Economic Analysis of Pay-for-Delay Settlements and Their Legal Ruling

36 Pages Posted: 4 Jan 2012  

Linda Gratz

E.CA Economics; Ludwig Maximilian University of Munich - Munich Graduate School of Economics (MGSE)

Date Written: January 4, 2012

Abstract

In this paper, we ask whether courts should continue to rule settlements in the context of pharmaceutical claims per se legal, when these settlements comprise payments from originator to generic companies, potentially delaying generic entry compared to the underlying litigations. We find that the rule of per se legality induces maximal collusion among settling companies and therefore yields the lowest consumer welfare compared to alternative rules. While under the rule of per se illegality settling companies are entirely prevented from colluding, under the rule of reason they collude to a limited degree when antitrust enforcement is subject to error. Contrary to intuition, limited collusion can be welfare enhancing as it increases settling parties' profits, and thus fosters generic entry. Alternative incentive devices to foster generic entry, for instance, the provision of an exclusivity right to first generic entrants, as implemented within the Hatch-Waxman Act of 1984, are shown to be ineffective.

Keywords: Antitrust and Intellectual Property Law, Patent Settlements, Collusion, Per Se Rule, Rule of Reason, Hatch-Waxman Act

JEL Classification: I18, K40, L40, O34

Suggested Citation

Gratz, Linda, Economic Analysis of Pay-for-Delay Settlements and Their Legal Ruling (January 4, 2012). Available at SSRN: https://ssrn.com/abstract=1979699 or http://dx.doi.org/10.2139/ssrn.1979699

Linda Gratz (Contact Author)

E.CA Economics ( email )

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Berlin, 10178
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Ludwig Maximilian University of Munich - Munich Graduate School of Economics (MGSE)

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Germany

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