Patent Settlements, Risk, and the Suppression of Information

The recent spate of U.S. antitrust cases challenging patent settlements has brought attention to the competition implications of such settlements. But the cases, which have primarily involved “reverse payments” by brand-name drug manufacturers to potential generic entrants in exchange for promises by the generic manufacturers not to enter the market until some future date, have focused on the competitive effect of delayed entry into the product market. There is another important effect of patent settlements, and indeed of licensing more generally: by replacing litigation with private agreements, the parties can prevent the production of information regarding patent scope and validity. The suppression of such information is a potential anticompetitive effect of settlement, so for settlements to be permissible, that anticompetitive effect should be balanced by procompetitive benefits. The most often-cited benefit of settlement is the elimination of risk for the settling parties, but I argue in this work that the elimination of risk is not necessarily procompetitive. Risk is an inevitable effect of competition, and parties’ responses to risk can in fact promote consumer welfare. A better way to determine whether a settlement or licensing agreement is procompetitive, argue, is to focus on facts that indicate whether the information that would be produced by litigation would likely be valuable. I propose that antitrust courts use market decisions by the settling parties and third parties, together with any information produced in or prior to litigation, to balance the costs of litigation against the benefits of the information it produces. Taking this approach would avoid, on the one hand, the U.S. courts’ current approach of assuming patent validity and, on the other, the problematic assessment of patent validity within an antitrust case. It thus provides an appropriate means for antitrust evaluation of settlements and license agreements.