Patent settlements in which the patentee pays the alleged infringer to stay out of the market are largely a consequence of the Hatch-Waxman Act, which was designed to facilitate the entry of generic drugs by providing the first generic producer to challenge a pioneer drug patent with a 180 day period of exclusivity. This period can be extended by a settlement even if the generic is not producing, and in any event all subsequent generic firms are denied the 180 day exclusivity period, significantly reducing their incentive to enter.
The Circuit Courts of Appeal are split three ways over such settlements. The Sixth Circuit has declared them unlawful per se. The Second and Federal Circuits conclude they are legal, provided that the patent lawsuit was not a “sham” and the settlement does not reach beyond the scope of the patent. The Eleventh Circuit would apply a rule of reason. The FTC has consistently opposed these agreements as unlawful under FTC Act §5. The Antitrust Division has recently changed its position and now regards them as presumptively unlawful.
Reaching a reverse payment settlement is typically far more lucrative for a generic than defeating the patent in litigation. This fact substantially undermines the generic’s incentives to litigate infringement to a conclusion and makes it essential that post-settlement challenges be pursued by someone other than the generic firm.
Both the rules of virtual per se illegality and legality generally attempt to resolve antitrust challenges to these agreements without inquiring into patent validity or infringement. Rules of presumptive illegality rest on the premise that a very high payment itself is a strong indicator of patent invalidity. By contrast, antitrust’s rule of reason typically requires inquiry into validity and infringement. If the patent is valid and infringed, then even a large payment for the full remaining life of the patent represents a wealth transfer but causes consumer harm only if the payment increases the pioneer’s costs and thus may increase its drug price. At the other extreme, a patent that is invalid or not infringed should invite immediate generic entry, and the delay imposed by the reverse payment settlement represents competitive harm equivalent to that of any naked market division agreement. However, the costs attending a rule of reason inquiry makes it appropriate to consider alternatives that might be available within patent law, which this essay explores.
Hovenkamp, Herbert J., "Antitrust and Patent Law Analysis of Pharmaceutical Reverse Payment Settlements" (2011). Faculty Scholarship. 1861.
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