Do Reverse Payment Settlements Violate the Antitrust Laws?

Abstract

The term "reverse payment" has been used as shorthand to characterize a variety of diverse agreements between patent owners and alleged infringers that involve a transfer of consideration from the patent owner to the alleged infringer. Reverse payment settlements are particularly associated with drug patent challenges mounted by generic drug companies under the Hatch-Waxman Act. Many, including the Federal Trade Commission, would characterize these agreements as antitrust violations. However, courts have generally declined to find these agreements in violation of the antitrust laws based solely on the presence of a reverse payment.

This article begins in Section II with an overview of the diverse array of patent settlement agreements that have been classified within the general taxonomy of "reverse payment settlements." Section III discusses a variety of specific factors that have led to a natural proliferation of reverse payments patent settlements between branded and generic drug companies. Section IV traces the development of the FTC's position, which would find most reverse payment settlements presumptively illegal, focusing in particular on its recent ill-fated enforcement action against Schering-Plough. Section V reviews the courts' response to antitrust challenges against reverse payment settlements, and identifies an emerging consensus position that will find a violation of the antitrust laws only in cases where the challenged agreement contains restrictions on competition that exceed the exclusionary potential of the patent. The article concludes in Sections VI and VII with a discussion of the future prospects for the antitrust treatment of reverse payments settlements, including a suggestion that in evaluating the anticompetitive implications of these agreements more explicit consideration be paid to barriers to market entry facing potential third party generic competitors.

Keywords: patent, hatch-waxman, generic drugs, antitrust, reverse payment, settlement, exclusion payment, pharmaceutical, paragraph IV certification

JEL Classification: D23, I18, K21, K23, L40, L44, L65, 034