“Reverse” or “exclusion” payments to settle pharmaceutical patent lawsuitsare facilitated because the Hatch-Waxman Act has been interpreted to give180 days of generic exclusivity to the first generic company to file forFDA approval, whether or not that company succeeds in invalidating thepatent or finding a way to avoid infringement. As a result, the patenteecan “buy off” the first generic entrant, paying them to delay their entryinto the market while still offering them the valuable period of genericexclusivity. And if that first generic is entitled to its 180 days, no oneelse can enter until after the exclusivity period has expired or beenforfeited. The result is that the 180-day exclusivity period is not servingits purpose of eliminating weak patents. True, it is encouraging lots ofchallenges to those patents. But it is encouraging the challengers toaccept compensation to drop those challenges, rather than taking them tojudgment and benefiting the rest of the world.We propose a change to the Hatch-Waxman statutory scheme. Our alternativeis straightforward: first-filing generic drug companies should be entitledto 180 days of exclusivity only if they successfully defeat the patentowner, for example, by invalidating the patent or by proving that they didnot infringe that patent. The point of 180-day exclusivity was to encouragechallenges to patents because the invalidation of bad patents benefitssociety as a whole. Society doesn’t benefit from a private deal to drop achallenge. That doesn’t mean settlement is never a good idea; it is acommonplace in our legal system. But it seems bizarre to insulate a companyfrom competition just because it settles the case. Indeed, we expect thatour proposal, if implemented, would facilitate more rational settlements,in which the settlements that result accurately reflect the likelihood ofsuccess in litigation.
Optimal Incentives for Patent Challenges in the Pharmaceutical Industry