Antitrust Law and Patent Settlement Design

By Hovenkamp, Erik | Harvard Journal of Law & Technology, Spring 2019 | Go to article overview

Antitrust Law and Patent Settlement Design


Hovenkamp, Erik, Harvard Journal of Law & Technology


TABLE OF CONTENTS    I. INTRODUCTION                                       418  II. PATENT SETTLEMENTS BETWEEN RIVALS                  424    A. Horizontal Restraints: Examples                   424    B. What's the Problem?                               426      1. Contrast with Settlements in Other Contexts     427    C. The Scope of the Patent Doctrine                  429    D. Actavis and Proportional Effects                  431      1. Pay-for-Delay Settlements                       433      2. The Actavis Decision                            435    E. The Administrability Problem                      436 III. THE ECONOMICS OF SETTLEMENT DESIGN: AN OVERVIEW    438    A. Relevant Aspects of Settlement Design             439    B. Licensing Restraints                              440      1. Applications                                    445    C. Reverse Payments and Counter-Restraints           450      1. Reverse Payments                                451      2. Counter-Restraints                              454      3. The Pareto Problem                              456  IV. MULTIPLE ENTRY, HATCH-WAXMAN, AND OTHER CONSIDERATIONS                                          457    A. Clarifying the Hatch-Waxman Problem               460    B. Litigation Costs                                  462    C. Cross-Licensing Settlements                       463   V. REFRAMING THE ANTITRUST QUESTION                   465    A. Administration                                    465    B. Demystifying Causation                            471    C. Evaluating Potential Objections                   473      1. What if the Patentee is Risk-Averse?            473      2. Appeals to Non-Pareto Hypotheticals             475  VI. CONCLUSION                                         477 

I. INTRODUCTION

Antitrust usually prohibits rival firms from striking agreements that forestall competition. Patent settlements provide an exception, however, because a patent on a significant technology may provide a lawful basis for excluding competitors from the marketplace. Problematically, firms always prefer to restrain competition into monopoly (and share in the proceeds), even if they privately believe that the patent is very likely invalid or noninfringed. (1) This might not be such a challenging problem if it were easy to discern whether a given patent is valid and infringed. But in practice this is almost never the case. (2)

The settlement problem is emblematic of the analytical difficulties that emerge at the intersection of antitrust and patent law, which has long been a source of widespread confusion and debate. (3) In some cases, the settlement restrains inter-party competition in a way that is not even facially authorized by patent law, even if the relevant patent is definitively valid and infringed. (4) But in the more challenging cases--which are the focus of this paper--the firms' settlement restrains competition in a manner that potentially falls within the patentee's exclusionary entitlement. Specifically, the settlement forecloses competition by no more than a permanent injunction would, which is the most restrictive remedy available for patent infringement. (5) For example, if a settlement limits the monthly sales of a patented product by a rival licensee, it clearly diminishes competition. Indeed, if not for the patent, it would be illegal per se. But it is less restrictive than an injunction, which would not permit the rival to make any sales at all.

As outlined below, antitrust analysis of these settlements has become increasingly concerned with how patent litigation would have played out but for the settlement. This is now widely-regarded as the appropriate benchmark for evaluating the settlement's competitive effects. (6) To that end, scholars and courts have framed the antitrust inquiry to require evidence or "signals" bearing on the likelihood that the relevant patent is invalid or noninfringed. …

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