Reverse Payment Research Articles

The Global Reach of FTC v. Actavis – Will Europe Differ from the US Approach to Pay-for-Delay Agreements?

Reverse payment agreements between patent-holding drug companies and their generic competitors have raised a conflict between patent law and competition law policies that is difficult to reconcile. The US Supreme Court decision in FTC v. Actavis is the first high court decision to have ruled on these agreements, adopting a rule-of-reason approach that favored the objectives of competition law over those of patent law. However, the decision fell short of providing a clear, workable test for the lower US courts, meaning that the practical impact of the decision remains unknown. Meanwhile, the European Commission and other European jurisdictions are actively pursuing their own investigations into these agreements. The extent to which other jurisdictions will converge with or depart from the US approach under Actavis is explored in this article. We first discuss the origins of reverse payment agreements, starting with the regulatory framework of the US Hatch-Waxman Act, and then consider the US case law, including an analysis of the FTC v. Actavis ruling. We then discuss the ongoing European investigations, focusing on the EU and the European Commission’s announcement of fines in the Lundbeck case. We discuss the ways in which the EU and other jurisdictions might depart from or converge with the US approach reflected in Actavis, in practice and in principle. Ultimately, we argue that European jurisdictions will share the Supreme Court’s view that antitrust objectives should take precedence over patent law objectives when it comes to reverse payment settlements. However, European jurisdictions are likely to rely on a more categorical legal framework than the US rule of reason.

Competition Ahead? The Legal Landscape for Reverse Payment Settlements After Federal Trade Commission v. Actavis, Inc.

Competition Ahead? The Legal Landscape for Reverse Payment Settlements After Federal Trade Commission v. Actavis, Inc.

Reverse Payments – Life After Actavis

On its face, the United States Supreme Court’s opinion in Federal Trade Commission (FTC) v. Actavis seemed to contain the elements of a straightforward antitrust indictment: a dominant drug company paid potential rivals millions of dollars not to compete at the cost of public access to cheaper medicine. The interests of these rivals, once aligned with those of the public, have been twisted to align with its former rival and current paymaster. According to an FTC report, these settlements cost consumers $3.5 billion a year. The Court likened these settlements to cases involving market division arrangements, hardcore offenses normally weeded out under a per se standard of illegality. However, it ultimately opted for a rule of reason approach. Lower courts were to balance benefits and anticompetitive harms, taking into consideration the size and scale of the payment in relation to the patent owner’s anticipated litigation costs and any auxiliary services it received from the generic drug company. Large and unexplained payments could be used as a proxy for market power and anticompetitive harm, sparing lower courts the need for complex, costly and time-consuming inquiries into issues of patent validity and infringement.While the Hatch-Waxman Act makes it lucrative for generic challenges to induce settlements, the fact that the European Union faces similar issues in cases such as Lundbeck, Les Laboratoires Servier and others even without similar legislation is evidence that reverse payments occur outside the setting of the Act. Looking ahead, parties to a reverse payment will need to negotiate with a view that their agreement will be scrutinized by antitrust agencies and courts. Since at least 2005, settlements have evolved beyond cash payments to include other forms of consideration. Courts must now articulate how cross-licensing, service agreements and offers to delay authorized generic launches are to be assessed. Carelessly applied, Actavis could open litigation floodgates, dampening R&D by current and prospective patent owners. With the prospect and payoffs of settlement now tightened, generics could also be less willing to develop cheaper alternatives or challenge patents to bring such alternatives to market. In the United States where patent litigation is considerably higher than in Europe, these risks are more real and the consequences more dire. Beyond reverse payments, Actavis provides a rare and precious opportunity to move the dialogue on the interface between the patent and antitrust laws beyond mere platitudes. Most patent and antitrust stakeholders agree that both regimes seek to promote competition and innovation. An enduring disagreement remains, however, as to how these goals should be operationalized. The fierce rift between the majority and dissent vividly illustrates this: should we give primacy to visible marketplace rivalry or allow more latitude for private ordering between the settling parties? The true legacy of Actavis lies in the promise of catalyzing those from the patent and antitrust spheres into moving towards a realistic compromise on how the rules that affect them both should look like and function. Through debate, experimentation and refinement innate in the common law, future cases can craft pieces that will form a coherent analytical framework for the interface between patent and antitrust laws. The effort must be supported by constituents clear-headed enough to look beyond traditional prejudices, who are able to translate economic insights into workable legal rules, and who recognize that failure would mean that law at the interface will look a lot like the current state of American politics – divided, dysfunctional and a hotbed for empty rhetoric.

FTC v. Actavis: The Patent-Antitrust Intersection Revisited

Antitrust and patent law both seek to advance public welfare, but there has long been an undeniable tension between them. Where antitrust seeks to minimize market power in order to ensure competitive markets and pricing, patent law seeks to provide market power in order to provide incentives for the creation and disclosure of desirable inventions. In its most recent iteration, the tension between patent and antitrust law was before the Court in FTC v. Actavis, a case involving the legality of so-called reverse payments settlements. In a reverse payment settlement, a pharmaceutical company and a generic drug company settle claims of patent infringement by agreeing that the generic drug company will remain out of the pharmaceutical market covered by the patent in return for a payment from the patent-holding pharmaceutical company. The various circuit courts had reached widely variant conclusions on whether reverse payment settlements were legal, with some of the courts ruling such agreements, essentially, per se illegal, while others ruled such agreements, essentially, per se legal, at least so long as the agreement’s anticompetitive effects fell within the patent’s exclusionary scope. In its decision, the Court rejected both approaches, and required courts to apply the rule of reason to these settlements. While the Court provided some guidance on how the courts should approach a rule of reason analysis in these cases, some issues remain unclear. With the hope of suggesting some workable principles, this article re-examines the economics of patents and explains why some patents are weak, while others are strong. It then uses a game theoretic approach to analyze how the legal rules governing settlement can advance or disserve the goals of patent and antitrust law in this context.

US Supreme Court decision on reverse payment agreements: new era in patent litigation settlements – FTC v Actavis, Inc., 570 US (2013)

<section class="abstract"> Reverse payment agreements have long been the cause of sharp debate between pharmaceutical industry stakeholders as regards this fundamental question: what is more important within the context of Hatch-Waxman patent settlements – patent law or competition law? As with the question, ‘what came first, the chicken or the egg?’, US courts also seem to struggle to answer this question. However, the US Supreme Court has finally considered the issue and has given guidance to the lower courts. It held that these type of agreements are not immune from antitrust scrutiny and firmly rejected the settled ‘scope of patent’ approach largely used by the courts, as well as the FTC’s ‘quick look’ test, suggesting that reverse payment agreements must be analysed under the antitrust ‘rule of reason’ approach. </section>

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.

Reverse Payment Patent Settlements in the Pharmaceutical Sector and Competition Law – Do Lundbeck and Actavis Help to Bridge the Views Across the Atlantic Regarding the Delayed Market Entry of Cheaper, Generic Medicines?

Abstract Competition law and Intellectual Property law are remarkably divergent in scope and thus make for uneasy bedfellows. Although they both purport to help the consumer, their effects on the common market can be strikingly different. Recent decisions in the European Union and the United States of America have brought into focus the role of reverse payment patent settlement agreements. These agreements are generally of a commercial nature, and are agreements to settle actual or potential disputes which are related to patents. The questions which are sought by the parties to mutually settle range from infringement of a patent or the validity of a patent. When such a settlement agreement between a patent holder (in this instance the originator company) and a patent challenger (being a generic company) involves a value transfer from the originator to the generic company, coupled with a provision to limit or restrict the generic company’s ability to market its own product on the market, then certain interesting areas of conflict tend to come forward. The question arises whether this is simply a case of a company paying off its competitors to stay out of its market and delay the entry of cheaper, generic medicines, and is thus purely anticompetitive and harmful to consumers? Or whether the right to settle a patent dispute within the scope of patent laws is something which is outside the domain of Competition law? The European Commission and the Federal Trade Commission have displayed similar levels of distrust towards such commercial settlement agreements, and now the United States Supreme Court has weighed in with its own opinion. It remains to be seen how this matter will develop further in the courtrooms on both sides of the Atlantic.

The Need for a Patent-Centric Standard of Antitrust Review to Evaluate Reverse Payment Settlements

Reverse payment settlements have ignited a firestorm debate among all affected parties: consumer groups, brand-name pharmaceutical companies, generic manufacturers, pharmaceutical wholesalers and retailers, lawmakers, executive agencies, and the federal courts. The Federal Trade Commission (“FTC”) has waged a decade-long battle against such private settlements of pharmaceutical patent litigation as illegal market-sharing agreements, with skirmishes among the circuits trending in favor of the settling parties until recently. The Third Circuit’s recent decision in In re K-Dur Antitrust Litigation unsettled this trend, and the Supreme Court granted the FTC’s petition for a writ of certiorari in a separate case on the issue on December 7, 2012.A reverse payment settlement is an agreement ending a pharmaceutical patent infringement suit under which a putative patent holder agrees to compensate an alleged infringer, typically a generic firm, to settle a patent infringement case. In exchange, the alleged infringer agrees not to challenge the patent holder’s patent or sell a generic version of the drug for a stated term. Because the payment flows from the plaintiff to the defendant, it has been called a “reverse” payment.This Note argues that any standard of antitrust review for reverse payment settlements must involve an evaluation of the patent’s strength at the time the patent holder and generic firm enter into a settlement. The Court of Appeals for the Federal Circuit is the court of competent jurisdiction to review a district court’s evaluation of a patent’s strength. Part I reviews reverse payment settlements generally and the statutory schemes that promote their emergence. Part II presents three approaches the circuit courts have adopted to review reverse payment settlements: per se illegality, a rebuttable presumption of illegality, and the scope of the patent test. Part III argues that any standard of antitrust scrutiny must consider the patent’s strength at the time of the settlement — an approach no circuit has yet adopted — and that the Federal Circuit is the proper appellate court to review patent strength.

‘Pay-for-Delay’ Settlements: In Search of the Right Standard

In its 2009 pharmaceutical sector inquiry, the European Commission observed that patent settlements involving a value transfer from the originator to the generic manufacturer (reverse payment) could fall under the prohibition of anticompetitive agreements. In 2012, it issued its first two statements of objections in reverse payment cases. In the US, where competition authorities have dealt with this issue for more than a decade, courts remain split on the applicable competition standard. Condone reverse payments as long as the settlement does not exceed the potential exclusionary scope of the patent? Or, conversely, consider them as prima facie evidence of an agreement to keep generics off the market ('pay for delay')? One reason for this indecision is that many courts are reluctant to interfere with the complex dynamics of patent settlements: while reverse payments could be indicative of anticompetitive intent, they could also be seen as a necessary mechanism to help parties reach a settlement. Blindly condemning all reverse payments thus seems excessive, but determining which payments are legitimate and which are not poses serious difficulties. In light of these difficulties, the more lenient approach to reverse payments that is currently adopted by the majority of US courts at least has the merit of pragmatism.

Reverse Payments, Perverse Incentives

Issuing and enforcing prescription drug patents requires courts and legislatures to strike a delicate balance. A patent gives drug manufacturers a legal, if temporary, monopoly on sales of a drug; this encourages manufacturers to engage in costly research and development of new medicines. But not all patents issued by the Patent Office are ultimately deemed valid – generic drug manufacturers can infringe the patent, and, when sued, attack its validity in court on a variety of grounds, including obviousness. In recent years, patent holders have begun to settle these suits (which they initiated) by paying the alleged infringer. Not surprisingly, these reverse payment settlements (“RPSs”) have been challenged on antitrust grounds. The federal courts of appeals split over whether this practice is presumptively an illegal restraint of trade, and in December 2012 the Supreme Court agreed to decide the issue, granting a writ of certiorari in FTC v. Watson Pharmaceuticals. In light of the importance of the issue to both drug consumers and manufacturers, it is crucial to understand the economic effects of RPSs. Many courts, including the Second Circuit and the Eleventh Circuit, commentators and scholars have suggested that restricting RPSs would necessarily retard technological progress, by reducing the expected returns of becoming a patentee. In this Article, I show, with the help of a game-theoretical model, that this conclusion is unwarranted. Restricting RPSs has the effect of chilling generic entry when – and only when – the underlying patent is strong, or likely to be held valid and infringed. Therefore, restricting RPSs increases the expected returns of holding a strong patent by eliminating potential payments to generic entrants, while at the same time eliminating the possibility of monopoly profit-splitting between branded and generic manufacturers when the patent is weak. This reward shifting effect implies that restricting the use of RPSs is likely to foster more revolutionary innovations, which lead to stronger patents, while lowering R&D towards relatively obvious inventions, which lead to weaker patents. This reward shifting effect of restrictive rules on RPSs, to the best of my knowledge, has gone unnoticed in the past, and it should play an important role in the Supreme Court’s cost benefit analysis.

Supreme court to resolve legality of ‘reverse payment’ settlement agreements between brand-name drug manufacturers and generic competitors

Supreme court to resolve legality of ‘reverse payment’ settlement agreements between brand-name drug manufacturers and generic competitors

Waiting is the Hardest Part: Why the Supreme Court Should Adopt the Third Circuit's Analysis of Pay-for-Delay Settlement Agreements

In March 2013, the U.S. Supreme Court will hear Federal Trade Commission v. Watson Pharmaceuticals, Inc., giving the Court the opportunity to answer the multibillion-dollar question of whether brand-name pharmaceutical companies violate antitrust laws when they pay generic drug manufacturers to delay entering the drug market. The Supreme Court’s decision in this case could have a significant impact on rising health care costs in this country. The high cost of prescription drugs has put crippling economic pressure on the U.S. health care system. In 2010, forty-eight million Americans sacrificed filling essential drug prescriptions due to cost - often leading to life-threatening consequences and further increased health care expenses. Although many factors contribute to high drug prices, collusive settlements between brand-name pharmaceutical companies and generic drug manufacturers play a major role by presenting a barrier to lowering drug costs. Brand-name pharmaceutical companies have long been settling patent litigation by paying generic manufacturers large sums of money to drop patent lawsuits, thereby delaying generic drugs from entering the market. These settlement arrangements, known as “reverse payments” or “pay-for-delay” agreements, derive from the regulatory framework of the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Act. Though Hatch-Waxman’s goal was to increase generic drug competition in the pharmaceutical drug market while still fostering patent innovation, reverse payment settlements largely prevent timely generic drug entrance into the marketplace. As a result, drug prices remain inflated and American healthcare consumers bear the burden. According to the Federal Trade Commission (“FTC”), these anticompetitive agreements, which rose to a record number in 2012, cost consumers $3.5 billion per year. Due to the complex intersection of the regulatory scheme of Hatch-Waxman, antitrust principles, and patent law, circuit courts have reached divergent conclusions on whether reverse payment settlements are anti-competitive. Three circuit courts applied antitrust scrutiny to find that the reverse payments were unreasonable restraints of trade and violated Section 1 of the Sherman Act. Conversely, three circuit courts reasoned that a reverse payment was legal so long as it remained within the “scope of the patent.” In fact, last year, the Third Circuit reviewed the same settlement agreement as the Eleventh Circuit did in 2005 and yet reached an opposite conclusion. While the Eleventh Circuit applied the scope of the patent test to find that the payments were legal, the Third Circuit expressly rejected the scope of the patent test and found that the payments constituted prima facie evidence of an antitrust violation. Beyond settling the differences in opinion among the lower courts, the U.S. Supreme Court decision will have significant implications for the pharmaceutical industry and American consumers. This Comment contains four Parts. Part I of this Comment provides background information regarding the reverse payment settlement problem, including Congress’s intent for passing the Hatch-Waxman Act, the Act’s basic mechanisms, principles of antitrust and patent law, and the first two cases to deal with reverse payments stemming from the Act. Next, Part II discusses how the Eleventh Circuit, Second Circuit, and Federal Circuit applied the scope of the patent test to reverse payment settlement agreements, and how the Third Circuit rejected the test. Part III then analyzes these circuit court decisions, reasoning that the Third Circuit properly considered reverse payments as prima facie evidence of an unreasonable restraint of trade. Finally, Part IV proposes that the Supreme Court should adopt the Third Circuit’s reasoning and considering additional factors regarding the reasonableness of reverse payments.

Delay in generic entry should remain a concern to competition authorities

The importance of the pharmaceutical sector for Europe has been growing as it is essential for the health and well-being of its citizens to access innovative, safe and affordable medicines, particularly as its population ages. The 2009 sector inquiry of the European Commission into the pharmaceutical sector found that on average citizens waited more than 7 months after patent expiry for cheaper generic medicines, costing them and their health care systems 20% in extra spending. This article discusses to what extent the conduct of pharmaceutical companies and the agreements between originator and generic companies contribute to the delay of generic entry. The recent monitoring exercises by the Commission have revealed that although the total number of patent settlements has steadily increased in Europe in recent years, the potentially anticompetitive patent settlements (settlements leading to delay of generic entry with the presence of reverse payments and/or out-of-scope settlement terms) have generally decreased in Europe following the Commission's sector inquiry. Competition authorities should, however, remain vigilant and concerned about potentially anticompetitive practices leading to delay in generic entry. Moreover, further guidance will need to be developed by competition authorities and ultimately by the courts whether and under what circumstances patent settlement agreements that delay generic entry in return for a payment or other value transfer from the originator company constitute anticompetitive conducts.

Solving the Patent Settlement Puzzle

Courts and commentators are sharply divided about how to assess “reverse payment” patent settlements under antitrust law. The essential problem is that a PTO-issued patent provides only a probabilistic indication that courts would hold that the patent is actually valid and infringed, and parties have incentives to structure reverse payment settlements to exclude entry for longer than this patent probability would merit. Some favor comparing the settlement exclusion period to the expected litigation exclusion period, but this requires difficult case-by-case assessments of the probabilities of patent victory. Others instead favor a formal “scope of the patent” test that allows such settlements for nonsham patents if the settlement does not delay entry beyond the patent term, preclude noninfringing products, or delay nonsettling entrants. However, the formal scope of the patent test excludes entry for longer than merited by the patent strength, and it provides no solution when there is either a significant dispute about infringement or a bottleneck issue delaying other entrants. This Article provides a way out of this dilemma. It proves that when the reverse payment amount exceeds the patent holder’s anticipated litigation costs, then under standard conditions the settlement will, according to the patent holder’s own probability estimate, exclude entry for longer than both the expected litigation exclusion period and the optimal patent exclusion period, and thus will both harm consumer welfare and undermine optimal innovation incentives. Further, whenever a reverse payment is necessary for settlement, it will also have those same anticompetitive effects according to the entrant’s probability estimate. This proof thus provides an easily administrable way to determine when a reverse payment settlement is necessarily anticompetitive, without requiring any probabilistic inquiry into the patent merits. We also show that, contrary to conventional wisdom, patent settlements without any reverse payment usually (but not always) exceed both the expected litigation exclusion period and the optimal patent exclusion period, and we suggest a procedural solution to resolve such cases.

WOULD THE PER SE ILLEGAL TREATMENT OF REVERSE PAYMENT SETTLEMENTS INHIBIT GENERIC DRUG INVESTMENT?

“Reverse payment” patent settlements between brand and generic pharmaceutical manufacturers have received substantial scrutiny in recent years. While much has been written about the appropriate antitrust policy towards these settlements, the literature has paid little attention to the effect that changes in that policy might have on the incentives of generic manufacturers to develop generic drugs and challenge branded patents. We present a basic economic model of generic manufacturers' investment decisions and argue that these incentives should be taken into account in evaluating policy issues. We conclude that a per se rule against “reverse payment” patent settlements could chill the incentives for generic investment by increasing the cost and uncertainty of patent litigation, and could deprive consumers of benefits from lower cost generic drugs.

Should Setllements in Which the Patent Owners Pay the Accused Infringers to Stay Out the Market Be Illegal Per Se

The entire topic revolves around the concept of reverse settlement payment in which a huge lump of money is paid by the company owning the patent to the generic company for not infringing its product and so that it could enjoy its 20 years for that patent. These provisions are enabled by Hatch-Waxman Act as to application by the patent owner to obtain a patent and it also deals with on what specific grounds a generic company can infringe the patent of the patent owner. The topic briefly narrows down about how reverse payment settlement is violating the antitrust laws and its related case laws. It also describes about how reverse settlement violated the competition law provisions.

Reverse Payment Settlements in the Pharmaceutical Sector: A European Perspective

On 17 January 2011, the European Commission launched , a monitoring exercise of patent settlements in the pharmaceutical sector for the second time after the Pharmaceutical sector inquiry of 2009. As was the case for the first monitoring exercise launched in January 2010, a number of pharmaceutical companies were asked to submit copies of their patent settlement agreements concluded in the European Economic Area (EEA), together with any relevant annex, amendment or related agreement.The rationale for the monitoring exercise derives from some of the findings of the Pharmaceutical Sector Inquiry, which had highlighted the possibility that some of the agreements reached by originators and generics to settle IP-related disputes (generally believed to be efficiency-enhancing tools to save money on litigation costs), may in fact turn out to have anticompetitive effects on the market. This is particularly the case for so-called “reverse payment agreements”. These are settlements that involve a payment (in direct or indirect form) flowing in a direction that intuitively appears “reverse”, as money is paid by the patent holder (the originator) to the alleged infringer – a generic firm.

CAFC to Rehear Inequitable Conduct Case en Banc; Developments in Patent Term Extension; Two Reverse Payment Suits Decided; European Court of Justice to Consider Scope of Biotechnology Patent Protection; Genetic Technologies' Patents Affirmed; Heart Failure Drug Receives U.S. Patent; BLR Archives: Amicus Brief in Bilski

Biotechnology Law ReportVol. 29, No. 4 PATENTSCAFC to Rehear Inequitable Conduct Case en Banc; Developments in Patent Term Extension; Two Reverse Payment Suits Decided; European Court of Justice to Consider Scope of Biotechnology Patent Protection; Genetic Technologies' Patents Affirmed; Heart Failure Drug Receives U.S. Patent; BLR Archives: Amicus Brief in BilskiPublished Online:5 Aug 2010https://doi.org/10.1089/blr.2010.9941AboutSectionsPDF/EPUB Permissions & CitationsPermissionsDownload CitationsTrack CitationsAdd to favorites Back To Publication ShareShare onFacebookTwitterLinked InRedditEmail FiguresReferencesRelatedDetails Volume 29Issue 4Aug 2010 Information© 2010 Mary Ann Liebert, Inc.To cite this article:CAFC to Rehear Inequitable Conduct Case en Banc; Developments in Patent Term Extension; Two Reverse Payment Suits Decided; European Court of Justice to Consider Scope of Biotechnology Patent Protection; Genetic Technologies' Patents Affirmed; Heart Failure Drug Receives U.S. Patent; BLR Archives: Amicus Brief in Bilski.Biotechnology Law Report.Aug 2010.395-400.http://doi.org/10.1089/blr.2010.9941Published in Volume: 29 Issue 4: August 5, 2010PDF download

The Economics of Injunctive and Reverse Settlements

This paper extends the economic literature on settlement and draws some practical insights on reverse payment settlements. The key contributions follow from the distinction drawn between standard settlements, in which the status quo is preserved, and injunctive settlements, w and under which reverse settlements will be observed among injunctive settlements. Reverse settlements are likely when the stakes associated with the injunction are large relative to damages and litigation costs. The analysis has broader implications for efficient remedies and legal rules. (JEL K10, K40, K41, D24, O34)

Real Knowledge is to Know the Extent of One's Own Ignorance: On the Consumer Harm Approach in Innovation-Related Competition Cases

Modern economics advocates an assessment of competition law cases in light of the effects of firm conduct on the relevant market. In many instances, law enforcers and also firms that have to assess the legality of their business models in advance will often have to predict the “likely” effects in the future. This obviously creates a problem of uncertainty. This article reviews this problem for the assessment of competition law cases in innovation-related markets. Thereby, three specific sets of cases are discussed: (1.) the GlaxoSmithKline cases in Europe, where the question was whether R&D intensive pharmaceutical companies should be allowed to restrain parallel trade between Member States in order to enhance their ability to invest in innovation, (2.) the European Microsoft case, and (3.) “pay-for-delay” settlements of patent litigation proceedings that involve a so-called “reverse payment” by the patent holder to the generic drugs producer for delaying the market entry of the generic drug. Thereby, the article aims to identify the most appropriate standard of liability against the background of the problem of uncertainty. It rejects the consumer harm standard which is accepted by the courts in the U.S. and traditionally rejected by the EU courts in favor of a concept of protecting the process of dynamic competition which focuses on the elements of rivalry, openness of the market, and consumer choice.