Patent Law

Sencer Ecer and Richard S. Higgins (both of LECG) provide "a simple economic framework for evaluating the benefits and costs of the Hatch-Waxman Act."  In their conclusion they state, in part:

The Hatch-Waxman Act was expressly designed to expedite entry of generic prescription drugs. To pass such legislation that is in principle inimical to the pioneer drug industry, the latter was granted the right to enjoin entry as a matter of course by simply notifying the FDA of its concern that its intellectual property would otherwise be expropriated. Initially, it appeared that incumbent drug manufacturers were going to be able to take advantage of the injunction provision and forestall entry for at least the thirty months provided for in the HWA and often for a multiple of this period based on subsequent patent listings. The HWA?s entry injunction created, perhaps inadvertently, a demand for antitrust counterclaims by potential entrants forced to await the outcome of patent litigation. In effect, the injunction creates the potential for antitrust damages since an incumbent with market power in the absence of entry will seek to maintain its monopoly rents perhaps even by defending an invalid patent. As a result, the would-be entrant is barred from realizing income through the production and sale of its product for the period of the injunction, of which, in addition to the 180 day exclusivity reward, injury can only be redressed at the antitrust bar. Moreover, since in antitrust law, damages are trebled, the demand for counterclaims is even greater. Thus, it would appear that the incentives for incumbent drug manufacturers to abuse the Hatch-Waxman process would be held in check by the threat of having to pay the plaintiff/entrant three times the profit the entrant would have made over the thirty month period pending the outcome of litigation.

The prospect of such an award undoubtedly inhibits the filing of lawsuits with virtually no merit. However, there is no denying the power of the purse: based on the law of demand, monopoly rent is greater than the sum of duopoly rents, sometimes by a lot. As a result, the litigants quickly realized the mutual benefit of settling. The settlements typically entailed the payment of cash by the incumbent to the potential entrant who in turn agreed not to enter, sometimes for a period beyond thirty months. The firm that most quickly established a colorable claim of bio-equivalence was paid an amount equal to the value of the potential entrant?s counterclaim not to compete, in effect, sharing in the monopoly rent. This in turn led the FTC to challenge many of these settlement agreements on the grounds that they were anticompetitive; in particular, the FTC properly focused on the reverse payments from incumbent to entrant as evidence of harm to competition. In Schering-Plough, the FTC affirmed its position against patent litigation settlements with generic manufacturers that include reverse payments and agreements not to research, develop, market or sell a generic product for any time period.

Read the full detailed analysis here.  I read with interest that one of the commentors on the article was Jack Staines.  Jack and I were formerly collegues at Putnam, Hayes & Bartlett, Inc.'s Washington, D.C. office.