An Investigation of when the Antitrust Agencies are likely to challenge a Pay-for-Delay Settlement under ACTAVIS

Journal of Business & Technology Law Volume 17 Issue 1 Article 2 An Investigation of when the Antitrust Agencies are likely to challenge a Pay-for-Delay Settlement under ACTAVIS Thomas Y. Lu Follow this and additional works at: https://digitalcommons.law.umaryland.edu/jbtl Part of the Antitrust and Trade Regulation Commons Recommended Citation Thomas Y. Lu, An Investigation of when the Antitrust Agencies are likely to challenge a Pay-for-Delay Settlement under ACTAVIS, 17 J. Bus. & Tech. L. 1 (2022) Available at: https://digitalcommons.law.umaryland.edu/jbtl/vol17/iss1/2 This Article is brought to you for free and open access by the Academic Journals at DigitalCommons@UM Carey Law. It has been accepted for inclusion in Journal of Business & Technology Law by an authorized editor of DigitalCommons@UM Carey Law. For more information, please contact . Lu (Do Not Delete) 8/8/2022 1:59 AM An Investigation of When The Antitrust Agencies Are Likely To Challenge A Pay-For-Delay Settlement Under ACTAVIS T HOMAS Y. LU *© Abstract In FTC v. Actavis, the U.S. Supreme Court held that a large, unjustified reverse payment in a pay-for-delay settlement might be classed as anticompetitive. However, neither the courts nor academia have clearly defined what a “large and unjustified” reverse payment entails. Thus, it is difficult to predict when a given payfor-delay settlement might be challenged by the antitrust agencies. To establish a better prediction, this paper used machine learning to develop two decision tree models based on numerical and categorical data. The former model considers the duration of the generic drug delay entering the market and the estimated reverse payment, while the latter regards the status of the generic entry and the scale of the estimated reverse payment. Using the results of the decision tree models, a payment should be deemed large and unjustified if the estimated reverse payments for pay-for-delay settlements based on generic entry status to delay the entry of generic drugs exceed USD $24 million (2021). Pharmaceutical companies can use the results of the decision trees to predict whether past or future pay-for-delay settlements will be classified as large and unjustified thereby lowering the risks of being challenged from antitrust agencies. Keywords: Reverse Payment, Pay-for-delay settlement, Antitrust Agencies, Machine Learning, Decision Tree © Thomas Y. Lu, 2021. * Assitant Professor, Department of Business Management , National Sun-Yat Sen University, Taiwan. Doctor of the Science of Law (J.S.D. 2019), Washington University in St. Louis School of Law. Email: . The author would like to thank the Management Studies Research Center at the National Sun-Yat Sen University for technical support, including coding the decision tree in R, and participants in colloquia at the Third IP and Innovation Researchers of Asia Conference. The author gratefully acknowledges financial support from the Taiwan Ministry of Science and Technology. Journal of Business & Technology Law 1 Lu (DO NOT DELETE) 8/8/2022 1:59 AM An Investigation of When The Antitrust Agencies Introduction 1 In the 2013 case FTC v. Actavis, the U.S. Supreme Court made five key judgments about how lower courts should analyze pay-for-delay agreements2 from an antitrust perspective.3 First, pay-for-delay agreements between brand-name and generic manufacturers have the “potential for genuine adverse effects on competition.”4 Second, the adverse effects on competition may be justified because the compensation that the generic manufacturer receives could be greater than the avoided patent litigation costs and may also cover other services that the generic firm has promised, such as distributing or helping to develop a market for the patented item.5 Third, the size of the payment may also reflect the brand-name company’s market power because firms with significant market influence can charge higher than competitive prices.6 Fourth, an unexplained large reverse payment normally suggests that the patentee has serious doubts about the patent’s survival.7 Furthermore, it is normally unnecessary to litigate a patent’s validity to determine whether a pay-for-delay settlement is injurious to competition.8 Fifth, the fact that a large, unjustified reverse payment risks violating antitrust laws does not prevent the litigants from settling a suit.9 Thus, the purpose of the settlement plays a key role in its analysis. Courts should invalidate agreements that maintain and divide patent-generated monopoly profits between the brand-name and generic manufacturers without a sufficient justification.10 In Actavis, the justices used the terms “unexplained large reverse payment” and “large, unjustified reverse payment” to describe pay-for-delay agreements that might be anticompetitive.11 However, they failed to clarify exactly how large such 1. FTC v. Actavis, Inc., 570 U.S. 136 (2013). A pay-for-delay agreement is generally a form of patent dispute settlement where a pharmaceutical patent holder extends to a generic company some sort of value transfer, for instance direct monetary payment, distribution or licensing rights and/or other forms of considerations in return for which the generic company acknowledges the validity of the patent in dispute and undertakes to refrain from marketing a generic version of drugs which is equivalent to the originator drugs for a specified period of time at the end of the life of the patent. The consideration in return for the delay of the generic drug in above situation is also called reverse payment. Tay and Partners, The Notorious “Pay-for-Delay” Agreement, LEXOLOGY, https://www.lexology.com/library/detail.aspx?g=eacd6026-39c5-4c49-8b66-47ba05eedf8c (last visited November 1, 2021). 3. Actavis, Inc., 113 U.S. at 141. 4. Id. at 153 (citing FTC v. Indiana Fed’n of Dentists, 476 U. S. 447, 460-61 (1986)). 5. Id. at 156. 6. Id. at 157. 7. Id. 8. Id. 9. Id. at 158. 10. Id. 11. Id. at 157-58. 2. 2 Journal of Business & Technology Law Lu (Do Not Delete) 8/8/2022 1:59 AM THOMAS Y. LU payments are or how their size should be determined. Instead, they only laid down the factors to be considered when determining whether payments might be anticompetitive, such as the avoided litigation cost and other services that are included in the payment.12 Thus, pharmaceutical companies have difficulty predicting whether their past and future pay-for-delay settlements might be challenged by the antitrust agencies. 13 This paper aims to provide a clear, standardized method by which the antitrust agencies are likely to challenge a pay-for-delay settlement under Actavis by evaluating which sizes of reverse payments would be classified as large and unjustified and in which situations pharmaceutical manufacturers could significantly risk being challenged by antitrust agencies. In Part II, we explore how the lower courts, the Federal Trade Commission (FTC), and other scholars have dealt wi (...truncated)