FTC v. Actavis: The Patent-Antitrust Intersection Revisited
58 Pages Posted: 31 Oct 2013 Last revised: 29 Dec 2013
Date Written: September 10, 2013
Antitrust and patent law both seek to advance public welfare, but there has long been an undeniable tension between them. Where antitrust seeks to minimize market power in order to ensure competitive markets and pricing, patent law seeks to provide market power in order to provide incentives for the creation and disclosure of desirable inventions. In its most recent iteration, the tension between patent and antitrust law was before the Court in FTC v. Actavis, a case involving the legality of so-called reverse payments settlements. In a reverse payment settlement, a pharmaceutical company and a generic drug company settle claims of patent infringement by agreeing that the generic drug company will remain out of the pharmaceutical market covered by the patent in return for a payment from the patent-holding pharmaceutical company. The various circuit courts had reached widely variant conclusions on whether reverse payment settlements were legal, with some of the courts ruling such agreements, essentially, per se illegal, while others ruled such agreements, essentially, per se legal, at least so long as the agreement’s anticompetitive effects fell within the patent’s exclusionary scope. In its decision, the Court rejected both approaches, and required courts to apply the rule of reason to these settlements. While the Court provided some guidance on how the courts should approach a rule of reason analysis in these cases, some issues remain unclear. With the hope of suggesting some workable principles, this article re-examines the economics of patents and explains why some patents are weak, while others are strong. It then uses a game theoretic approach to analyze how the legal rules governing settlement can advance or disserve the goals of patent and antitrust law in this context.
Keywords: law and economics, game theory, antitrust, patent, pharmaceutical patents, Hatch-Waxman, generic drugs
JEL Classification: C70, D61, K21, K41, L42, L65, O34
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