Rational Competition Policy and Reverse Payment Settlements in Hatch-Waxman Patent Litigation

Abstract

This paper examines the problem of 'reverse payment' settlements in patent litigation under the Hatch-Waxman Act. A reverse payment settlement involves a payment from a branded pharmaceutical company to a generic manufacturer, usually in return for the generic manufacturer’s agreement to delay market entry. Federal appellate courts, regulatory agencies and commentators are divided about the legality of such agreements. This paper argues that the importance of product market definition has been overlooked in existing treatments of the issue. The paper develops an empirically-based 'Settlement Competition Index' that could be used by courts and regulatory agencies to evaluate reverse payment settlements. A formula to calculate the Settlement Competition Index is provided and tested with hypothetical and real-world examples.