Activating Actavis: Economic Issues in Applying the Rule of Reason to Reverse Payment Settlements

Abstract

Ever since the Eleventh Circuit first articulated its scope-of-the-patent test, the debate about reverse payment settlements has been strident and polarized. In effect, each side of that disagreement has urged that these settlements presumptively are either legal or illegal. In fact, however, there is no economic support for either extreme position. In choosing the middle ground by ruling that the settlements are properly analyzed under the rule of reason, the Supreme Court has rightly affirmed that whether or not a given settlement is anti-competitive, pro-competitive or competitively neutral is ultimately a fact-specific inquiry. Some of the factors that will inevitably need to be addressed in such analyses include monopoly power, the characteristics and strength of the patent(s) at issue, the extent of the reverse payment, if any, the likely effect of the agreement on output and prices, and other considerations that often enter into rule-of-reason inquiries. Although such analyses can be burdensome and time consuming in some cases, in other situations threshold questions about monopoly power and patent strength may well prove pivotal and thereby obviate the need for an extended, full-blown rule of reason case.

Keywords: ANDA, antitrust, Arkansas carpenters, competitive effects, drugs, Federal Trade Commission, FTC, generic entry, Hatch-Waxman Act, horizontal collusion, K-Dur, market power, Paragraph IV, pay for delay, pharmaceutical industry, quick look approach, settlement, Third Circuit

JEL Classification: D40, D42, G18, H10, I10, I18, K10, K23, L11, L12, L40, L41