Taking Antitrust to Patent School: The Instance of Pay-For-Delay Settlements

• Author: Rudolph J.R. Peritz
• Published date: 01 March 2013
• Date: 01 March 2013
• DOI: http://doi.org/10.1177/0003603X1305800106
• Subject Matter: Essay

THE ANTITRUST BULLETIN: Vol. 58, No. 1/Spring 2013 : 159
Taking antitrust to patent school:
The instance of pay-for-delay settlements
BY RUDOLPH J.R. PERITZ*
The essay develops a new approach for antitrust analysis of pay-for-
delay settlements in pharmaceutical patent infringement cases, an
approach that shows them to be presumptively prohibited agree-
ments in restraint of competition. The issue is timely in light of Wat-
son Pharmaceuticals v. FTC, a case now pending before the Supreme
Court; the decision below is one in a line of antitrust cases conclud-
ing that the settlement agreements are legal per se so long as their
pay-for-delay provisions fall “within the scope of the patent.” The
essay explains why proper antitrust analysis calls for separate atten-
tion to the scope of the injunction remedy and then shows how
antitrust approval of pay-for-delay provisions entails satisfaction of
the Supreme Court’s traditional test for the injunction remedy in
patent infringement cases set out in the landmark eBay decision.
Along the way, the essay briefly describes how the economics of
patent law, rightly understood, supports the eBay test’s application in
the antitrust analysis of cases like Watson.
KEY WORDS: pay-for-delay, patent settlements, eBay, reverse payments,
Watson v. FTC, patents, antitrust, FTC
* Professor and Director, IProgress Project, New York Law School;
Senior Fellow and Advisory Board member, American Antitrust Institute.
AUTHOR’S NOTE: The essay develops a line of analysis proposed in a presentation at the
Annual Conference of the Academic Society for Competition Law (Max Planck Institute,
Munich), entitled State-Initiated Restraints of Competition, Mackenzie University,
São Paulo, Brazil, on April 13, 2012.
© 2013 by Federal Legal Publications, Inc.

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160 : THE ANTITRUST BULLETIN: Vol. 58, No. 1/Spring 2013
I.
INTRODUCTION: INTELLECTUAL PROPERTY RIGHTS,
ANTITRUST, COMPETITION
In the mainstream view, there is a profound tension if not a binary oppo-
sition between the patent holder’s fundamental right to exclude and
antitrust policy’s antipathy toward exclusionary conduct. Courts have
largely resolved the conflict in favor of the holder’s right to exclude. But
the orthodox view calls for close examination, especially in light of
Supreme Court jurisprudence in recent patent decisions. A powerful
il ustration is the landmark eBay decision,1 whose test for granting per-
manent injunctions expresses the largely unrecognized teaching that
patent remedies promote competition over exclusion. Once recognized,
eBay’s teaching explodes the dominant view of binary opposition
between patent and antitrust attitudes toward exclusionary rights.
In sharp contrast to the mainstream view, the essay proposes that
patent law is better understood as a regime governed by policies and
doctrines that promote competition. After illuminating eBay’s neg-
lected competition logic, the essay applies it in the Watson case now
pending before the Supreme Court, an antitrust case involving the
fundamental patent right to exclude others from making, using, or
sel ing the patented invention.2 The circuit court decision below is the
most recent in a line of controversial antitrust decisions approving
pay-for-delay provisions in agreements settling pharmaceutical patent
infringement cases. The provisions reflect “reverse payments” by
plaintiffs to defendants, payments by holders of drug patents to
generic companies in exchange for promises to stay off the market.3
This line of decisions is founded on the mainstream binary view
because the provisions are seen as an exercise of patent rights to
exclude competitors, rights that trump antitrust prohibition of exclu-
sionary conduct. The essay explains why antitrust courts should turn
1
eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).
2
F.T.C. v. Watson Pharm., Inc., 677 F.3d 1298 (11th Cir. 2012), cert.
granted, 2012 WL 4758105 (U.S. Dec. 7, 2012) (No. 12-416).
3
But see In re K-Dur Antitrust Litig., 686 F.3d 197 (3d Cir. 2012). This
court’s rejection of the per se legality standard for pay-for-delay settlements
produced the conflict between circuits that set the stage for the Supreme
Court’s grant of the FTC’s petition for certiorari in Watson.

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PAY- F O R - D E L AY : 161
away from their current view of patent rights and, at the same time,
reject these exclusionary provisions in light of the patent regime’s
indigenous competition policy reflected in the eBay opinion. The rever-
sal of outcomes that would result in these pay-for-delay cases is but
one example of the powerful effects that would stem from antitrust
courts’ recognizing the patent regime’s “baseline of free competition.”4
What has led U.S. policy makers to the view that patent holders’
rights to exclude competitors trump antitrust policy’s antipathy
toward restraints of competition?
Two overlapping rationales for patent rights have justified their
expansion and their dominance over the past thirty or so years.
Although some have seen them as natural rights, others have viewed
them as constitutional means of promoting the public benefits of eco-
nomic progress.
First, patents are broadly understood to be especially compelling
forms of natural property rights. Their moral foundation is seen as
not only satisfying John Locke’s labor theory of value but also
rewarding the Romantic genius of individual imagination. This image
of inventorship attributes success to individual brilliance, success
associated more with Steven Jobs’s persona than with his battalions of
employees, more with individual Nobel laureates in biology and
medicine than with the international networks of densely staffed lab-
oratories supporting the winners. What emerges is the powerful ide-
ology that patents are the just desserts of individual genius, the
commercial reward for success in intellectual competition of the high-
est order. In this light, any expansion of patent protection is praised as
fuller protection of perfectly natural rights.
Second, there is the dominant scholarly view of patents as consti-
tutional rights. Indeed, the U.S. Constitution does empower Congress
to enact patent protection for the purpose of advancing knowledge
and industrial technology.5 And so patent rights can be understood as
4
Bonito Boats, Inc. v. Thunder Craft Boats, Inc., ...