Antitrust Policy toward Agreements that Settle Patent Litigation

• Date: 01 September 2004
• Published date: 01 September 2004
• Author: John P. Bigelow,Robert D. Willig
• DOI: 10.1177/0003603X0404900306
• Subject Matter: Article

Thc Antitrust Bullctill/Fall 2004 655

Antitrust

policy

toward

agreements

that settle patent litigation

BY ROBERT D. WILLIG* and JOHN P. BIGELOW**

I.

Introduction

In

this article, we apply standard economic tools to analyze some of

the central issues involved in formulating antitrust enforcement policy

toward agreements that settle patent litigation. These issues have

come to a head in a recent series of Federal Trade Commission (FTC)

cases challenging as anticompetitive agreements settling patent dis-

putes between pioneer drug companies and potential generic entrants.'

*Professor

of

Economics and Public Affairs, Princeton University,

Princeton, NJ.

** Senior Economist, Princeton Economics Group, Princeton, NJ.

AUTHORS' NOTE: This research was begun in connection with work we per-

formed

on

behalf

on Schering-Plough Corporation. We are grateful to

Vladimir Mares for his assistance with this work, and to the referee

for

very

helpful editorial suggestions.

FTC has

brought

complaints

against

Abbott Laboratories and

Geneva Pharmaceuticals, Inc. Abbott Labs., FTC Docket No. C-3946

(May 22, 2000) (complaint), available at http://www.ftc.gov/os/2000/05

Ic3946omplaint.htm; Hoechst Marion Roussel, Inc., FTC Docket No.

9293 (Mar. 16, 2000) (complaint), available at http://www.ftc.gov.os

12000/03/hoechstandrxcomplaint.htm;

Schering-Plough

Corp.,

FTC

Docket No. 9297 (Mar. 30, 200 I), available at http://www.ftc.gov/os

/200 1I04/scheringpart3cmp.pdf and In re Schering-Plough Corp., Opin-

() 2004by FederalLegal Publications, Inc.

656

The antitrust bulletin

This article analyzes whether such settlements are socially desirable

and whether the payment of net consideration by the patent holder to

the

potential

entrant is a reliable indicator that the

settlement

is

socially undesirable.

The

setting we analyze has an incumbent patent holder and a

potential entrant who may be sued for infringement. and who

mayor

may not prevail in the resulting patent litigation. As long as the patent

has substantial value and assuming no other substitutes are available.

the market will be "monopolized" by the incumbent before the poten-

tial entrant comes in.' After entry. which may unleash a flow

of

subse-

quent additional entry. the market will be more competitive. Under

these conditions. the incumbent and the entrant have incentives

of

various kinds to settle their patent dispute outside

of

litigation. We

assume that any settlements of the patent dispute are voluntary and

must be viewed as superior to litigation by both the incumbent and the

entrant. They may be risk averse. and may face significant litigation

costs. They may recognize that the flow of monopoly profit (or rents

from previous innovative activities) exceeds the total flow

of

duopoly

or

competitors'

profits. and

seek

asettlement that maintains the

monopoly outcome for both of them. Short-run (or "static") consumer

welfare and social welfare are both advanced by longer spells of com-

petition, by avoiding the expenditure of litigation costs, and by dimin-

ishing the risks borne by those with risk aversion .

.1

ion

of

the

Commission.

available

at

http://www.ftc.gov/os/adjpro

/d9297/031218commissionopinion.pdf (Dec. 18.2003). Some of the pri-

vate cases include In re Terazosin Hydrochloride Antitrust Litig .• 164 F.

Supp. 2d 1340 (S.D. Fla. 2000). and In re Cardizem CD Antitrust Litig .•

105 F. Supp. 2d 682 (E.D. Mich. 2000).

In the FTC cases mentioned above, there have been significant

factual disputes over whether the patents and agreements at issue con-

ferred monopoly power either before or after generic entry. To simplify

our

analyses

in

this

article,

we

assume

that the

patent

holder

has

monopoly power or is protecting its rents from innovation absent entry

by generic competitors. We do not intend to imply that the relevant prod-

ucts markets in the FTC cases are properly limited to only the patented

and generic products.

There may be tradeoffs between long-run and short-run consumer

welfare due to the effect

of

preventing settlements on innovation and the

Patent litigation

657

It is plain that some settlement agreements would profitably per-

petuate monopoly. to the harm of social and consumer welfare. while

other settlement agreements would be highly beneficial by avoiding

litigation costs and risks. and by bringing on competition sooner than

litigation would have been likely to do so. Is there a bright-line test

that can help separate the socially beneficial from the monopolizing

patent settlement agreements? Are any patent settlement agreements

likely to promote consumers' benefits? If so. would they involve cash

changing hands. or could they be even better for consumers if cash

were forced off the table as a matter of antitrust policy? One proposal

that has been considered is to condemn any patent settlement agree-

ment between active or potential competitors that in essence is found

to have included amoney. or money equivalent. payment by the

patent holder to the entrant as per se or presumptively illegal.' This

article expresses and explains several broad conclusions from the

analysis. which are highly relevant for finding the right answers to

these questions.'

First. there are likely to exist voluntary mutually beneficial settle-

ments between the patent holder who claims infringement and the

firm seeking to enter that are favorable to consumer and social wel-

fare. Under such socially desirable settlements. entry is permitted at

an intermediate date that is consonant with and reflects the relative

odds

of

the parties' success in the patent litigation that would ensue

absent settlement.

impact

of

innovation on consumer and social welfare. which we do not

address in this article. See James Langenfeld &Wenqing Li, Intellectual

Property and Agreements to Settle Patent Disputes: The Case

of

Settle-

ment Agreements with Payments from Branded to Generic Drug Manu-

facturers. 70 ANTITRUST L.J. 777 (2003).

For

example. see the court ruling in In re Cardizem

Antitrust

Litig., 105 F. Supp. 2d at

705-06.

For a general discussion

of

the other literature on these issues. see

Thomas Cotter. Antitrust Implications

of

Patent Settlements Involving

Reverse Payments: Defending aRebuttable Presumption

of

Illegality in

Light

of

Some Recent Scholarship. 71

ANTITRUST

L.J. 1069 (2004). For

application

of

some rigorous economic tools to these issues. see Carl

Shapiro. Antitrust Limits to Patent Settlements. 34

RAND

J.

ECON.

391

(2003).