Economic Analysis of Pay-for-delay Settlements and Their Legal Ruling Volkswirtschaft - Open Access LMU - Teil 02/03

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.