The Actavis Inference: Theory and Practice

51 Pages Posted: 7 Feb 2015 Last revised: 4 Oct 2015

See all articles by Aaron S. Edlin

Aaron S. Edlin

University of California at Berkeley; National Bureau of Economic Research (NBER)

C. Scott Hemphill

New York University School of Law

Herbert Hovenkamp

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

Carl Shapiro

University of California, Berkeley - Haas School of Business

Date Written: February 5, 2015

Abstract

In FTC v. Actavis, Inc., the Supreme Court considered "reverse payment" settlements of patent infringement litigation. In such a settlement, a patentee pays the alleged infringer to settle, and the alleged infringer agrees not to enter the market for a period of time. The Court held that a reverse payment settlement violates antitrust law if the patentee is paying to avoid competition. The core insight of Actavis is the Actavis Inference: a large and otherwise unexplained payment, combined with delayed entry, supports a reasonable inference of harm to consumers from lessened competition. This paper is an effort to assist courts and counsel in implementing the Actavis Inference. First, we evaluate a variety of fact patterns that have arisen in the district courts since Actavis, including payment that takes a form other than cash. For example, a branded drug maker may promise not to offer an authorized generic drug. As we explain, under Actavis, such agreements are especially likely to violate antitrust law. We also consider how much detail a plaintiff must offer in its initial complaint to comply with federal pleading requirements.

Second, we demonstrate that the Actavis Inference fully applies when multiple generic firms, rather than just one, threaten to enter the market. Our economic model shows that the Actavis Inference becomes stronger and more important in the presence of multiple generic firms. Our analysis demonstrates that the contrary conclusions reached in a recent paper by Bruce Kobayashi, Joshua Wright, Douglas Ginsburg, and Joanna Tsai (KWGT) are incorrect, inconsistent with KWGT’s own analysis, or irrelevant to a faithful implementation of Actavis.

Third, we clarify the reasons not to litigate the patent in the antitrust case. Thanks to the Actavis Inference, a trial court need not determine patent validity or infringement in order to assess the legality of the settlement. The antitrust question depends upon the ex ante prospects in patent litigation and not ex post litigation of the patent by a patent court or by the antitrust court considering the settlement. Litigating the patent is thus of limited probative value and not dispositive regarding a potential antitrust violation.

Keywords: Actavis, antitrust, drugs, FTC, Hatch-Waxman, innovation, patent, Paragraph IV, pay for delay, pharmaceuticals, regulation, reverse payment, settlement

JEL Classification: K21, L40, L41, L50

Suggested Citation

Edlin, Aaron S. and Hemphill, C. Scott and Hovenkamp, Herbert and Shapiro, Carl, The Actavis Inference: Theory and Practice (February 5, 2015). Columbia Public Law Research Paper No. 14-459. Available at SSRN: https://ssrn.com/abstract=2560107 or http://dx.doi.org/10.2139/ssrn.2560107

Aaron S. Edlin

University of California at Berkeley ( email )

Dept of Economics 549 Evans Hall #3880
Berkeley, CA 94720
United States
510-642-4719 (Phone)
510-643-0413 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

C. Scott Hemphill (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Herbert Hovenkamp

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
319-512-9579 (Phone)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Carl Shapiro

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-5905 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu

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