Working Paper: NBER ID: w29801
Authors: Keith M. Drake; Thomas McGuire
Abstract: Settlements of drug patent disputes that involve a potential payment from the brand to the generic signal a possible collusive profit split with a threat to competition, and have undergone intensive scrutiny in the literature on law and economics. A common feature of these brand-generic settlements, so-called “most-favored entry” (MFE) clauses, have not been investigated to the same extent. The expectation that brand drug companies make settlement decisions rationally implies that an otherwise unexplained brand payment above savings from expected future litigation costs derives from a delay in competition achieved by the settlement. This paper applies the condition of brand rationality to settlements with MFE clauses, with the added consideration that an MFE clause may affect two dates: the date of entry for the settling generic and the date of entry of third-party generic challengers. A brand payment from an MFE clause above future expected litigation costs implies delays in at least one and possibly two of these expected dates for competition. We find that MFE clauses can constitute a reverse payment. When a payment takes the form of an MFE clause, the pay-above-saved-litigation-cost criterion is, however, vulnerable to suggesting that a settlement is not anticompetitive, when in fact it is.
Keywords: most-favored entry clauses; drug patent litigation; reverse payment; antitrust
JEL Codes: D22; D43; K21; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MFE clauses (Y20) | delay in generic entry (C69) |
| MFE clauses (Y20) | harm to competition (L49) |
| MFE clauses (Y20) | harm to consumers (D18) |
| MFE clauses (Y20) | reverse payments (G35) |
| reverse payments (G35) | delay in competition (L13) |
| effectiveness of MFE clause (F23) | expected payment from brand (M37) |
| MFE clauses (Y20) | delay in entry of settling generic (Y20) |
| MFE clauses (Y20) | delay in entry of third-party generics (L49) |