The John M. Olin Center

Paper Abstract

724. Einer Elhauge & Alex Krueger, Solving the Patent Settlement Puzzle, 08/2012.

Abstract: 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 the patent is actually valid and infringed, and parties have incentives to structure reverse payment settlements to delay entry more than this patent probability would merit. Some favor comparing the settlement entry date to the probabilistic scope of the patent, but this requires difficult case-by-case assessments of the patent probabilities. Others instead favor a formal scope of patent test that allows such settlements for non-sham patents if the settlement does not delay entry beyond the patent term, preclude non-infringing products, or delay non-settling entrants.

However, the formal scope of patent test delays entry more than merited by the patent strength, and it provides no solution when there is a significant dispute about infringement or a bottleneck issue delaying other entrants. This paper provides a way out of this dilemma. It proves that when the reverse payment amount exceeds the patentholder's anticipated litigation costs, then under standard conditions the settlement entry date will always delay expected entry, harm consumer welfare, and exceed the probabilistic patent scope according to the patentholder's own probability estimate. Further, whenever a reverse payment is necessary for settlement, it will also have the 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 inquiry into the patent merits. We also show that, contrary to widespread assumption, patent settlements without any reverse payment usually (but not always) delay entry and exceed the probabilistic patent scope, and suggest a procedural solution to resolve such cases.


724: PDF