Who (If Anyone) Should Be Liable for Injuries from Generic Drugs?

Abstract

Two recent Supreme Court decisions (PLIVA, Inc. v. Mensing (2011), and Mutual Pharmaceutical v. Bartlett (2013)), have essentially removed the threat of liability from generic drug manufacturers. In this paper, we consider three possible liability regimes in two simple models of drug market competition and safety research. Specifically, we compare the Everyone Liable (EL) regime, where generics face the same liability as branded manufacturers, the No Liability for Generics (NLG) regime, resulting from PLIVA and Mutual, where generics face no liability, and a third, Branded Fully Liable (BFL) regime, where a branded developer faces liability from injuries caused by a generic version of a drug it has developed. We find that the BFL regime generally provides the most efficient incentives to identify side effects and develop an efficient warning. However, the BFL regime can lead to overconsumption of the generic drug by patients who should not take the drug at all. For this reason, the EL regime may be preferable for a drug where the danger of side effects may outweigh the clinical value, as was alleged in Mutual Pharmaceutical v. Bartlett. We find that the NLG regime that resulted from the recent Supreme Court decisions is unlikely to be optimal, because it is dominated by BFL when the consumption decision is not important, and inferior to EL when it is very important.

Keywords: PLIVA, Generic Drugs, Product Liability, Failure-to-warn, Pharmaceuticals

JEL Classification: K13, K23, L15