1

Federal Trade Commission

Intellectual Property Rights, Truncation, and Actavis:

Who’s Afraid of the Rule of Reason?

Remarks of Joshua D. Wright♠

Commissioner, Federal Trade Commission

at the

Global Competition Review Live 2nd Annual IP & Antitrust USA 

Washington, DC

April 14, 2015

I. INTRODUCTION

Good afternoon. I’m delighted to be here and am grateful for the opportunity to 

contribute to the discussion of antitrust enforcement in the context of intellectual 

property rights. I note at the outset that the views I express this afternoon are my own 

and are not those of the Commission or any of its other Commissioners.

 

♠ The views stated here are my own and do not necessarily reflect the views of the Commission 

or any of its other Commissioners. I am grateful to my advisor, Angela Diveley, for her invaluable 

assistance in preparing these remarks. 
2

Today I’d like to discuss an important concept in antitrust enforcement: 

truncated or so-called structured rule-of-reason analysis. In particular, I would like to 

focus upon an emerging demand by commentators and courts to apply truncated 

analysis in the context of business arrangements involving intellectual property rights, 

or IPRs. 

Recent calls for truncated antitrust analysis to accommodate IPRs’ unique 

features raise a number of interesting issues. One is to identify when truncated 

antitrust rules – that is, any antitrust analysis short of the full-blown rule of reason, 

including quick looks, presumptions, and per se rules – are appropriate as a general 

matter, and whether those conditions apply to business arrangements involving IPRs. 

Another interesting issue is whether IPRs require a special form of antitrust analysis. 

The demand for application of truncated antitrust analysis to evaluate business 

arrangements involving IPRs appears to be growing. To give just a few examples, 

antitrust commentators have proposed truncated antitrust analyses to evaluate 

standard essential patent holders seeking injunctions, the breach of SSO agreements by 

patent holders more generally, the business activities of patent assertion entities, and 

reverse payment settlements in the pharmaceutical industry. 

Let me begin by discussing the economics of truncated antitrust analysis. The 

default method of evaluating antitrust-relevant conduct is the rule of reason, which, as 
3

I’m sure many of you know first-hand, involves a costly, comprehensive weighing of 

any pro- and anticompetitive effects of the challenged conduct. Truncated antitrust 

analysis, by way of comparison, harnesses decision theory to develop shorthand 

analytical tools based upon judicial and market experience with the restraint at issue, as 

well as accumulated economic knowledge, to identify conduct that is likely to harm 

competition. 

Truncated analysis is appropriate when it, rather than the full-blown or 

unstructured rule of reason, minimizes the sum of error costs and the administrative 

costs of adjudicating antitrust claims. The benefit of truncation is that it economizes on 

existing judicial and economic knowledge to produce more efficient legal rules. We 

should think of the development of truncated antitrust rules as a dynamic process – that 

is, antitrust rules evolve over time, and only after significant judicial experience with 

the challenged conduct or an empirical understanding of its competitive effects can be 

discerned.1 In short, truncated analysis is at its core intended to be an easily 

administrable, effects-based application of the rule of reason.2

 

1 See Polygram v. FTC, 416 F.3d 29 (D.C. Cir. 2005); Polygram, 136 F.T.C. 310 (2003); Timothy J. Muris & 

Brady P.P. Cummins, Tools of Reason: Truncation Through Judicial Experience and Economic Learning, 

ANTITRUST, Summer 2014, at 46.

2 ANDREW I. GAVIL, WILLIAM E. KOVACIC & JONATHAN B. BAKER, ANTITRUST LAW IN PERSPECTIVE: CASES,

CONCEPTS AND PROBLEMS IN COMPETITION POLICY 185-87 (2d ed. 2008); Muris & Cummins, supra note 1, at 

46-47, 50.
4

Recent developments at the intersection of IPRs and antitrust appear to be 

producing truncated analyses that, although administrable, are inconsistent with 

traditional effects-based truncation as I have described it here. The rationale typically 

proffered in defense of these developments is that there is something special about IPRs 

that requires unique treatment under the antitrust laws. Students of antitrust history 

will recognize the claim that IPRs require a unique form of antitrust analysis. The 

zenith of the era of antitrust-IPR exceptionalism was the infamous and now-repudiated 

“Nine No-Nos.”3 

The approach of IP-exceptionalism is generally rejected in modern antitrust 

analysis in favor of analytical parity between IPRs and real property rights while 

accounting for important institutional and factual differences where relevant. The 

parity principle is manifested in the FTC and DOJ’s joint “Antitrust Guidelines for the 

Licensing of Intellectual Property,”4 which set forth the general principle that 

“intellectual property [is] essentially comparable to any other form of property.”5 This 

parity principle provides a consistent and predictable theoretical framework in which to 

 

3 Bruce B. Wilson, Deputy Assistant Attorney Gen., Patent and Know-How License Agreements: Field of 

Use, Territorial, Price and Quantity Restrictions, Remarks Before the Fourth New England Antitrust 

Conference (Nov. 6, 1970).

4 U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST GUIDELINES FOR THE LICENSING OF INTELLECTUAL 

PROPERTY (1995).

5 Id. at § 2.0(a).
5

analyze IPRs, and it recognizes that strong, clearly defined property rights are essential 

to dynamic competition. The Supreme Court endorsed these benefits and the parity 

principle in Independent Ink6 when it rejected the presumption that a patent necessarily 

confers market power.7

Recent developments in antitrust analysis of IPRs suggest a rejection of the parity 

principle,8 and in particular, the adoption of truncated antitrust analyses for business 

arrangements involving IPRs. For example, the FTC has invoked its “unfair methods of 

competition” authority under Section 5 of the FTC Act to condemn standard essential 

patent (“SEP”) holders seeking injunctions.9 Of particular concern is the concept that 

such conduct is in breach of implied contracts to license SEPs on fair, reasonable, and 

non-discriminatory (“F/RAND”) terms.10 Outside of IPRs, antitrust law does not 

 

6 Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 28-29, 38-43 (2006); see also Joshua D. 

Wright, Missed Opportunities in Independent Ink, 2006 CATO SUP. CT. REV. 333 (2006); Bruce H. Kobayashi,

Spilled Ink or Economic Progress? The Supreme Court’s Decision in Illinois Tool Works v. Independent Ink, 53 

ANTITRUST BULLETIN 5 (2008).

7 Joshua D. Wright & Douglas H. Ginsburg, Whither Symmetry? Antitrust Analysis of Intellectual Property 

Rights at the FTC and DOJ, COMPETITION POL’Y INT’L, Autumn 2013, at 41, 43 (“an avowed endorsement of 

symmetrical antitrust analysis.”).

8 See id. at 44-48.

9 See Complaint ¶¶ 25-26, 31, Motorola Mobility LLC, FTC Docket No. C-4410 (July 23, 2013), available at

https://www.ftc.gov/sites/default/files/documents/cases/2013/07/130724googlemotorolacmpt.pdf; 

Complaint ¶¶ 20-21, Robert Bosch GmbH, FTC Docket No. C-4377 (Nov. 21, 2012), available at

https://www.ftc.gov/sites/default/files/documents/cases/2012/11/121126boschcmpt.pdf; Complaint ¶¶ 26-

38, Negotiated Data Solutions LLC, FTC Docket No. C-4234 (Sept. 22, 2008), available at

https://www.ftc.gov/sites/default/files/documents/cases/2008/09/080923ndscomplaint.pdf.

10 See Statement of the Fed. Trade Comm’n 1, Motorola Mobility LLC, FTC File No. 121-0120 (Jan. 3, 2013) 

(“Motorola reneged on a licensing commitment made to several standard-setting bodies to license its 
6

recognize claims involving “garden variety breach-of-contract . . . disputes.”11 To do so 

within the context of IPRs rejects the parity principle and singles out IPRs as deserving 

special antitrust treatment.

Some scholars have also rejected the parity principle in the context of patent 

assertion entities (“PAEs”), calling for a presumption that the PAE business model of 

asserting and licensing IPRs is anticompetitive.12 The argument that PAEs inherently 

harm competition rests explicitly upon the assumption that IPRs are fundamentally 

different from real property rights and should therefore be subjected to stricter antitrust 

scrutiny.13 

In the pharmaceutical sector, lower courts are increasingly relying primarily 

upon the language in Actavis to use the size of reverse payment settlements as a proxy 

 

standard-essential patents relating to smartphones, tablet computers, and video game systems on 

FRAND terms by seeking injunctions against willing licensees of those SEPs.”); Statement of the Fed. 

Trade Comm’n 1, Robert Bosch GmbH, FTC File No. 121-0081 (Nov. 26, 2012); Statement of the Fed. 

Trade Comm’n 1, Negotiated Data Solutions LLC, FTC File No. 051-0094 (Jan. 23, 2008).

11 Dissenting Statement of Commissioner Maureen K. Ohlhausen 3, Robert Bosch GmbH, FTC File No. 

121-0081 (observing rejection of the parity principle and stating, “The Commission statement emphasizes 

the context here (i.e., standard setting); however, it is not clear why the type of conduct that is targeted 

here (i.e., a breach of an allegedly implied contract term with no allegation of deception) would not be 

targeted by the Commission in any other context where the Commission believes consumer harm may 

result”).

12 See Fiona Scott Morton & Carl Shapiro, Strategic Patent Acquisitions, 79 ANTITRUST L.J. 463, 464, 494 

(2014); see also Joshua D. Wright & Douglas H. Ginsburg, Patent Assertion Entities and Antitrust: A 

Competition Cure for a Litigation Disease?, 79 ANTITRUST L.J. 501, 506, n.20 (2014) (describing and criticizing 

the presumption).

13 See Wright & Ginsburg, supra note 12, at 506 n.20.
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for patent strength to determine the legality of the settlements under the antitrust laws, 

and scholars have provided economic analyses attempting to map out a relationship 

between payment size and likely competitive effects. 

To illustrate the potential dangers to competition and consumers of truncation

before it is adequately supported by judicial and economic learning, I will focus upon 

recent proposals for truncated rule-of-reason analysis in the reverse payment context 

based upon reverse payment size. I will contend that, for reasons I will explain shortly, 

economic analysis to date does not support a presumption of anticompetitive effect 

based upon a comparison of payment size and litigation costs.

II. TRUNCATED ANTITRUST ANALYSIS

Let’s begin with a quick primer on truncation in antitrust analysis. The rule of 

reason arose in recognition of the fact that the antitrust laws were intended to address 

competitively harmful conduct and not all restraints of trade.14 As modern economic 

knowledge has been infused into antitrust analysis, the rule of reason has displaced 

bright-line per se rules of liability.15 The antitrust analysis of maximum and minimum 

resale price maintenance, exclusive territories, tying arrangements, block booking, 

exclusive dealing, vertical mergers, and franchise agreements, among others, have 

 

14 See Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 62-66 (1911).

15 See, e.g., Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S 877, 878-80 (2007); Continental 

T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 36-37 (1977).
8

benefitted tremendously from the greater incorporation of economic reasoning into 

antitrust standards.

There is one rule of reason, which is best understood as a continuum with the per 

se rule on one end and the full-blown rule of reason on the other.16 The optimal 

standard or rule for a particular type of business conduct will depend upon its likely 

competitive effects, the accuracy with which the legal rule can identify anticompetitive 

conduct, and the costs of applying the rule in practice. As economic knowledge and 

judicial experience with particular restraints accumulates, truncated analyses have 

developed where efficient – that is, where a less costly rule can replace a more 

cumbersome standard without an offsetting loss in the accuracy with which 

competitive effects can be predicted. 

The per se rule is the easiest example of truncation. It applies where experience 

indicates a given type of conduct “always or almost always tend[s] to restrict 

competition or decrease output.”17 The most illustrative example of such conduct is 

naked price fixing. The harm is clear: consumers pay higher prices than they would 

otherwise pay under competitive conditions. Furthermore, there are no procompetitive 

justifications for price fixing. Thus, the bright-line, per se rule is appropriate here; it 

 

16 Muris & Cummins, supra note 1, at 46 (citing Cal. Dental Ass’n v. FTC, 526 U.S. 726, 779 (1999)).

17 Broad. Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 19-20 (1979).
9

reliably captures anticompetitive conduct with little risk of prohibiting procompetitive 

conduct, and it is easy to administer. While it is theoretically possible that naked pricefixing behavior increases consumer welfare in some instances, the per se prohibition is 

optimal because the cost savings from administering the bright-line rule is greater than 

any loss to consumers from false positives.

Antitrust analysis is more nuanced where the challenged conduct appears likely 

to harm competition but still has potential procompetitive virtue. A prime example of 

the application of the truncated framework to conduct that might plausibly involve 

procompetitive virtues is Polygram.18 There, both the Commission and the D.C. Circuit 

acknowledged the tradeoff between the lower administrative costs incurred under 

easily administrable rules and the potential for greater error costs arising from less 

accurate prediction. The D.C. Circuit also acknowledged the benefits of applying “an 

enquiry meet for the case,” namely the mode of analysis on the rule-of-reason 

continuum that minimizes total error and administrative costs.19 

The D.C. Circuit determined the agreement in Polygram was “inherently 

suspect,” raised an inference of competitive harm, and shifted the burden to Polygram 

to raise procompetitive justifications because it “look[ed] suspiciously like a naked price 

 

18 See Polygram v. FTC, 416 F.3d 29, 35-36 (D.C. Cir. 2005); Polygram, 136 F.T.C. 310, 348-51 (2003).

19 See Polygram, 416 F.3d at 34.
10

fixing agreement between competitors” and bore a “close family resemblance [to] 

another practice that already stands convicted in the court of consumer welfare.”20 This 

framework is consistent with the Supreme Court’s rationale in California Dental that 

truncated analysis is appropriate only where judicial experience and economic 

knowledge suggest the challenged conduct will routinely be treated the same way 

under a full-blown rule of reason.21

Importantly, decision-theoretic analysis does not always support truncated 

antitrust rules. Sometimes significant experience analyzing a given class of conduct 

indicates the full-blown rule of reason is the most appropriate analytical standard. For 

example, the vast majority of mergers are not anticompetitive and therefore do not 

violate the Clayton Act.22 Antitrust law and policy recognize there is no single form of 

truncated analysis that can be applied in the merger context that would efficiently 

minimize error costs.

Similarly, a truncated analysis has failed to develop in the context of resale price 

maintenance. In Leegin, the Supreme Court charged lower courts with constructing the 

proper analytical framework for analyzing RPM based upon “experience considering 

the effects of these restraints by applying the rule of reason over the course of 

 

20 Polygram, 416 F.3d at 37; see also Polygram, 136 F.T.C. at 353-57.

21 See Cal. Dental Ass’n, 526 U.S. at 781; see also Polygram, 416 F.3d at 35.

22 Muris & Cummins, supra note 1, at 47.
11

decisions.”23 The Court suggested shorthand rules or presumptions may arise “to make 

the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to 

promote procompetitive ones.”24 It is clear from Leegin that the Court intended for 

truncated analysis to develop only if and when significant judicial and market 

experience weighs in its favor.

Lower courts have thus far been reluctant to adopt a truncated analysis for 

RPM,25 opting instead for analysis consistent with the traditional rule of reason, 

requiring proof of actual anticompetitive effects in order to shift the burden to 

defendants to proffer offsetting procompetitive justifications.26 This outcome is 

consistent with the current economic understanding that minimum RPM is quite often 

not only competitively neutral but procompetitive.27 Thus, as with mergers, courts are 

thus far properly reluctant to apply truncated rules to minimum RPM. 

 

23 Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S 877, 898 (2007).

24 Id. at 899.

25 See Theodore Voorhees, Jr., Reasoning Through the Rule of Reason for RPM, ANTITRUST, Fall 2013, at 60.

26 See id., at 60; see, e.g., House of Brides, Inc. v. Alfred Angelo, Inc., No. 11 C 07834, 2014 WL 64657, at *7 

(N.D. Ill. Jan. 8, 2014); P & M Distributors, Inc. v. Prairie Farms Dairy, Inc., No. 11-3145, 2013 WL 5509191, 

at *8 (C.D. Ill. Oct. 4, 2013); Bel Canto Design, Ltd. v. MSS HiFi, Inc., 11-cv-6353 CM, 2012 WL 2376466, at 

*13 (S.D.N.Y. June 20, 2012) (dismissing antitrust counterclaim as “counterclaimants have not alleged any 

adverse effects on the interbrand market. . . . [N]or has it pleaded that [the plaintiff] has power in that 

market.”); Jacobs v. Tempur-Pedic Int’l, Inc., 626 F.3d 1327 (11th Cir. 2010) (affirming dismissal for failure 

to allege a valid product market).

27 See Thomas A. Lambert & Michael Sykuta, Why the New Evidence on Minimum Resale Price Maintenance 

Does not Justify a Per Se or “Quick Look” Approach , CPI Antitrust Chron., Nov. 2013, at 7-8 (re-analysis of 

prior economic study, finding only 1.6% of RPM product categories surveyed had both an increase in 
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III. TRUNCATED RULES IN INTELLECTUAL PROPERTY: REVERSE PAYMENT SETTLEMENTS

Let me turn now to one example of truncation of antitrust rules in the context of 

IPRs. 

1. Actavis and Truncation

After Actavis, lower courts are faced with another call to develop and to apply a 

structured rule-of-reason analysis in the context of IPRs. In Actavis, recall that the 

Supreme Court held the traditional rule of reason is the proper analytical framework for 

determining whether a reverse payment settlement violates the antitrust laws.28 The 

Supreme Court rejected other forms of truncated analysis. It rejected the scope of the 

patent test, which would have rendered reverse payment settlements per se lawful if 

they did not extend the rights of the patent holders beyond the scope of the patent.29 

The Court also explicitly rejected the Commission’s invitation to apply another form of 

truncated analysis, pursuant to which all reverse payment settlements would be 

 

price and a decrease in quantity in states that shifted to rule of reason); Joshua D. Wright, The Economics 

of Resale Price Maintenance & Implications for Competition Law and Policy, Remarks Before the British 

Institute of International Comparative Law 21 (April 9, 2014) (finding that vertical restraints are generally 

competitive neutral); see generally James C. Cooper, et al., Vertical Antitrust Policy as a Problem of Inference, 

23 INT’L J. INDUS. ORG. 639, 658 (2005) (“virtually no studies can claim to have identified instances where 

vertical practices were likely to have harmed competition.”); Francine Lafontaine & Margaret Slade, 

Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, in HANDBOOK OF 

ANTITRUST ECONOMICS (Paolo Buccirossi, ed., 2008) (vertical contracts tend to benefit consumers in 

higher quality products and better service).

28 See FTC v. Actavis, Inc., 133 S. Ct. 2223, 2238 (2013). 

29 Id. at 2230.
13

presumed unlawful, shifting the burden to the settling parties to proffer evidence of the 

procompetitive effects of the settlement.30 Instead, as it did in Leegin, the Court held 

reverse payment settlements should be analyzed under the traditional rule-of-reason 

framework, and it delegated the task of structuring the rule of reason to the lower 

courts.31

The Court did provide some general guidance for lower courts to structure the 

contours of that analysis, emphasizing the potential analytical link between reverse 

payment size, patent strength, and anticompetitive effects. The Court observed that the 

plaintiff’s prima facie demonstration of a settlement’s anticompetitive effects necessarily 

“depends upon its size, its scale in relation to the payor’s anticipated future litigation 

costs, its independence from other services for which it might represent payment, and 

the lack of any other convincing justification.”32

Assessing the strength of the patent at issue has always been key to any 

competitive effects analysis of reverse payment settlements. The Court suggested a 

“workable surrogate” for patent strength under the rule of reason: reverse payment 

size. The Court observed “a reverse payment, where large and unjustified, can bring 

 

30 Id. at 2237.

31 Id. at 2238.

32 Id. at 2237-38.
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with it the risk of significant anticompetitive effects.”33 Recognizing the practical 

difficulties of embedding a full-blown patent validity trial within an antitrust 

proceeding, the Court also further suggested “a court, by examining the size of the 

payment, may well be able to assess its likely anticompetitive effects along with its 

potential justifications without litigating the validity of the patent.”34 

The critical question implicated by the Court’s ruling is what evidence will be 

sufficient to dispel the plaintiff’s prima facie burden? In particular, given the Court’s 

emphasis on the role of payment size and the complexity of litigating patent validity, it 

is completely unsurprising that courts, including the Supreme Court, are eager to 

identify an appropriate and workable proxy for patent strength in antitrust litigation of 

reverse payment settlements rather than embracing the full-blown rule of reason. It is 

also quite understandable that lower courts and academics have focused on the 

potential for payment size to serve as the basis for a truncated analysis. Economic 

analysis, however, is required to assess the strength of any relationship between 

payment size and likelihood of anticompetitive effects.

Academic economists and lawyers have answered the call for economic analysis 

of that relationship. Specifically, Aaron Edlin, Scott Hemphill, Herbert Hovenkamp, 

 

33 FTC v. Actavis, Inc., 133 S. Ct. 2223, 2237 (2013).

34 Id.
15

and Carl Shapiro (“EHHS”), who published jointly an article, entitled “Activating 

Actavis,” just a few months after the Actavis decision, favor what might be described as 

the “avoided-litigation-cost” benchmark for assessing the legality of reverse payment 

settlements.35 EHHS argue that if the payment size is positive after deducting the patent 

holder’s avoided litigation costs and the value of any goods, services, or other 

consideration provided by the claimed infringer to the patentee, the remaining payment 

likely reflects a relatively weak patent and “may be understood to be payment for 

delaying entry.”36

Some lower courts have now adopted reverse payment size as a proxy for patent 

strength and inferred anticompetitive effects from the existence of “large and 

unjustified” reverse payments.37 At least some courts have determined that the 

 

35 See Aaron Edlin, Scott Hemphill, Herbert Hovenkamp & Carl Shapiro, Activating Actavis, ANTITRUST, 

Fall 2013, at 16; Aaron Edlin, Scott Hemphill, Herbert Hovenkamp & Carl Shapiro, Actavis and Error 

Costs: A Reply to Critics, ANTITRUST SOURCE, Oct. 2014 [hereinafter Actavis and Error Costs]; Aaron Edlin, 

Scott Hemphill, Herbert Hovenkamp & Carl Shapiro, The Actavis Inference: Theory and Practice (Feb. 5, 

2015) (unpublished) (manuscript at 4), available at

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2560107. For a critique of the first article, see Barry C. 

Harris, Kevin M. Murphy, Robert D. Willig & Matthew B. Wright, Activating Actavis: A More Complete 

Story, ANTITRUST, Spring 2014, at 83.

36 Edlin, Hemphill, Hovenkamp & Shapiro, Activating Actavis, supra note 35, at 18.

37 See e.g., In re Aggrenox Antitrust Litigation, No. 3:14-md-2516 (SRU), 2015 WL 1311352, at *11 (D. Conn. 

Mar. 23, 2015) (“The salient question is . . . whether the settlement included a large and unjustified 

reverse payment leading to the inference of profit-sharing to avoid the risk of competition.”); United 

Food and Commercial Workers Local 1776 v. Teikoku Pharma USA, Inc., No. 14-md-02521-WHO, 2014 

WL 6465235, at *16 (N.D. Cal. Nov. 17, 2014) (“plaintiffs have plausibly alleged that the terms were large 

and unjustified reverse payments, which is sufficient to support plaintiffs' theories of injury at this 

juncture”); King Drug Co. of Florence v. Cephalon, Inc., Nos. 2:06-cv-1797, 2:06-cv-1833, 2:06-cv-2768, 

2:08-cv-2141, 2015 WL 356913, at *10 (E.D. Pa. Jan. 28, 2015) (rejecting, on a motion for summary 
16

existence of a large reverse payment settlement is sufficient to satisfy the plaintiff’s 

prima facie burden under the rule of reason.38

The demand for truncated analyses by lower courts and the instinct of academic 

economists and lawyers to supply them are understandable and desirable, but the 

fundamental question remains: are truncated analyses based upon payment size truly 

shedding light upon the settlements most likely to prove anticompetitive or are they 

closer to the analytical equivalent of the way a drunk uses a lamppost – for support 

rather than illumination?39 

Assessing whether this focus upon the size of the reverse payment is an efficient 

form of truncated analysis requires an understanding of the economic conditions under 

which inferences about competitive harm can reliably be drawn from a large payment. 

I turn to that question next. 

 

judgment, the assertion that a demonstration of actual anticompetitive effects is necessary and instead 

finding that only “evidence of a large payment is required for a plaintiff to satisfy its initial burden of 

demonstrating anticompetitive effects under the Actavis rule of reason analysis”).

38 See e.g., In re Aggrenox, 2015 WL 1311352, at *9 (“The anticompetitive harm, under Actavis, is that the 

reverse-payment settlement ‘seeks to prevent the risk of competition’ . . . . The plaintiffs . . . must plead 

facts sufficient to infer (and they must ultimately prove, within the rule-of-reason framework) that a large 

and otherwise unjustified reverse-payment was made as part of the settlement in order to shore up some 

perceived risk of the ′577 patent's invalidity.”); United Food and Commercial Workers, 2014 WL 6465235, at 

*13; King Drug Co. of Florence, supra note 37.

39 See Michael A. Salinger, Dir. Bureau of Econ., Fed. Trade Comm’n, Looking for the Keys under the 

Lamppost: Insights from Economics into Standards for Unilateral Conduct, Comments for ABA Section of 

Antitrust Law: Econ. and Section 2 Comm. Brownbag 2 (July 24, 2006), available at

https://www.ftc.gov/sites/default/files/documents/public_statements/looking-keys-under-lamppostinsights-economics-standards-unilateral-conduct/060731lookingforthekeys_0.pdf.
17

2. The Monopoly-to-Duopoly Model and the Avoided-Litigation-Cost 

Benchmark

As discussed, the avoided-litigation-cost benchmark posits simply that reverse 

payments greater than avoided litigation costs after netting out the value of any goods, 

services, or other consideration provided by the claimed infringer to the patentee reflect 

a weak patent, are properly understood as “payment for delaying entry,” and should be 

presumptively unlawful. Proponents of the avoided-litigation-cost benchmark contend 

that it is an efficient form of truncation because it accurately identifies anticompetitive 

reverse payment settlements, does not deter procompetitive settlements, and reduces 

administrative costs associated with the application of the full-blown rule of reason. 

The case for the avoided-litigation-cost standard as efficient truncation turns on 

whether it provides a reliable link to the competitive effects of reverse payment 

settlements and whether the rule minimizes the sum of relevant error costs. I will argue 

that the avoided-litigation-cost benchmark fails on both of these dimensions for at least

two reasons. First, the analytical link between payment size and competitive harm is 

far weaker than the economic model providing its rationale presumes. Second, the 

benchmark ignores the error costs associated with “forgone innovation due to the 

reduced incentives from erroneous invalidation of patents and the in terrorem

settlements paid to avoid that outcome.”
18

Prior economic analyses of reverse payment settlements are based upon a 

monopoly-to-duopoly model that assumes a single generic entrant. Specifically, these 

economic analyses model the Brand’s decision to litigate or settle based upon the 

assumption that if the Brand loses litigation to a generic entrant it will subsequently 

share duopoly profits with a single generic entrant. The avoided-litigation-cost

benchmark is based upon the result from these monopoly-to-duopoly models that 

settlements must reduce consumer welfare if the size of the reverse payment exceeds 

the patentee’s litigation costs.40 

The basic monopoly-to-duopoly model is based upon two flawed assumptions 

about competition after litigation results in invalidation of a patent: (1) duopoly profits 

of the brand and generic hold until expiration of the patent, and (2) only a single generic 

would enter the market. The monopoly-to-duopoly model effectively assumes that the 

marketing-exclusivity period lasts precisely until the expiration of the patent. Under 

this assumption, there is a single ANDA generic entrant prior to the expiration of the 

 

40 Carl Shapiro, Antitrust Limits to Patent Settlements, 34 RAND J. ECON. 391 (2003); Edlin, Hemphill,

Hovenkamp & Shapiro, Activating Actavis, supra note 35; Actavis and Error Costs, supra note 35; Murat 

Mungan, Reverse Payments, Perverse Incentives, 27 HARV. J.L. & TECH. 1 (2013); Einer Elhauge & Alex 

Krueger, Solving the Patent Settlement Puzzle, 91 TEX. L. REV. 283 (2012). But see Harris, Murphy, Willig & 

Wright, Activating Actavis: A More Complete Story, supra note 35 (using monopoly-duopoly model, but 

criticizing antitrust limits on reverse settlements); Mark R. Patterson, Leveraging Information About Patents: 

Settlements, Portfolios and Holdups, 50 HOUS. L. REV. 483 (2012) (analyzing the informational effect of patent 

challenges and estoppel rules).
19

patent and the first ANDA entrant that invalidates the brand patent obtains duopoly 

profits until the patent expires. 

In a recent analysis I co-authored with Bruce Kobayashi, Judge Douglas 

Ginsburg, and Joanna Tsai, we revise these two assumptions and model the competitive 

effects of the decision to litigate or settle. We incorporate the more realistic assumption 

that entry by multiple firms can follow the invalidation of a patent. Relatedly, we also 

incorporate the more realistic assumption that invalidation would provide only 180 

days of exclusivity to the generic that won the litigation, and after that period, both the 

brand with the invalidated patent and the generic entrant that successfully invalidated 

the patent in litigation obtain only the lower profits associated with free entry. Revising 

these features of the simple monopoly-to-duopoly model, we conclude that the range of 

feasible settlements is significantly larger than predicted under the single-entrant 

model.41 

The economic intuition for this result – a much broader set of feasible settlements

– is straightforward. The reduced payoff for the first generic entrant increases its 

incentive to litigate, as well as the amount for which it will settle. At the same time, 

litigating a patent under a rule of defensive non-party, non-mutual collateral estoppel 

 

41 Bruce H. Kobayashi, Joshua D. Wright, Douglas H. Ginsburg & Joanna Tsai, Actavis and Multiple ANDA 

Entrants: Beyond the Temporary Duopoly, ANTITRUST, Spring 2015, at 89.
20

under Blonder-Tongue v. University of Illinois Foundation,42 which prevents the patentee 

with an invalidated patent from relitigating the validity of the patent against 

subsequent generic entrants, imposes greater losses upon the patentee than under the 

original model. This decreases the patentee’s incentive to litigate due to the increased 

litigation risk, reduces the minimum entry time for a given reverse settlement, and 

increases the acceptable reverse payment for a given entry time. This produces a wider 

range of feasible settlements to which patentees and potential generic entrants would 

agree.

The wider feasible-settlement range when accounting for the possibility of 

multiple entrants after patent invalidation indicates that the avoided-litigation-cost 

benchmark is not a reliable predictor of anticompetitive settlements. Rather, the 

primary conclusion that can be taken from the wider settlement range is that the 

competitive setting generated by the interaction of the Hatch-Waxman regime and 

collateral estoppel rules generate stronger incentives to settle than assumed in prior 

analyses, and that the incentives are attributable to much more than simply avoiding 

“the risk of competition” contemplated as the relevant antitrust harm in Actavis. 

Critically, incorporating multiple, serial entrants into the model weakens significantly 

any relationship between patent strength and the size of the settlement and thus 

 

42 Blonder-Tongue Lab., Inc. v. Univ. of Ill. Found., 402 U.S. 313 (1971).
21

undermines the assertion that payment size can truly be a “workable surrogate” for the 

validity of a patent and can accurately predict whether a reverse payment settlement is 

anticompetitive and violates the antitrust laws. 

The first point – that incorporation of serial, multiple entrants after patent 

validation fundamentally alters the litigation-settlement calculus – is an important 

institutional detail to include in any economic model designed to capture the costs and 

benefits of litigation and settlement. 

The second point in our analysis is equally important, but more conceptual in 

nature: the economic analyses underlying the avoided-litigation-cost benchmark, and 

EHHS in particular, do not incorporate the risk of what I will describe as dynamic Type 

I errors into their analysis. EHHS contend that competitive harm caused by 

invalidating a valid patent in litigation is appropriately ignored when designing the 

optimal antitrust rule. I do not think that makes economic sense as a general matter, 

but it makes the least economic sense when discussing the intersection of IPRs and 

antitrust. At the heart of IP-antitrust policy is the notion that efficiency requires 

tradeoffs between the use of IPRs and their creation. This is the classic tradeoff, well 

known within antitrust circles and evident in nearly every competition policy 

discussion involving innovation, between the welfare gains from broader use of an 

innovation and the incentive to innovate. 
22

EHHS argue that the optimal antitrust rule should only account for losses to 

consumers arising from erroneous condemnation of procompetitive settlements. As an 

aside, careful observers will note that this approach does not support a rule of reason 

analysis at all, but rather a per se condemnation of all reverse payment settlements, not 

just those limited to litigation costs, because we can safely ignore any welfare costs 

arising from “errors” in litigation. Serious intellectual gymnastics are required to 

square this conclusion with the language of Actavis.43 Further, even more careful 

observers will detect that the argument that dynamic Type I errors should be ignored 

also implies we should have a no-settlement rule if the marginal costs of litigation are 

not large, as the benefits of patent litigation (the invalidation of bad patents) are only 

achieved through litigation and not settlement. I will leave as an exercise to the reader 

what the implications of this analysis are for whether we should have patents in the 

first place. 

However, as is well understood, welfare losses can arise not only from the 

erroneous condemnation of reverse payment settlements in litigation, which results in 

the limitation of the legal rights associated with patents, but also from the innovation 

 

43 See Actavis, 133 S. Ct. at 2234 (“We recognize the value of settlements and the patent litigation 

problem.”).
23

forgone as a result of patentees’ inability to hedge against the risk of erroneous 

invalidation of patents.

To ignore the costs of forgone innovation is antithetical to the underlying 

purposes of both the antitrust and the patent laws. The FTC and DOJ’s IP Guidelines 

summarize this concept, stating that the intellectual property laws establish enforceable 

property rights, the absence of which would permit imitators to exploit the IP holders’ 

efforts, which in turn reduces the commercial value of the IPRs and the incentives to 

invest in innovation to obtain them.44 The rationale is also supported in case law,45

economics,46 and the policies underlying the Hatch-Waxman Act,47 not to mention the 

Patent Clause of the Constitution itself.48

 

44 U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, supra note 4, § 1.0 (“The intellectual property laws and the 

antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare. 

The intellectual property laws provide incentives for innovation and its dissemination and 

commercialization by establishing enforceable property rights for the creators of new and useful 

products, more efficient processes, and original works of expression. In the absence of intellectual 

property rights, imitators could more rapidly exploit the efforts of innovators and investors without 

compensation. Rapid imitation would reduce the commercial value of innovation and erode incentives to 

invest, ultimately to the detriment of consumers. The antitrust laws promote innovation and consumer 

welfare by prohibiting certain actions that may harm competition with respect to either existing or new 

ways of serving consumers.”).

45 See e.g., United States v. Glaxo Group, 410 U.S. 52, 58 (1973) (“It is as important to the public that 

competition should not be repressed by worthless patents, as that the patentee of a really valuable 

invention should be protected in his monopoly.”).

46 See WARD S. BOWMAN, PATENT AND ANTITRUST LAW: A LEGAL AND ECONOMIC APPRAISAL (1973); 

HERBERT HOVENKAMP ET AL., IP AND ANTITRUST: AN ANALYSIS OF ANTITRUST PRINCIPLES APPLIED TO 

INTELLECTUAL PROPERTY LAW 1–13 (2d ed. 2013) (stating that the antitrust and patent laws “are 

complementary efforts to promote an efficient marketplace and long-run, dynamic competition through 

innovation”).
24

In conclusion, we should be extremely wary of adopting an antitrust rule so 

inconsistent with competition policy and so disjointed from the competitive effects of 

the challenged restraint. For reverse payment settlements specifically and IPRs 

generally, as with all other conduct subject to the antitrust laws, the rule of reason is the 

most appropriate analysis unless and until judicial and economic experience suggest a 

truncated analysis minimizes the error costs associated with its application. The 

avoided-litigation-cost benchmark fails to provide an efficient and procompetitive form 

of truncated analysis. For now, we are left with the traditional rule of reason.

Thank you for your time.

 

47 See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 261 F.Supp.2d 188, 192 (E.D.N.Y. 2003) 

(“[T]he Hatch–Waxman Amendments embody Congress’ attempt to balance two conflicting policy 

objectives: to induce name-brand pharmaceutical firms to make the investments necessary to research 

and develop new drug products, while simultaneously enabling competitors to bring cheaper, generic 

copies of those drugs to market.” (internal quotation marks omitted)).

48 U.S. CONST. art. I, § 8 (“To promote the progress of science and useful arts, by securing for limited times 

to authors and inventors the exclusive right to their respective writings and discoveries.”).