Most-Favored Entry Clauses in Drug Patent Litigation Settlements as a Potential Reverse Payment

Keith M. Drake and Thomas McGuire

No 29801, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Settlements of drug patent disputes that involve a potential payment from the brand to the generic signal a possible collusive profit split with a threat to competition, and have undergone intensive scrutiny in the literature on law and economics. A common feature of these brand-generic settlements, so-called “most-favored entry” (MFE) clauses, have not been investigated to the same extent. The expectation that brand drug companies make settlement decisions rationally implies that an otherwise unexplained brand payment above savings from expected future litigation costs derives from a delay in competition achieved by the settlement. This paper applies the condition of brand rationality to settlements with MFE clauses, with the added consideration that an MFE clause may affect two dates: the date of entry for the settling generic and the date of entry of third-party generic challengers. A brand payment from an MFE clause above future expected litigation costs implies delays in at least one and possibly two of these expected dates for competition. We find that MFE clauses can constitute a reverse payment. When a payment takes the form of an MFE clause, the pay-above-saved-litigation-cost criterion is, however, vulnerable to suggesting that a settlement is not anticompetitive, when in fact it is.

JEL-codes: D22 D43 K21 L41 (search for similar items in EconPapers)
Date: 2022-02
New Economics Papers: this item is included in nep-com, nep-ind, nep-ipr, nep-mic and nep-reg
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