Antitrust & Competition Policy Blog

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Levin College of Law

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Sunday, January 9, 2005

Article on reverse payments

Reverse payments are settlement payments made by a patent holder of a pharmaceutical product to a generic manufacturer in a patent infringement law suit.  These settlements have been scrutinized by courts and the FTC under antitrust law recently with conflicting results.  Some courts apply a per se approach; others, rule of reason. The FTC has adopted the position of per se illegality with the possibility of justification.

Professor John Lopatka has made an interesting scholarly contribution to debate in his article A Comment on the Antitrust Analysis of Reverse Payment Patent Settlements Through the Lens of the Hand Formula, 79 Tulane Law review 235 (2004).  Professor Lopatka recommends that courts apply a benefit-cost analysis of the settlements separate from an inquiry into patent validity.   He describes his approach as follows:

"In this adaptation, the variables of the Hand formula have the following meanings:
B =The marginal social cost of an alternative to a reverse payment settlement.
P =The probability of loss.
L =The deadweight loss in allocative efficiency caused by an unlawful restraint on competition.
Some implications of these definitions bear emphasis. The relevant cost of a precaution is social cost. Purely private cost, in the form of lost monopoly profits from an illegal combination, is excluded because it does not represent a social cost. Moreover, cost should be understood in the conventional economic sense of opportunity cost: the full cost of socially valuable opportunities forgone, including productive efficiencies, by use of the alternative under consideration instead of a reverse payment settlement. A reduction in efficiency is both a social cost and a private cost; the avoidance of that cost by use of the reverse payment settlement represents a cognizable private benefit, in contrast to monopoly profits, which are an incognizable private benefit. The relevant loss in allocative efficiency consists solely of that loss attributable to an unlawful restraint of trade, as defined under the antitrust laws. A deadweight loss, which for most purposes can be understood as a consumer welfare loss, brought about by the exploitation of intellectual
property rights established in the patent law is not included in L. Antitrust law does not condemn practices that produce only this kind of loss."

Professor Loptaka's approach is effectively a modified rule of reason approach with focus on the benefits and costs of settlement on the market for the drug.  His approach is applied to the 2003 amendments to the Hatch-Waxman Act which placed limits on these settlements and the exclusivity to a generic manufacturer that receives FDA approval:

"The amendments, therefore, greatly reduce the potential for joint exclusion, but they neither eliminate that potential entirely nor eliminate the possibility of collusion. The first generic has seventy-five days after the patent dispute is definitively resolved against the pioneer to protect its right to generic exclusivity, and then that exclusivity will last for 180 days. Therefore at a minimum, other generics can be excluded for seventy-five days. Further, the subsequent 180-day period of exclusivity may not be characterized by vigorous competition between the pioneer and the first generic. For example, the first generic might be able to begin marketing its drug, then stop, thereby preserving the ability to prohibit additional entry despite not in fact competing. Or it might be able to satisfy its commercial marketing obligations under the act through token production. The pioneer and first generic, therefore, may be able to prevent other generics from entering the market for at least 255 days, while not seriously competing against one another. As a technical matter, any anticompetitive impediment to entry should be reflected in L. More generally, strategic agreements between potential competitors that impair competition by other firms translate into a social loss that deserves to be taken into account in L."

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