Economic Analysis of Pay-for-delay Settlements and Their Legal Ruling

In this paper, we ask whether courts should continue to rule
settlements in the context of pharmaceutical claims per se legal,
when these settlements comprise payments from originator to generic
companies, potentially delaying generic entry compared to the
underlying litigation. Within a theoretical framework we compare
consumer welfare under the rule of per se legality with that under
alternative standards. We find that the rule of per se legality
induces maximal collusion among settling companies. In comparison,
the rule of per se illegality entirely prevents collusion and the
rule of reason induces limited collusion when antitrust enforcement
is subject to error. Contrary to intuition, limited collusion can
be welfare enhancing as it increases companies' expected settlement
profits and thus fosters generic entry. Generic companies obtain
additional incentives to challenge probabilistic patents, which
potentially leads to overall increased competition. We further show
that generic entry is fostered more effectively by inducing limited
collusion than by rewarding first generic entrants with an
exclusivity right.