Question
June 10, 2004
HAND DELIVERY
Mr. Michael Verne
Compliance Specialist
Premerger Notification Office
Federal Trade Commission
Washington, DC 20580
Re: Exclusive Supply and Distribution Agreement
Dear Mr. Verne
This is to confirm our telephoneconversation of May 6, 2004, in which you agreed that an agreement, the termsof which we described to you and which are substantially as set forth below,represents a supply and exclusive distribution agreement and not theacquisition of an asset under the Hart-Scott-Rodino Act, HSR rules of practiceand related interpretations of the Premerger Notification Office.
FACTS:
Company A is a foreign person with alimited United States presence. It has developed and holdscertain Patents and Know-How relating to an active ingredient that can be incorporatedinto a number of formulated finished products. It has also developed a numberof finished products incorporating this active ingredient. Company B is a United States person that will commercialize some ofthe finished products that have been developed by Company A. Company B may alsodevelop other finished products utilizing the active ingredient.
Company A and Company B intend to enterinto an exclusive agreement whereby Company A will manufacture the activeingredient and supply Company B with 100 percent of its requirements for theactive ingredient for use in Company B's finished products. Company B will thenhave the right to sell to the ultimate customer finished products containingthe active ingredient for certain uses. Company A will retain the right to sellfinished products containing the active ingredient for other uses. Company B'srights to market and sell finished product containing the active ingredientwill be limited to certain geographic territories (including the United States). Company A will retain rights to usethe product it manufactures in finished products to be sold in all parts of theworld other than Company B's territory.
Under the terms of the agreement, CompanyB does not have rights to manufacture the active ingredient. In addition,Company B does not have the right under the agreement to use the Patents andKnow-How of Company A in order to develop a new product that would otherwiseinfringe Company A's Patents or Know-How. The proposed license is restricted toCompany A's Patents and Know-How as they relate to the active ingredientmanufactured by Company A and any products incorporating that product to bemanufactured by Company B.
Company A holds all Patents related tothe active ingredient and is "primarily" responsible for filing,prosecuting and maintaining the Patents. Company B will have the primary rightto enforce the Patents against third party infringers in its geographicterritory. Company A will pay all costs incurred by Company B relating topre-clinical and clinical trials necessary to obtain regulatory approvals forfinished products to be sold by Company B in its assigned territory.
The proposed supply agreement will beexclusive; that is, Company A will sell only to Company B and Company A willprovide Company B with "know how" as it relates to the activeingredient. This is necessary in order for Company B to produce its finishedproducts. The license is strictly limited to how the active ingredient isformulated into the finished product and Company B does not have the right toutilize any of Company A's Patents or Know-How regarding Company A's productother than noted herein. Finally, Company B must make available to Company Afor use in its retained geographic territories any Patents or Know-How itdevelops related to the finished product(s) that Company B develops.
ANALYSIS AND CONCLUSION:
Based on our review of the above facts, we concluded that theagreement between Company A and Company B is in effect an exclusive supply anddistribution arrangement and not an exclusive patent or know-how licenseotherwise subject to the HSR Act. We came to this conclusion based principallyon the following: (1) Company B would not have rights to manufacture the activeingredient to be manufactured by Company A; (2) the license to Company A'sPatents and Know-How would be only as they relate to the product manufacturedby A for B and the products to be manufactured by B incorporating A's product,and not any broader to encompass, for example, any additional inventions that Bmight create and that would otherwise infringe the Patents and Know-How held byA; and (3) Company B's right to commercialize finished products incorporatingCompany A's active ingredient is limited to certain fields of use. These limitationsare so substantial that it is impossible to conclude that Company B hasacquired an exclusive license to the Patents and Know-How owned by Company A.Thus, there is no asset acquisition under the HSR Act and related rules ofpractice. Rather, the transaction should be regarded as an exclusive supply anddistribution agreement, which is exempt from premerger filing requirementsunder section 7A(c)(1) as a transaction in the ordinary course of business.
We are relying on this advice in advising our clients with respectto their HSR obligations regarding this agreement. If we have made an error inour summary of the discussion, or if you disagree with our conclusions, pleaselet us know as soon as possible. Thank you for taking the time to speak with uson the phone and for reviewing our recollection of that discussion.