Reverse Settlements as Patent Invalidity Signals

I. INTRODUCTION Over the last decade, a new type of settlement emerged in litigation over patents covering pharmaceutical products. This phenomenon passed largely unnoticed in most other litigation contexts, but in the very specific world of pharmaceutical patent litigation, it has resulted in high-profile cases involving the Federal Trade Commission ("FTC"), the Department of Justice ("DOJ"), and numerous private plaintiffs. Congress has attempted--thus far unsuccessfully--to provide a legislative solution, and numerous law professors have debated the issue on the pages of various law journals. Traditionally, the alleged trespasser on someone else's rights pays the rights holder to settle the litigation. In these new settlements, however, it is the rights holder that pays the alleged trespasser. For these reasons, such settlements have been termed "reverse payment settlements" or simply "reverse settlements." (1) In this Article, I propose a new approach and argue that the proper way to police these agreements is not by subjecting them to an antitrust analysis, but by ordering a reexamination of any patent involved in a reverse settlement. Although the reverse settlements have been attacked by some commentators, (2) the FTC, (3) and a number of legislators (4) as anti-competitive, anti-consumer, and an abuse of the patent, in my view the question of whether the settlement is pro- or anti-competitive turns on the strength of the patent and the likely conclusion of the litigation. The antitrust analysis--especially under the per se approach advocated by the FTC (5)--simply is not designed to address patent scope and validity issues, and therefore cannot properly differentiate between pro- and anti-competitive settlements. Instead, because the patent law is designed to address this very question, it should be relied on to police reverse settlements. The rise of reverse settlement agreements is a direct consequence of the incentives created by the Hatch-Waxman Act. On the one hand, the Act creates an incentive for generic manufacturers to challenge existing patents without much regard for their strength. As a reward for such challenges, Hatch-Waxman bestows a 180-day marketing exclusivity period on the first challenger. (6) on the other hand, by permitting the challenger to retain the exclusivity period irrespective of the litigation's outcome, (7) the Act encourages the challenger to enter into a settlement agreement which would permit market entry prior to the patent's expiration. Such agreements would provide for payments from the patentee to the generic until the date of actual market entry, while allowing the generic to maintain the economic benefits of the exclusivity period when the market entry finally occurs. (8) The patentee is also incentivized to settle on similar terms because a settlement assures monopoly rents for some defined time into the future. (9) While that time may be shorter than the length of the patent, the settlement insures the patentee against the possibility of losing the suit and thus losing its monopoly earlier than what the settlement agreement would provide. (10) In other words, the Act incentivizes the patentee and the challenger to enter a settlement "involv[ing] a negotiated market entry date for the generic product" that "typically occurs later than would have likely occurred if the generic company had prevailed in the patent dispute [but earlier than the patent expiration date], i.e., the parties split the remaining patent term." (11) on the surface, these settlements may look like traditional horizontal agreements between competitors--agreements that have long been held per se illegal under the antitrust laws. (12) The thrust of the antitrust argument is that these agreements are detrimental to consumers because they allow the patentee to unjustifiably maintain monopoly pricing. (13) Further, because the Hatch-Waxman Act precludes the entry of other generic companies until the 180-day exclusivity period has expired, settlements that delay the entry of the first generic also necessarily delay the entry of other generic manufacturers. …