Optimal Incentives for Patent Challenges in the Pharmaceutical Industry

In this paper, we show that a provision in antitrust law to allow patent settlements with a later market entry of generics than the date that is expected under patent litigation can increase consumer welfare. We introduce a policy parameter for determining the optimal additional period for collusion that would incentivize the challenging of weak patents and maximize consumer welfare. While in principle, later market entry leads to higher profits and lower consumer welfare, this can be more than compensated for if more patents are challenged as a result.

Why Incumbents (Usually) Prefer Weak Intellectual-Property Rights

This chapter challenges the conventional assumption that incumbents in technology markets lobby for strong IP rights to erect entry barriers and capture market rents. In the railroad industry in the late nineteenth century, in the software industry in the 1960s and 1970s, and in patent-reform debates since the mid-2000s, large vertically and horizontally (systems-level) integrated firms outside the pharmaceutical industry have generally advocated for weaker patents or resisted the extension of IP protection to new technologies. By contrast, smaller R&D-intensive entities and venture-capital firms have generally expressed the opposite position. A comprehensive study of all amicus briefs filed in Supreme Court patent-related litigation during 2006–2016 confirms this entity-specific divergence in IP-policy preferences. Historical and contemporary evidence supports the hypothesis that in a significant number of industries, weak patents protect incumbents by impeding entry by smaller innovators that lack comparable non-IP complementary capacities by which to capture returns on innovation.

Regulatory exclusivity protection for undisclosed test data in China: an innovative approach to implementing the TRIPS Agreement

Regulatory exclusivity, the TRIPS-plus protection for undisclosed test data, is considered as the principal means to extend market protection for brand-name pharmaceutical companies. When China joined the World Trade Organization in 2001, it promised to enact new laws or regulations that will comply with article 39.3 of the TRIPS Agreement. China's choice of implementing the TRIPS Agreement through regulatory exclusivity resulted mainly from intrinsic demands for China's strategy of innovative-driven development, and partly from the pressure of China-US trade disputes. There are two categories of regulatory exclusivities under China's laws. One is the market exclusivity for New Drugs and Traditional Chinese Medicine. The other is the data exclusivity for Innovative Drugs, Orphan Drugs, Paediatric Drugs, Innovative Biologics; and a ‘Generic Exclusivity’ for the first generic drug company that succeeds in challenging weak patents of pharmaceutical products.

Brief Amici Curiae of 118 Law, Economics, and Business Professors and the American Antitrust Institute in Support of Petitioners

This Supreme Court amicus brief, filed in Federal Trade Commission v.Watson, explains why exclusion-payment settlements, by which brand-namedrug companies pay generic firms to delay entering the market, contravenethe policies of patent law, antitrust law, and the Hatch-Waxman Act. Itaddresses five points.First, the settlements are not consistent with the Hatch-Waxman Act,Congress’s framework for balancing patent and antitrust law in thepharmaceutical industry, which encouraged generics to challenge patents.Second, the settlements are anticompetitive, serving as a form of marketdivision, which is the practical result when brands pay generics to dropchallenges to weak patents and delay entering the market instead.Third, the mere fact of a patent cannot justify the payments. The PatentOffice frequently issues invalid patents, and the patents at the heart ofthese settlements present concern, often covering not the drug’s activeingredient but narrower aspects like the formulation or method of use thatare less innovative and bear more potential for anticompetitive mischief.Patent policy encourages challenges to weak patents, and the proceduralpresumption of validity does not justify the settlements.Fourth, exclusion payments are not needed to settle cases in the publicinterest; history has shown that brands and generics can reach settlementswithout them.Fifth, the most appropriate antitrust framework employs a “quick look”rule-of-reason analysis that treats exclusion payments as presumptivelyunlawful. Such a framework recognizes the potentially severeanticompetitive effects of exclusion-payment settlements while permittingthe settling parties to introduce possible procompetitive justifications,if any, for their agreement.

Earning Exclusivity: Generic Drug Incentives and the Hatch-Waxman Act

“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.

Missing the Forest for the Trolls

Trolls are a significant feature of the patent system. They account for alarge number of suits, now a majority of all patent assertions in thecountry and an even higher percentage in the information technology (IT)industries. They win both larger judgments and larger settlements than do“practicing entities” (“PEs”) -- those that practice patents and are notprincipally in the business of collecting money from others that practicethem. And they do so despite complaints that trolls assert weak patents andsome evidence that troll patents are more likely to lose in court.Nonetheless, we think the focus on patent trolls obscures a more complexset of challenges confronting the patent system. In this paper, we makethree points. First, patent trolls are not a unitary phenomenon. We see atleast three different troll business models developing, and those modelshave different effects on the patent system. Second, patent assertions bypracticing entities can create just as many problems as assertions bypatent trolls. The nature of many industries obscures some of the costs ofthose assertions, but that does not mean they are cost-free. In addition,practicing entities are increasingly engaging in “patent privateering,” inwhich product-producing companies take on many of the attributes of trolls.Put differently, while trolls exploit problems with the patent system, theyare not the only ones that do so. Third, many of the problems associatedwith trolls are in fact problems that stem from the disaggregation ofcomplementary patents into too many different hands. That in turn suggeststhat groups like Intellectual Ventures might be reducing, not worsening,these problems (though, as we will see, the overall effects are ambiguous),while “patent privateers” that spin off patents in order for others toassert them might make things worse. For this reason, patent reformers andantitrust authorities should worry less about aggregation of patent rightsand more about disaggregation of those rights, sometimes accomplished byspinning them out to others.Understanding the economics of patent assertions by both trolls andpracticing entities allows us to move beyond labels and the search for “badactors,” focusing instead on aspects of the patent system itself that giverise to the problems and on specific, objectionable conduct in which bothtrolls and practicing entities sometimes engage. Patent trolls alone arenot the problem; they are a symptom of larger problems with the patentsystem. Treating the symptom will not solve the problems. In a very realsense, critics have been missing the forest for the trolls. Exposing thelarger problems allows us to contemplate changes in patent law that willactually tackle the underlying pathologies of the patent system and theabusive conduct they enable.