Mark, and asserted claims against Already for trademark infringement, unfair competition and trademark dilution under the federalLanham Act and New York State law.  Already counterclaimed for a declaratory judgment that Nike’s asserted mark was not a valid trademark and that Already did not infringe.  Already also sought an order cancelling Nike’s federal trademark registration for the Air Force 1 Mark.

Several months later, Nike delivered to Already a written covenant not to sue in which Nike voluntarily agreed not to assert any claims against Already relating to the Air Force 1 Mark based on the appearance of Already’s “current and/or previous footwear product designs, and any colorable imitations thereof, regardless of whether that footwear is produced, distributed, offered for sale…before or after the Effective Date of th[e] Convenant.”  According to the covenant note to sue, Nike “recently learned that Already’s actions complained of in the Complaint no longer infringe or dilute the NIKE Mark at a level sufficient to warrant the substantial time and expense of continued litigation and NIKE wishes to conserve resources relating to its enforcement of the NIKE Mark…”

Nike then moved to dismiss its complaint, as well as Already’s counterclaim.  According to Nike, its delivery of the covenant not to sue, as well as its request to dismiss the complaint, removed any actual case or controversy concerning the subject of Already’s counterclaim, and divested the district court of subject matter jurisdiction to entertain the declaratory judgment counterclaim.

Already disagreed, and argued that the district court retained jurisdiction over the counterclaim.  According to Already’s response to Nike’s motion to dismiss, a justiciable controversy existed because the existence of Nike’s federal trademark registration was “continuing to interfere with Yums’ [Already’s] ability to carry on a lawful business in making and selling YUMS-branded shoes.”

After considering the scope of Nike’s covenant not to sue and the improbability of future claims of infringement, the district court agreed that Nike’s covenant did extinguish any justiciable controversy.  The district court further found that Already’s request for an order of cancellation of Nike’s federal trademark registration was not an independent basis for the court’s continued subject matter jurisdiction.

The Second Circuit affirmed the judgment of the district court.

The Supreme Court granted Already’s petition for a writ of certiorari on June 25, 2012.  The Supreme Court heard oral argument concerning the appeal on November 7.  A transcript is available here:  http://www.supremecourt.gov/oral_arguments/argument_transcripts/11-982.pdf

The Supreme Court is expected to issue its much anticipated decision by the end of June 2013, according to reports.

© Copyright 2012 Dickinson Wright PLLC

Abandonment and Revival of U.S. Patent Application

The National Law Review recently featured an article, Abandonment and Revival of U.S. Patent Application, written by Ivan T. Kirchev of Michael Best & Friedrich LLP:

 

The power to protect a company’s inventions with patents comes with the responsibility of seeing its patent applications the whole way through the Patent Office, from the initial filing to issuance and beyond.

The filing of a patent application begins a lengthy and sometimes harrowing dialogue with an examiner at the Patent and Trademark Office (PTO) who is responsible for making sure that the application’s invention is truly deserving of patent protection. If (or in reality when) the examiner does not agree that the claimed invention is patentable, the examiner will send the applicant a series of “office actions” rejecting the application or demanding certain amendments to the application. With each office action comes a turn of the hourglass, giving the applicant a definite window of time (usually up to six months) to submit a response. If the applicant’s reply satisfies the examiner, the examiner issues a “notice of allowance,” indicating that the applicant’s invention will be issued as a patent.

However, if the applicant makes a wrong turn during prosecution, the application may become “abandoned” in the eyes of the PTO. When a patent application is abandoned, the patent application is dead and anyone can practice the invention described in the patent application. Once it becomes abandoned, the application requires special petition procedures and payment of fees to revive, if it can be revived at all. If it cannot be revived, the application will never issue as a patent.

An application can become abandoned in one of two ways. First, the applicant fails to respond to a particular PTO notice within a specified time during the prosecution of the application. For example, if the applicant fails to reply to an office action within the specified time period, or files an incomplete reply, or fails to do whatever it is that the examiner has requested before the hourglass runs out, then the application will become abandoned.

Second, a patent application can become abandoned by a formal, express abandonment, requested by the applicant. Express abandonment is not necessarily a bad thing and sometimes is actually a step in the right direction for a company. Because an abandoned unpublished application will never become available to the public, sometimes abandonment may be a strategic decision on the part of the applicant to keep the invention out of the public eye.

When the application becomes abandoned, the applicant will receive a notice from the PTO. At that point, the applicant can either ask for reconsideration if he or she disagrees with the PTO decision, or petition for revival. In order to petition the PTO for revival, the applicant must file a reply that includes; (1) the reply that was originally required before the missed deadline, (2) a statement or showing that abandonment was respectfully either unavoidable or unintentional, and (3) the necessary fee.

If the applicant claims that the abandonment was unavoidable, it must show the PTO that the entire delay in filing the required reply from the due date for the reply, until the filing of a grantable petition pursuant to this paragraph, was unavoidable. “The entire delay” means every single day from the missed deadline to the submission of the petition for revival; the showing must include documentary evidence to support the claim of unavoidability. What qualifies as “unavoidable delay” is determined on a case-by-case basis by the “reasonably prudent person” standard.

Generally, to justify revival on the grounds of unavoidability, an applicant must either show truly dire and uncontrollable circumstances, or reasonable actions that unexpectedly resulted in abandonment. Examples of justifiable unavoidability include the death of the prosecuting patent attorney, the constant moving and financial burden of an application for the medical treatment of cancer, or any reasonable interpretation of a rule. What will not qualify for unavoidable grounds of revival includes miscalculation of the filing deadline, unawareness or misunderstanding of the rules of patent prosecution, or conflicts with personal life. Therefore, businesses should carefully consider their decision to abandon a patent application intentionally (e.g. by deliberately not responding to an office action). Most likely, this type of action will lead to an abandoned application that can never be revived.

If the applicant claims that the abandonment was unintentional, it similarly must state that the entire delay was unintentional. But because a petition claiming unintentional abandonment must merely contain a statement stating as much, rather than a showing, petitions claiming unintentional abandonment are generally less burdensome than claiming unavoidable abandonment. The Manual of Patent Examining Procedure (MPEP) acknowledges as much, stating that the PTO relies on the applicant’s duty of candor and good faith to accept the statement that “the entire delay in filing the required reply from the due date for the reply until the filing of a grantable petition pursuant to 37 CFR 1.137(b) was unintentional” without requiring further information in the vast majority of petitions. Furthermore, the PTO’s reliance on the face value of this statement is enforced by the applicant’s obligation to inquire into the underlying facts and circumstances before providing the statement to the PTO.

However, if the application is revived based on this statement, but then after the patent issues facts arise showing that the statement was false, the entire patent family can be rendered unenforceable on the grounds on inequitable conduct. This situation may arise, for instance, in the discovery of correspondence from the patent attorney to the inventor or the patent examiner indicating an understanding that the patent application will become abandoned, followed by the patent application actually becoming abandoned.

If the application is revived in either case, the applicant must submit a terminal disclaimer to disclaim the length of time that the application was abandoned, and the term of the patent will be shortened accordingly.

Finally, although the America Invents Act (AIA) will impact a variety of patent prosecution issues as it goes into full effect by April of next year, the rules related to abandonment and revival will remain unaffected.

*Also contributing, J. Ryan Lawlis.

© MICHAEL BEST & FRIEDRICH LLP

Is Continued Employment Enough to Uphold Invention Assignment Agreements?

It is a common misconception that employers automatically own the rights to intellectual property created by their employees. Specifically for patents, the default is that an invention and any patents covering it belong to the inventor, unless an agreement is established to the contrary. Nonetheless, the absence of an agreement does not necessarily preclude an employer from claiming a right to an employee’s invention. In such situations, an employer may be entitled to a “shop right”1 to use an invention while the employee retains ownership. As a result of this counterintuitive and complicated framework, without a specific written agreement to partition rights, it can be challenging to ascertain employer-employee rights. This is particularly true when multiple inventors are involved, as is often the case in the corporate context.

As a remedy, employers have often required, as a condition of employment, that employees enter into written agreements requiring that any inventions (and other intellectual property) created as part of their job will be assigned to the employer. However, for any contract to be enforceable – including an intellectual property assignment – there generally needs to be a mutuality of consideration. That is, each party needs to get something out of the deal.

Because of this mutuality requirement, companies often struggle with whether simply providing the employee with continued employment is sufficient to support an intellectual property assignment contract.

Case Background

The United States Court of Appeals for the Federal Circuit recently confronted this issue in Preston v. Marathon Oil Company, 684 F.3d 1276 (Fed. Cir. 2012). The court held that no additional consideration beyond the continuation of at-will employment is required to support an employee’s assignment of inventions (and other intellectual property) to the employer.

In the case, Pennaco Energy, a subsidiary of Marathon Oil Company (collectively “Marathon”), hired Yale Preston as a relief pumper in Marathon’s coal bed methane well operation. Preston was hired as an employee at-will, and, consequently, either he or Marathon could terminate the employment relationship at any time for any reason without cause or liability.

After he was hired, Preston signed an agreement that, among other things, assigned all intellectual property rights to Marathon for anything he created related to Marathon’s business or that used Marathon’s confidential information or equipment during his employment. There was no separate or additional consideration for this contract beyond Preston’s continued employment.

During his employment, Preston worked on a baffle plate system used for methane gas extraction. Preston drafted conceptual drawings, met with Marathon’s engineers, engaged a third party on Marathon’s behalf to manufacture the baffle plates, and managed the installation of the baffle plates in Marathon’s gas wells.

While Marathon still employed Preston, the company began preparing a patent application for the baffle plate system. After Preston’s employment ended, Preston filed his own patent application for the baffle plate system. Both patent applications ultimately matured into issued patents, but Preston refused to assign his patent to Marathon.

Marathon brought suit against Preston in Wyoming state court, alleging that Preston had breached his employee agreement by refusing to assign the patent.

Preston, in turn, filed a complaint in the U.S. District Court for the District of Wyoming2, seeking a declaration that he was the sole inventor of the patent in his name, and alleging other related (and later rejected) claims. Marathon counterclaimed in the federal suit, seeking its own declaration that Preston had agreed to assign his rights in the patent to Marathon.

The federal district court found that Preston was the sole inventor of his potential invention, but that Preston was required to assign his interest to Marathon pursuant to his employment agreement. The district court also found that Preston, in failing to assign the patent to Marathon, was in breach of that contract.

Preston appealed to the United States Court of Appeals for the Federal Circuit, with the key issue being whether, under Wyoming law, continuing the employment of an existing at-will employee constitutes adequate consideration to support an agreement containing an invention assignment provision. The Federal Circuit certified this question to the Wyoming Supreme Court, which answered in the affirmative – that continuation of at-will employment is sufficient consideration under Wyoming law3. Preston v. Marathon Oil Co., 277 P.3d 81, 88 (Wyo. 2012). As a result, the Federal Circuit found that the employment agreement at issue was enforceable.

In addition, under the language of Preston’s employment agreement, the Federal Circuit held that even assuming Preston had “conceived” of the invention prior to joining Marathon, he could not establish that he had made the invention in any tangible way – known as “reducing to practice” – before the employment, which the agreement required for an invention to be excluded from the ambit of the assignment. The appeals court, therefore, rejected Preston’s claim that his individual patent should be exempt from the assignment clause, and affirmed the lower court’s finding that Preston had “little more than a vague idea” for the ultimate patented invention prior to his employment.

Lesson for Employers

At first blush, the implication of the Preston holding is to provide a federal-level, unified resolution to the question of whether continued employment constitutes sufficient consideration for an assignment contract. However, because this decision was rendered under Wyoming state law, it may not be capable of being universally applied. Nonetheless, the Federal Circuit’s opinion certainly provides guidance to employers concerning how best to structure intellectual property assignment agreements to ensure that their rights are protected.

1 The “shop right doctrine” holds that when an employee, during hours of employment, uses the employer’s materials and equipment to conceive and perfect an invention for which the employee obtains a patent, the employee must provide the employer with a non-exclusive right to practice the invention. See United States v. Dubilier Condenser Corp., 289 U.S. 178, 188, amended sub nom. United States v. Dubilier Condenser Corp., 289 U.S. 706 (1933).

2 The Wyoming state court action was then stayed pending the outcome of the federal case.

3 The Wyoming Supreme Court distinguished its previous ruling in Hopper v. All Pet Animal Clinic, Inc., 861 P.2d 531 (Wyo. 1993), which required separate consideration, other than continued at-will employment, for a non-compete agreement, noting “there is a fundamental difference between non-competition agreements and intellectual property assignment agreements,” and that the stability of the business community is served by not requiring additional consideration for intellectual property assignments. Preston, 277 P.3d at 87.

© 2012 Neal, Gerber & Eisenberg LLP

Holy Infringement!—Noncommercial Infringement Is Not Fair Use

The National Law Review recently featured an article regarding Infringement written by Hasan Rashid of McDermott Will & Emery:

 

Declining to find fair use for an archbishop’s educational, non-commercial use of copyrighted material the U.S. Court of Appeals for the First Circuit upheld a grant of summary judgment over numerous orthodox (and unorthodox) arguments. Society of the Holy Transfiguration Monastery, Inc., v. Archbishop Gregory of Denver, Colorado, Case No. 11-1262 (1st Cir., Aug. 2, 2012) (Torruella, J.) (Souter, J., sitting by designation).

In the mid-2000s, Archbishop Gregory (the Archbishop) posted seven works (that he helped to create), translated by the Society of the Holy Transfiguration Monastery (the Monastery), on his website.  After the Monastery brought suit for copyright infringement, the district court granted summary judgment of infringement by the Archbishop. On the Archbishop’s appeal, the First Circuit affirmed the district court on the infringement issue and declined to recognize a transfer of copyright by operation of law.

Of particular interest are the 1st Circuit’s fair use analysis and the non-commercial and educational nature of the infringement.  The 1st Circuit held that a lack of monetary gain does not warrant a finding of fair use.  It cited precedent holding that monetary gain is not the question, but rather whether copyrighted material is exploited without payment.  It also cited precedent for the proposition that, when considering the economic market, the court does not look at commercial gains or losses, but rather whether the infringement affects the value of the work and denies the copyright holder of a reward Congress intended him to have.  For these, among other reasons, the court rejected the Archbishop’s asserted fair use defense.

The Archbishop also attacked the Monastery’s ownership of a valid copyright because of transfer to another, general publication, and unoriginality.  First, the court rejected the transfer argument based on the Monastery’s disassociation from another because disassociation did not necessitate reversion.  Second, the court rejected the argument that the works were generally published, concluding rather that the targeted distribution to selected congregations is a limited publication, not a general publication.  Third, the court rejected the unoriginality argument because, although similar to other works, word usage and structure were different between them.

The court next turned to copying.  Conceding that there was actual copying, the Archbishop argued that he did not copy protected elements of the works.  The Court disagreed—concluding that the slight textual differences between the two were insufficient to avoid summary judgment.  The court also rejected the argument that, by definition, translations are not variable.  Applying the merger doctrine, however, the court found that the art of translation involves choosing among several expressions of ideas.

In addition to fair use, the court rejected three other defenses.  First, the Archbishop argued he did not directly infringe because he did not himself post the works on the internet.  The court found that he nevertheless owned the website and admitted to having authority and responsibility for the site’s contents.  Second, he argued that the Digital Millennium Copyright Act (DMCA) immunized him from infringement.  The court rejected this argument because he failed to plead it and because the argument was simply a remolding of his direct infringement defense.  Third, the Archbishop asserted copyright misuse.  Noting that the 1st Circuit does not recognize that defense, it declined to accept the offer to do so in this case.

Practice Note:  Be mindful when advising on the fair use defense for activities that are not for profit.  Such activities may nevertheless infringe.

© 2012 McDermott Will & Emery

Appellate Court Ruling Permits Continued NIH Funding of Embryonic Stem Cell Research

An article by Warren Woessner of Schwegman, Lundberg & Woessner, P.A. regarding Embryonic Stem Cell Research Funding recently appeared in The National Law Review:

On August 24th, the D.C. Cir. ruling dismissing the suit brought to block any federal funding of embryonic stem cell research was affirmed. Stem cell researchers can breathe a bit more easily, and keep the lights on in their labs – for the next few months at least.

© 2012 Schwegman, Lundberg & Woessner, P.A.

When Can You Claim A Color As Your Trademark?

In its recent decision in Christian Louboutin S.A. v. Yves Saint Laurent America, Inc., the Second Circuit held there was no “per se rule that would deny protection for use of a single color as a trademark in a particular industrial context.”  The Court found that the single color red on the sole of a women’s shoe that contrasted with the color on the upper portion of the shoe could be protected as a trademark in the fashion industry. A Federal District Court in California ruled recently, that a company’s use of the color orange for markings and text on its medical syringe could not be protected as a trademark since the color was “functional” when applied to that product. It determined that the color orange was functional in the medical industry because it signifies that a device is for oral use. So, how does this color-as-a-trademark work?

Many companies have successfully obtained trademark protection for a single color, for example,  United Parcel Service’s registration for the color brown for transportation and delivery services, Reg. 2901090; Tiffany’s multiple registrations for a particular color of  blue used on bags, boxes and various other products and services, Reg. Nos. 4177892, 2359351, 2416795, 2416794, 2184128; 3M’s registrations for yellow as a trademark for telephone maintenance instruments and POST-IT® notes, Reg. Nos. 2619345, 2390667; and Owens Corning’s registrations for the color pink for masking tape, insulation, and other products used in the building and construction industry, Reg. Nos. 3165001, 2380742, 2380445, 2090588, 1439132.

In Qualitex Co. v. Jacobson Prods. Co., the U.S. Supreme Court held that color alone may be protected as a trademark, “when that color has attained ‘secondary meaning’ and therefore identifies and distinguishes a particular brand (and thus indicates its ‘source’).” The Court held color may not be protected as atrademark when it is “functional”. There are two types of functionality: “utilitarian” and “aesthetic.” A color is functional under the utilitarian test if it is essential to the use or purpose of the product, or affects the cost or quality of the product.  A  color is aethestically functional if its exclusive use “would put a competitor at a significant non-reputation-related disadvantage”.   If color “act(s) as a symbol that distinguishes a firm’s goods and identifies their source, without serving any other significant function,” it can be protected as a trademark. So, how do you know if a color you are using or plan to use in your business can be protected as a trademark to the exclusion of your competitors?

Protecting color as a trademark can be a very powerful advantage if the color has no particular function or meaning in the industry in which it is used. However, in order to claim color as a trademark, the color must be showcased as a source indicator for products or services in its marketing campaigns and advertising materials. Good examples of this are UPS’s reference to itself as “brown” in its advertising and Owen Corning’s blatant use of the color pink in its advertising.  Both companies very clearly highlight a color in their ads and identify it strongly with their respective products and services. This type of careful and clever planning, implementation, and marketing strategy is critical to developing a strong, unique and highly recognized color trademark.

Whatever color is used, it must not be “functional” in any respect in the industry in which it is used. Various “functionality” tests have been developed by the courtsover time, and  some include:

  • whether the design (or color) yields utilitarian advantage
  • whether alternative designs (or colors) are available
  • whether advertising touts utilitarian advantages of the design (or color), and
  • whether the particular design (or color) results from a comparatively simple or inexpensive method of manufacture.

Functionality is evaluated within the context of the specific industry in which the goods or services for which color is claimed as a trademark will be offered. Had the markings on the medical devices been red instead of orange in the case before the Federal District Court in California mentioned above, it is possible that there would not have been a finding of functionality. Thus, know your industry before selecting a color on which to focus your marketing and advertising efforts.

Thinking outside the box when selecting trademarks and planning marketing strategy is critical in any industry. The explosion of social media and changes in traditional advertising and marketing methods have changed the way products and services are recognized. Companies need more unique and  nontraditional approaches for a competitive edge. Promoting non-traditional trademarks such as a color, or other unique source indicators such as sounds, scents, flavor, and product shapes, may provide a fresh method to attract and entice a wider audience.

So, get out those color wheels and start plotting a new course.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

IP Law Summit – September 13-15, 2012

The National Law Review is pleased to bring you information about the upcoming IP Law Summit:

The IP Law Summit will highlight the current challenges and opportunities through visionary conference sessions and keynote presentations delivered by your most esteemed peers and thought leaders from Americas leading corporations. The one-on-one meetings with leading service providers will offer vast expertise in the area of intellectual property law. All this, seamlessly integrated with informal networking opportunities over three days, will provide a unique interactive forum. Do not miss this opportunity to network, establish new connections, exchange ideas and gain knowledge.

IP Law Summit – September 13-15, 2012

The National Law Review is pleased to bring you information about the upcoming IP Law Summit:

The IP Law Summit will highlight the current challenges and opportunities through visionary conference sessions and keynote presentations delivered by your most esteemed peers and thought leaders from Americas leading corporations. The one-on-one meetings with leading service providers will offer vast expertise in the area of intellectual property law. All this, seamlessly integrated with informal networking opportunities over three days, will provide a unique interactive forum. Do not miss this opportunity to network, establish new connections, exchange ideas and gain knowledge.

FTC Proposes Amendments to HSR Rules Targeting Certain Pharmaceutical Licensing Arrangements

The National Law Review recently published an article by Robert G. Kidwell and Farrah Short of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding Pharmaceutical Licensing:

 

The Federal Trade Commission (FTC) recently announced proposed amendments to the Premerger Notification Rules (HSR Rules) to clarify reporting requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), for transactions involving the transfer of patent rights in the pharmaceutical industry. The proposed rule is largely a codification of the FTC’s current treatment of exclusive licenses, with one significant change regarding the weight given to manufacturing rights retained by the licensor in pharmaceutical transactions.

The HSR Act requires parties engaged in certain transactions (involving the acquisition of voting securities, assets, or controlling non-corporate interests) to file a notification with the FTC and the Antitrust Division of the Department of Justice (DOJ), and to observe the statutorily prescribed waiting period prior to closing. Theacquisition of a patent is treated as an asset acquisition, and thus a potentially reportable transaction under the HSR Act. However, whether the transfer of rightsto a patent is also deemed an asset acquisition commonly involves a complex analysis focused on whether the transferred rights grant the licensee theexclusive right to “make, use and sell.”

Commercially Significant Rights

The proposed amendments would codify the reporting requirement under the HSR Act for any transaction within the pharmaceutical industry that involves the transfer of “all commercially significant rights.” These rights are defined as the exclusive patent rights to use the patent in a particular therapeutic area or in a specific indication within a therapeutic area.

The FTC has defined the pharmaceutical industry for purposes of this amendment by specifying NAICS (North American Industry Classification System) code 3254, which includes medical and botanical manufacturing, pharmaceutical preparation manufacturing, in-vitro diagnostic substance manufacturing, and biological product manufacturing. Importantly, the FTC’s proposed amendments are limited to the pharmaceutical industry and do not change the current HSR Act reporting requirements related to exclusive licenses in other industries.

Retained Manufacturing Rights

Under current FTC practice, transactions where the licensor retains the right tomanufacture are generally deemed non-exclusive and thus non-reportable under the HSR Act, even if the licensee obtains exclusive rights to use and sell under the patent. These transactions historically have been viewed as distribution agreements, rather than asset acquisitions.

The FTC, however, has determined that the right to manufacture in pharmaceutical licensing arrangements is far less important than the right to commercialize (use and sell) the product. Therefore, the FTC’s proposed amendment treats these types of exclusive arrangements in the pharmaceutical industry — where the licensee obtains the exclusive right to use and sell but the licensor retains the right to manufacture — as the transfer of “all commercially significant rights” and thus potentially reportable under the HSR Act. This change would represent a significant departure from the FTC’s current practice.

Retained “Co-Rights”

In certain licensing arrangements, the licensor often retains “co-rights” when granting an otherwise exclusive license. For example, in the pharmaceutical industry, co-rights provide for the shared responsibility between the licensor and the licensee to see the licensed product through the Food and Drug Administration (FDA) approval process, and the subsequent marketing and promotion of the product (often referred to as “co-development” and “co-marketing” rights). Under current FTC practice, the retention of these co-rights by the licensor does not render the license non-exclusive, therefore they remain potentially reportable licensing arrangements under the HSR Act. The proposed amendments would simply codify this approach without making any change to current practice.

The proposed amendments would modify the HSR Rules contained in 16 C.F.R. §801.1 and §801.2. Click here for the text of the Federal Register Notice, and the full language of the proposed amendments. Comments regarding the proposed amendment must be submitted to the FTC by October 25, 2012.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.