Einer Elhauge & Alex Krueger
91 Texas L. Rev. 283
Courts and commentators are sharply divided about how to assess reverse payment patent settlements under antitrust law. The essential problem is that a PTO-issued patent provides only a probabilistic indication that courts would hold the patent is actually valid and infringed, and parties have incentives to structure reverse payment settlements to exclude entry for longer than this patent probability would merit. Some favor comparing the settlement exclusion period to the expected litigation exclusion period, but this requires difficult case-by-case assessments of the probabilities of patent victory. Others instead favor a formal scope of patent test that allows such settlements for non-sham patents if the settlement does not delay entry beyond the patent term, preclude non-infringing products, or delay non-settling entrants. However, the formal scope of patent test excludes entry for longer than merited by the patent strength, and it provides no solution when there is either a significant dispute about infringement or a bottleneck issue delaying other entrants. This paper provides a way out of this dilemma. It proves that when the reverse payment amount exceeds the patent holder’s anticipated litigation costs, then under standard conditions the settlement will, according to the patent holder’s own probability estimate, exclude entry for longer than both the expected litigation exclusion period and the optimal patent exclusion period, which both harms consumer welfare and undermines optimal innovation incentives. Further, whenever a reverse payment is necessary for settlement, it will also have those same anticompetitive effects according to the entrant’s probability estimate. This proof thus provides an easily administrable way to determine when a reverse payment settlement is necessarily anticompetitive, without requiring any inquiry into the patent merits. We also show that, contrary to conventional wisdom, patent settlements without any reverse payment usually (but not always) exceed both the expected litigation exclusion period and the optimal patent exclusion period, and we suggest a procedural solution to resolve such cases.