Resolving Reverse-Payment Settlements with the Smoking Gun of Stock Price Movements

19 Pages Posted: 15 Apr 2015 Last revised: 18 May 2016

Thomas G. McGuire

Harvard University - Department of Health Care Policy

Keith Drake

Greylock McKinnon Associates

Einer Elhauge

Harvard Law School

Raymond S. Hartman

Greylock McKinnon Associates

Martha Starr

American University - Department of Economics

Date Written: May 17, 2016

Abstract

The Supreme Court recently held that in reverse-payment settlements of drug patent disputes, anticompetitive effects can be inferred if the reverse payment exceeds the patent holder’s anticipated litigation costs, absent some offsetting justification. Application of this standard is problematic because defendants usually: (1) obscure the amount of the reverse payment; and (2) claim their settlement was justified by risk aversion. Further, even if a net reverse payment can be proven, it is little help in estimating the period of delay or damages. This Essay offers another type of evidence that demonstrates and quantifies anticompetitive effects. An otherwise unexplained bump in the patent holder’s stock price shows that the settlement created new future profits by extending the period without generic competition beyond what the stock market expected. The stock market test has several advantages: it rebuts the risk aversion claim (which cannot explain the stock price rise); it more effectively (though still conservatively) captures damages than the magnitude of the reverse payment; and, finally, it relies on the behavior of objective traders rather than deal makers with well-understood incentives to obscure the presence of a payment. We conduct a stock market event study on one of the early instances of a reverse-payment settlement to illustrate how the method works.

Keywords: patent, antitrust, settlement, reverse payment, patent settlement, event study, risk aversion, damages

JEL Classification: C72, K00, K10, K11, K20, K21, K29, K30, K39, K40, K41, K49, L12, L40, L41, L42, L49

Suggested Citation

McGuire, Thomas G. and Drake, Keith and Elhauge, Einer and Hartman, Raymond S. and Starr, Martha, Resolving Reverse-Payment Settlements with the Smoking Gun of Stock Price Movements (May 17, 2016). 81 Iowa Law Review 1581 (2016); Harvard Public Law Working Paper No. 16-18. Available at SSRN: https://ssrn.com/abstract=2593944

Thomas G. McGuire

Harvard University - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

Keith Drake

Greylock McKinnon Associates ( email )

75 Park Plaza
4th Floor
Boston, MA 02116
United States

Einer R. Elhauge (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

Raymond S. Hartman

Greylock McKinnon Associates ( email )

75 Park Plaza
4th Floor
Boston, MA 02116
United States

Martha Starr

American University - Department of Economics ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States
202-885-3747 (Phone)

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