Patent Settlements in the Pharmaceutical Industry: An Antitrust Perspective

Patent settlements between originator and generic firms in the pharmaceutical industry are a controversial topic, both in EU competition policy and U.S. antitrust law. The main concern is that patent settlements, which involve large payments from the originator to generic firms (reverse payments) and simultaneously restrict or delay market entry of generic firms, might have to be regarded as anti-competitive agreements that protect weak and perhaps unjustified patents from challenges. Therefore, certain types of patent settlements might harm consumers, both by defending unjustifiable patents and restricting competition by generic firms. In this article, we use the dispute in U.S. antitrust law between the U.S. antitrust authorities and various U.S. courts about how to deal with patent settlements with reverse payments as a starting point for an economic analysis of this problem. We particularly focus on two aspects: (1) Patent settlements have also to be seen as potentially endangering the already weak mechanisms within patent law for challenging and weeding out weak patents. (2) The incentives for originator and generic firms for negotiating patent settlements depend crucially on the entire institutional framework in pharmaceutical markets. Therefore, the competitive assessment of patent settlements requires the analysis of the interplay between patent law rules, the regulations for drug approval (FDA regulations in the U.S.), antitrust law rules, and, in the U.S., the Hatch-Waxman Act with its specific rules for the relation between originator and generic firms. Important conclusions are the need for a much deeper analysis of this interplay of different regulations, and the insight that the U.S. criteria for assessing patent settlements might not be directly transferable to the EU, due to different institutional frameworks for pharmaceutical markets.