The Circular Logic of Actavis

Abstract

Assessing the fairness of settlements is an inherently difficult task. Because settlements foreclose the judicial determination of litigants’ entitlements, courts can only compare settlements to speculative predictions about what would have occurred in litigation. Courts can conduct full-blown inquiries into the merits after the fact, but doing so undermines the cost-saving rationale of settlement. In FTC v. Actavis, Inc., a case involving an antitrust challenge to a pharmaceutical patent settlement, the United States Supreme Court adopted a novel solution to this problem. The Court held that the terms of a patent settlement do not need to be compared to a judicial assessment of the parties’ underlying rights as determined by patent law. Rather, the fairness of a settlement could be inferred using economic analysis of the settlement terms themselves; the magnitude of a payment from the patentee to the challenger could serve as a surrogate for the weakness of the patent. In this Article, I argue that this inference is problematic on both jurisprudential and economic grounds. The jurisprudential critique is that Actavis implicitly relies on the prediction theory of law — the widely disparaged conception of law as consisting merely of predictions about what courts will do. To the extent that the settlement terms are probative of the merits of the patent infringement case, they reflect the parties’ expectations about the outcome of the litigation. In using the settlement terms as a surrogate for a legal conclusion, Actavis displaces legal reasons with predictions about court decisions. The economic critique is that the Actavis inference fails to account for “feedback effects” between the court and litigants. In settling the initial patent dispute, rational litigants will anticipate the inference that a subsequent court may draw from their settlement, which will distort the terms of their bargain. In drawing an inference from the settlement, a court must therefore account for the distorting effect of its own inference.

Keywords: antitrust, settlement, patent, reverse payment

JEL Classification: K21, K40, K41, L12, L40, L41