The Economics of 'Pay-for-Delay' Under Rule of Reason: Generic Competition and Hybrid Settlements

Abstract

This paper discusses a method for evaluating the competitive effects of reverse payments in the wake of the Supreme Court’s Opinion in Actavis. Specifically, we demonstrate a method for evaluating actual reverse payments against a “maximum-efficient-reverse-payment” criterion under both consumer-welfare and total-welfare standards. Our analysis shows that the maximum efficient reverse payment is a multiple of total litigation costs and a function of the characteristics of prevailing competition. Our analysis also suggests that after Actavis, we should expect Hatch-Waxman-motivated settlements to provide for generic entry before patent expiration and that these arrangements are more likely to produce socially efficient reverse payments. Finally, we introduce the prospect of strategic entry of “authorized generics” by the patentee and its effect on the reverse payment settlement decision, competition and social welfare.