A Short-Run Welfare Analysis of FTC Antitrust Oversight of Patent Litigation Settlements under the Hatch-Waxman Act

• Author: Richard S. Higgins
• DOI: 10.1177/0003603X0204700406
• Published date: 01 December 2002
• Date: 01 December 2002
• Subject Matter: Economic

The Antitrust BulletinlWinter 2002 661

A

short-run

welfare

analysis

of

FTC

antitrust

oversight

of

patent

litigation

settlements

under

the

Hatch-

Waxman Act

BY RICHARD S. HIGGINS*

1.

Introduction

In general, it is difficult for a patent holder to secure alegal right

to

enjoin

entry

of

an allegedly infringing product pending disposi-

tion

of

the infringement action. This is because the harm is rare

that

cannot

be adequately cured after the fact through amonetary

transfer.

If

the original

plaintiff

wins,

cash

awards are common-

place. Without an injunction, most infringement suits won by the

defendant/entrant require little or no monetary transfer from the

plaintiff/patent

holder,

except

perhaps

when

attorney's

fees are

awarded. This is true

even

when the defendant files an antitrust

countersuit,

which

typically

alleges an

invalid

patent

together

with

predation

through

litigation

and

other

means, because the

entrant's

lost profit is

not

likely to be substantial. In contrast,

if

an

*Director, LECG, LLC, Washington, DC.

AUTHOR'S

NOTE: I wish to thank Jack Staines and Raj Malik

for

providing

comments on an earlier draft

of

this article. I also wish to thank Dionne

Sanders

for

editorial assistance.

© 2003 by Federal Legal Publications, Inc.

662

The antitrust bulletin

entrant

was

prohibited

from

competing with the

patent

holder

until

the

infringement

suit

were

settled,

the

entrant

might

be

harmed substantially. In this case, therefore, an antitrust counter-

suit is routinely expected. Moreover, if the entrant prevails, the

incumbent is not

just

liable for damages but for three times the

would-be entrant's lost profits.

As most readers are aware, in the 1980s, the federal govern-

ment created asituation whereby holders of pharmaceutical drug

patents

automatically

obtain

an injunction, which lasts for

the

term of litigation or 30 months, whichever is shorter. Specifically,

the Drug Price Competition and Patent Restoration Act of 1984

(the Hatch-Waxman Act)l governs potential competition between

generic and branded drugs prior to the patent expiration date. In

addition to an automatic entry injunction, the Hatch-Waxman Act

grants to the first generic entry applicant an exclusive right to

entry for a specified period of 180 days. The combination of the

entry injunction and the exclusivity period provides the basis for

"reverse payments" by incumbent manufacturers that effectively

forestall entry. In response, the FTC has challenged some patent

settlements as anticompetitive. This article addresses the public-

policy consequences of such intervention.

II. The Hatch-Waxman Act

A. Description?

Prior to the Hatch-Waxman Act, a generic drug manufacturer

had to go

through

the gamut

of

NDA (New Drug Application)

Drug Price Competition and Patent Restoration Act of 1984, Pub.

L. No. 98-417, 98 Stat. 1585 (1984) (codified as amended 21 U.S.C.

§355 (1994)).

The description

of

FDA

procedures in this section paraphrases

that in David A. Balto, Hatch-Waxman Patent and Exclusivity Controver-

sies: The Antitrust Perspective, Office

of

Planning and Evaluation, FTC,

Before the Food &Drug Law Institute (1999), in Thomas B. Leary,

Antitrust Issues in Settlement

of

Pharmaceutical Patent Disputes, Sixth

Annual Health Care Antitrust Forum, Northwestern University School

of