Anticompetitive Patent Settlements and the Supreme Court's Actavis Decision

28 Pages Posted: 28 Jun 2013 Last revised: 29 Dec 2013

See all articles by Herbert Hovenkamp

Herbert Hovenkamp

University of Pennsylvania Carey Law School; University of Pennsylvania - The Wharton School; University College London

Date Written: November 28, 2013


In FTC v. Actavis the Supreme Court held that settlement of a patent infringement suit in which the patentee of a branded pharmaceutical drug pays a generic infringer to stay out of the market may be illegal under the antitrust laws. Justice Breyer's majority opinion was surprisingly broad, in two critical senses. First, he spoke with a generality that reached far beyond the pharmaceutical generic drug disputes that have provoked numerous pay-for-delay settlements.

Second was the aggressive approach that the Court chose. The obvious alternatives were the rule that prevailed in most Circuits, that any settlement is immune from antitrust attack if it is facially "within the scope of the patent." Under this approach the court may not second guess the settlement by inquiring into the validity of the patent; the settlement itself shields this query from the court. A second alternative concludes that a very large settlement payment is a sign that something is wrong with the patent, inviting the court to look more closely at the underlying patent to determine whether the settlement is really a good faith attempt to manage litigation and business risk. A third approach is that a large settlement exclusion payment disproportionate to litigation risk can be unlawful under antitrust's rule of reason, without inquiry into whether the patent is actually invalid, and even if the settlement agreement does not go "beyond the scope" of the patent's nominal coverage. Finally, the court might apply a "quick look," or truncated, antitrust analysis in which the plaintiff can enjoy presumptions about market power or anticompetitive effect. The Supreme Court chose the third, or rule of reason, option, but it made clear that the plaintiff need not make a long form rule of reason showing and suggested important shortcuts.

Also significant is that both sides, without dissent agreed that consumer welfare should be the goal of antitrust law.

Payments whose size correlates with risk are essential to entrepreneurial decision making, but entrepreneurial risk is usually private in the sense that the firm risks the resources of its own shareholders. In the pharmaceutical pay-for-delay setting, however, what is being placed at risk is both the investment of the pioneer and the welfare of consumers, interests that pull in opposite directions. Consumers represent an important externality. They are not participants in this dispute, but they stand to lose the benefits of competition that would otherwise have occurred. Traditional settlements reflect the risk of patent invalidity in their terms. For example, as a patent is perceived by the parties to be weaker, settlement royalties rates will be lower. The Hatch Waxman Act uniquely creates an incentive for the parties to take all risk out of the patent because for the life of the settlement no third party may challenge it. Even a very weak patent can obtain both exclusion against third parties and profits equal to the full cartel value of the patented product.

While the Court did not discuss private consumer challenges, its substantial revision of the law applies equally to private actions and it is reasonable to expect that several will emerge. Purchasers seeking antitrust overcharge damages from an anticompetitive pay-for-delay settlement should be able to proceed without proving patent invalidity, although they would be subject to the same rule-of-reason constraints that the Court created for the FTC.

Finally, the breadth of the Activis opinion makes it relevant for many situations outside of the Hatch-Waxman context. For example, the Court's dicta severely limited its 1926 GE decision permitting price fixing among a patent and its licensees, and implicitly overruled decisions such as Bement, which permitted product price fixing among the members of a patent pool. A central question was whether the Patent Act, either explicitly or by reasonable implication, authorized the challenged conduct. If the answer is no, ordinary antitrust analysis can proceed.

Keywords: antitrust, patents, settlements, pay-for-delay, phamaceutical, Hatch-Waxman, horizontal restraints, rule of reason

Suggested Citation

Hovenkamp, Herbert, Anticompetitive Patent Settlements and the Supreme Court's Actavis Decision (November 28, 2013). Minnesota Journal of Law, Science & Technology, Forthcoming, U Iowa Legal Studies Research Paper No. 13-35, Available at SSRN: or

Herbert Hovenkamp (Contact Author)

University of Pennsylvania Carey Law School ( email )

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University of Pennsylvania - The Wharton School ( email )

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University College London ( email )

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