Hart-Scott-Rodino Act May Apply to Technology, Patent and Trademark Licenses
by Scott J. Lochner
The Hart-Scott-Rodino Antitrust Improvements Act (the "Act") requires that certain purchasers and sellers of securities or assets worth more than $15 million report these transactions to the Federal Trade Commission ("FTC") and the Department of Justice prior to consummation, and wait a period of time (typically 30 days) while the agencies undertake an antitrust review of the proposed transaction. Although not obvious from a reading of the statute or its implementing regulations, the FTC staff (which is responsible for interpreting the Act and the implementing regulations) has taken the position that technology, patent and trademark licenses are potentially reportable acquisitions of "assets" under the Act.
Jurisdictional Tests
For the Act to apply to a proposed transaction, all of its three jurisdictional tests must be met: the commerce test, the size-of-the-parties test, and the size-of-the-transaction test. The commerce test is met if either the "acquired person" or the "acquiring person" is engaged in commerce or any activity affecting commerce, and is virtually always met. The size-of-the-parties test generally is met when one party and all of its affiliates have annual net sales or total assets of $100 million or more and the other party and its affiliates have annual net sales or total assets of $10 million or more. However, if the seller-licensor is the smaller person and is not engaged in manufacturing, it must have total assets of $10 million or more, regardless of its annual net sales. The size-of-the-transaction test is satisfied if the proposed transaction will result in the acquiring person holding more than $15 million of the acquired person's voting securities and/or assets; or, regardless of the purchase price, at least 50% of the voting securities of an issuer with annual net sales or total assets of $25 million or more.
If all three jurisdictional tests are satisfied, the parties must comply with the Act and make a filing (with which the acquiring person must pay a $45,000 filing fee), unless a specific exemption in the Act or the implementing regulations applies to the transaction. Failure to comply with the Act requirements could result in a civil penalty of up to $10,000 per day imposed on the non-complying party, and the rescission of the transaction.
Licenses as "Assets"
Neither the Act nor its implementing regulations define the term "assets". In interpreting the Act and regulations, the FTC staff has broadly construed "assets" to include intellectual property, and has drawn a distinction between exclusive and non-exclusive licenses of such property. It has taken the position that an exclusive patent or trademark license is the reportable acquisition of an "asset", assuming the three jurisdictional tests are satisfied. Acquisitions of non-exclusive patent or trademark licenses are not reportable. In addition, the FTC staff, through informal oral interpretations of the Act, has applied this "exclusive, non-exclusive" analysis to other forms of intellectual property as well, including trade secrets and know-how.
The FTC staff has interpreted the exclusivity requirement broadly, and has noted that if a license grants exclusive rights for a limited territory within a larger region, or exclusivity for certain (but not all) uses, it will be considered an "exclusive" license. For example, based on informal remarks of a member of the FTC staff, a transfer of exclusive rights to use the Coca-Cola trademark on all T-shirts sold in Georgia for one year would appear to satisfy the exclusivity requirement. In addition, a license is also considered exclusive if the licensor retains "march-in" rights, or the rights to use the intellectual property if the licensee fails to meet certain targets or use its best efforts to develop or sell the product. Further, it should be noted that if a facially non-exclusive license were accompanied by a non-compete agreement by the licensor, the license probably would be considered exclusive. Similarly, a non-exclusive license accompanied by the grant of a right of first refusal or option to purchase the licensor also might be treated as exclusive, although this is a close call.
Valuation of Assets
In determining if the size-of-the-transaction test is met, the implementing regulations provide that the "value" of the assets to be acquired "shall be the fair market value of the assets, or, if determined and greater than the fair market value, the acquisition price". When an agreement provides for a lump sum payment, such as an advance payment, and/or fixed or minimum payments, such as royalties, the sum of such payments must be included in the purchase price. The parties must take any such future payments at their face value and may not discount them to present value.
In addition, when the licensing arrangement provides for both fixed or minimum payments (e.g., guaranteed minimum royalty payments) and contingent payments (i.e., royalty payments in excess of the guaranteed minimum royalty payment), the licensee must make a good-faith determination of the reasonably expected contingent payments and include that amount in the purchase price. If the contingent payments are so uncertain they cannot be reasonably determined, then the licensee's board of directors or the board's delegee must make a good-faith determination of the present fair market value of the license. This is especially important when the fixed or minimum payments are slightly less than $15 million or there is reason to believe they are less than the fair market value.
A number of important issues arise in the course of valuing licenses which are beyond the scope of this article, including, without limitation, (i) when a license contains both exclusive and non-exclusive rights, (ii) when a license contains renewal rights, (iii) the extent to which any projected stream of future profits from a license should include not only profits from the licensed products, but any incremental profits resulting from the pull-through of additional sales of the licensee's complementary products, (iv) to what extent a worldwide license will generate U.S. sales, (v) the need to aggregate the value of an exclusive license together with the value of any other non-exempt stock or assets being acquired, and (vi) in certain instances, the need to aggregate the value of any stock or assets (e.g., an exclusive license) to be acquired with the value of other stock or assets previously acquired from the same person, including its affiliates.
Conclusion
In conclusion, Hart-Scott-Rodino considerations are an important part of any complete due diligence checklist involving licenses of intellectual property.
-------------------------------------------------------------------------------- |
