Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality

Abstract

A tidal wave of high drug prices has recently crashed across the U.S. economy. One of the primary culprits has been the increase in agreements by which brand-name drug manufacturers and generic firms have settled patent litigation. The framework for such agreements has been the Hatch-Waxman Act, which Congress enacted in 1984. One of the Act's goals was to provide incentives for generics to challenge brand-name patents. But brand firms have recently paid generics millions of dollars to drop their lawsuits and refrain from entering the market.

These reverse payment settlements threaten significant harm. Courts nonetheless have recently blessed them, explaining that the agreements reduce costs, increase innovation, and are reasonable based on the presumption of validity accorded to patents. Although scholars and the Federal Trade Commission have voiced strong arguments against courts' leniency, these have fallen on judicial deaf ears.

In this article, I apply the framework that the Supreme Court articulated in Verizon Communications v. Law Offices of Curtis V. Trinko, which underscored the importance in antitrust analysis of a regulatory regime addressing the challenged activity. In particular, the Hatch-Waxman Act provides Congress's views on innovation and competition in the drug industry, freeing courts from the thorny task of reconciling the patent and antitrust laws. Unfortunately, mechanisms that Congress employed to encourage patent challenges - such as an exclusivity period for the first generic to challenge validity - have been twisted into barriers preventing competition. Antitrust can play a central role in resuscitating the drafters' intentions and promoting competition.

Given the Act's clear purpose to promote patent challenges, as well as the parties' aligned incentives and the severe anticompetitive potential of reverse payments, courts should treat such settlements as presumptively illegal. If the parties can demonstrate that the payments represent a reasonable assessment of litigation success, then they can rebut this presumption. If not, courts should conclude that the agreements violate the antitrust laws.

Keywords: patent, antitrust, settlement, drugs, pharmaceuticals, Hatch Waxman, reverse payments

JEL Classification: I18, K21, L40, L41, L43, L65, O34, O38