Question
(redacted)
September 22, 1999
Richard B. Smith
Premerger Notification Office
Federal Trade Commission
600 Pennsylvania Avenue, N.W., Room 323
Washington, D.C. 20580
Re: S Company/H Company
Dear Dick:
I am writing to follow up on the telephone conversations that I (for H Company) and (redacted) (for S Company) had with you on Friday, September 17, 1999.
I previously had sent you a Fact Pattern, and you asked (redacted) and me several additional questions. In particular, I can confirm that the 1993 License from S Company to H Company involved a perpetual license, so that there was no effective extension of the duration of the ownership term by virtue of the assignment in the 1999 Agreement. Second, as I confirmed to you by telephone, the shares purchased in 1993 by H Company (as mentioned in Paragraph 5 of the Fact Pattern) are no longer held by H Company. Finally, the parties did not file HSR Forms in connection with the 1993 agreement and stock purchase for reasons that are currently unclear but that are being reviewed.
Based on these additional facts and those set out in the earlier Fact Pattern, I understand that you concur that no filing is required for the 1999 Agreement.
Thank you for your attention and prompt response.
Sincerely,
(redacted)
DRAFT September 17, 1999 (7:55am)
FACT PATTERN
Issue:Does converting a previous exclusive license of a patent into an assignment of the patent, and changing the royalty terms, result in a transfer of assets for which an HSR filing is required in view of the fact that substantially the entire beneficial ownership interest n that patent was transferred through the previous exclusive license?
1. These facts relate to the reportability of an August 31, 1999 agreement (the 1999 Agreement) between S Company and H Company. The 1999 Agreement involves intellectual property rights regarding the same chemical compound (TC) as an earlier exclusive license agreement of June 1, 1993 (the 1993 Agreement) between S Company and H Company. Both Agreements and issues pertinent to the reportability of the 1999 Agreement are described below.
The 1993 Agreement
2. Under this Agreement, S Company licensed to H Company exclusive rights to a patent application (the 156 Application). The exclusive license also included any patent that issued from the 156 Application, and a contingent right to another patent application relating to TC (the 149 Application).
3. At the time of the 1993 Agreement, H Company held an issued patent relating to a family of compounds which include TC (the 129 patent), and had also filed on May 11, 1992, a patent application covering certain uses of TC (the 542 Application). The parties recognized that a patent interference proceeding regarding S Companys 156 Application and H Companys 542 Application could likely follow if both parties were able to obtain allowable claims in these patent applications. In such case, only one party would be able to obtain a patent of the interfering subject matter. Accordingly, the 1993 Agreement made provision for an interference proceeding, and ensured that no matter how any interference concluded, H Company would have an exclusive license to make and sell TC products covered by any surviving S Company patent.
4. Under the 1993 Agreement, H company was to pay $3.75 million to S Company upon the issuance of any S Company patent; and additional $1.875 million in April 1997 if an S Company patent had issued and survived any interference proceeding; and an additional $1.875 million in April 1998 if an S Company patent had issued and survived any interference proceeding these potential payments were subject to many contingencies and uncertainties. The Agreement also provided for a 4% royalty to S Company (which could be adjusted up or down based on various factors) after expiration of H Companys 129 patent (in 2001) if any patent had issued from the 156 application and remained valid and enforceable by this time.
5. Simultaneously with the 1993 Agreement, the parties entered into a Stock Purchase Agreement under which H Company purchased 1,111,11 shares of S Company common stock for $9 per share.
Subsequent Events
6. The 693 patent (resulting from the 156 Application) issued to S Company. H Company paid S Company the $3.75 million due upon patent issuance and subsequently paid the two $1.875 milestone payment under protest because the patent had not then survived an interference proceeding. An interference proceeding involving S Companys 693 Patent, and 149 Application and H Companys 542 Application was declared by the U.S. Patent and Trademark Office. Shortly thereafter, the parties submitted the interference to arbitration, as provided in the 1993 Agreement, and evidence has closed. Before the arbitrator unsealed his decision, the parties determined to settle the dispute. This settlement will be effected by closing the 1999 Agreement. Upon implementation of the 1999 Agreement, H Company will become the legal owner of S Companys 693 Patent and 149 Application, and the interference will be dissolved, as an interference cannot exist between patents and patent applications that are all legally owned by the same entity.
The 1999 Agreement
7. While the 1993 exclusive license had conveyed beneficial ownership of the S Company 693 Patent (and contingently the 149 Application) to H Company, the settlement of the interference proceeding required that H Company become legal owner of the 693 Patent (and the 149 Application). Accordingly, the primary purposed of the 1999 Agreement was to assign to H Company legal ownership of the patent and patent application rights of which it was previously the beneficial owner through exclusive license under the 1993 Agreement. In addition, S Company exclusively licensed to H Company two new patent applications relating to TC (the 895 Application); and (the 570 Application).
8. The settlement also involved rearrangement of payment terms that had governed under the 1993 Agreement. H Companys protest was removed from the two previous payments of $1.875 million made under protest. And, rather than a possible 4% royalty beginning upon expiration of H Companys 129 Patent in 2001, S company is to receive a 1 1/4% royalty commencing in February 2001 as payment for the assignment of the 693 Patent and 149 Application (and related applications) and for exclusive license rights to S Companys newer patent applications relating to TC. No specific value is assigned to the two new patent applications that did not exist at the time of the 1993 Agreement; H Company has concluded that the fair market value of the exclusive license of the 895 and 570 Applications is less that $15 million.