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North Carolina Law Review




In FTC v. Actavis, the Supreme Court determined that courts should apply a rule of reason analysis to determine whether using a reverse payment settlement to resolve pharmaceutical patent litigation violates the antitrust laws. Essentially unique to pharmaceutical-patent litigation, a reverse payment settlement involves a payment from the patent-holder to generic challengers in return for the generics dropping their challenge to the patent(s) at issue and agreeing to remain out of the market. Such a settlement agreement enables the patent-holder to maintain exclusivity in the relevant market and to keep prices of the associated pharmaceutical higher than they would otherwise be and, perhaps, higher than they should be.

This Article uses game theory to explore how the legal rules regarding antitrust liability shape the terms upon which parties will settle pharmaceutical patent litigation. The Article demonstrates that, in the absence of any constraints on settlement terms, the parties will settle such litigation in a manner contrary to the purposes of both patent and antitrust laws. Prices for patented pharmaceuticals will remain both high and higher than necessary to foster desirable innovation. Creating a risk of antitrust liability, by applying a rule of reason analysis to these settlements, will constrain the terms upon which the parties may permissibly settle and should do so in a manner likely to promote the purposes of both patent and antitrust laws. Prices for particular patented pharmaceuticals may remain high, but only when and to the extent necessary to promote desirable innovation.

Unfortunately, the Court's approach may not go far enough. Under the Court's rule of reason approach, parties appear to remain free to settle pharmaceutical patent litigation using a licensed-entry format. Such a settlement format effectively duplicates the substance, but not the form, of the reverse payment format and may lead to prices for patented pharmaceuticals higher than necessary to ensure desirable innovation.

To address this risk, the Court may need to go a step further and effectively require parties to settle pharmaceutical patent litigation using a time of entry format. Under this format, no side payments are made. Instead, the parties agree to a date, between the end of the litigation and the end of the patent's life, at which generic entry may begin. Because the agreed date of entry should reflect the parties' judgment as to the likelihood that the patent-holder will otherwise prevail in the litigation, such a settlement approach should tend to ensure that generic entry is delayed, and prices for the associated pharmaceutical remain high, only to the extent necessary to foster desirable innovation.

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University of North Carolina School of Law

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