The Role of Risk Aversion in Reverse Payment Agreements

• Author: Wenqing Li
• DOI: 10.1177/0003603X18770066
• Date: 01 June 2018
• Published date: 01 June 2018
• Subject Matter: Articles

Article

The Role of Risk Aversion

in Reverse Payment Agreements

Wenqing Li*

Abstract

Both the courts and the economists have identified risk aversion as a justification for reverse payment

agreements, especially the risk aversion of brand-name companies. However, existing economic

researches show whether risk aversion can be a rationale for reverse payment agreements depends on

the type of reverse payment agreements reached. In “complete” settlement agreement where a brand-

name drug manufacturer provides consideration to a generic drug company to completely settle the

patent litigation, with agreed-upon entry dates for the generic, risk aversion does not provide a

justification for reverse payment, but asymmetry in risk aversion can be a rationale for reverse pay-

ment. In “partial” settlement agreement where a branded drug manufacturer provides consideration

to a generic drug company in exchange for the generic to agree not to enter the market while they

continue the patent litigation, it is not the risk aversion of the brand company, but the risk aversion of

the generic company that can facilitate the parties to reach a partial settlement agreement with reverse

payment that serves the procompetitive purpose.

Keywords

reverse payment, pay-for-delay, risk aversion, settlement, pharmaceutical, intellectual property

I. Introduction

Reverse payment agreements in which a brand-name drug manufacturer provides consideration

1

to

a generic drug company to settle their patent litigation, in exchange for the generic to agree not to

enter the market until a certain date, continue to attract enforcement attention. The Federal Trade

*

Director at Epsilon Economics, Chicago, IL, USA

Corresponding Author:

Wenqing Li, 111 South Wacker Drive, 50th Floor, Chicago, IL 60606, USA.

Email: wli@epsiloneconomics.com

1. Consideration can be, for example, a cash payment or a promise by the branded drug company not to launch an authorized

generic during certain period of time.

The Antitrust Bulletin

2018, Vol. 63(2) 237-245

ªThe Author(s) 2018

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DOI: 10.1177/0003603X18770066

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