Patent Law

The Oxford University Press recently published [June 2008] a case study that was co-authored by Senior Economist John Bigelow of the Princeton Economics Group, Inc. The case study described an attempt by the Federal Trade Commission to challenge so-called "reverse payments" made by Schering-Ploughto two generic drug manufacturers. A PEG team led by Dr. Bigelow worked with counsel for Schering to defend the company against FTC allegations that it was per se illegal for Schering to include payments to two generic manufacturers in settlements of patent litigation involving its potassium chloride product, K-Dur 20.

The FTC enforcement action was one of a series the agency had taken against settlements in the pharmaceutical industry that embody payments made by the patent-holder/brand manufacturer to the alleged patent infringer/generic manufacturer. The FTC describes these as "reverse payments" and "payments for delay" because, in the Schering case, as in others, the brand and generic manufacturers agreed to a future date at which the generic would enter the market. The agency alleged that the brand manufacturer protected its monopoly position by paying two potential competitors to delay entering the market.

The Supreme Court declined to take the case, leaving an unresolved problem for policy makers where patent litigation settlements with reverse payments and negotiated entry are concerned. This problem arises from the four lessons the Schering-Plough case teaches:

1. The parties to litigation have a socially beneficial incentive to settle costly and risky patent lawsuits.

2. Economic logic teaches that such settlements could include combinations of payments and delay that would injure competition.

3. Economic logic also teaches that the ability to include payments and negotiated entry in settlements can be essential to achieving pro-competitive socially beneficial settlements.

4. Antitrust inquiry may be incapable of reaching reliable conclusions about the merits of the underlying patent litigation.

Simple rules, either those that per se forbid reverse payments and negotiated entry or those that would grant them a blanket safe-harbor are likely to be unwise. The chapter calls for a program of research that would equip policy makers and enforcers to distinguish between pro-competitive and anti-competitive settlements.

The case studyis: John P. Bigelow [Princeton Economics Group] and Robert D. Willig[Professor of Economics and Public Affairs at the Woodrow Wilson School of Public & International Affairs at Princeton University] , "'Reverse Payments' in Settlements of Patent Litigation: Schering Plough, K-Dur, and the FTC." Case 9 in The Antitrust Revolution, 5th edition, John Kwoka and Lawrence White (ed.s); Oxford University Press, 248 - 75, June, 2008.

I worked with Dr. Willig on the economic issues affecting patent damages in the Polaroid v. Kodak patent infringement case for instant camera and film.