In FTC v. Actavis, the Supreme Court held that “reverse payment” pharma patent settlements within the scope of the patent may (or may not) violate the Sherman Act.1 The majority opinion in Actavis explained that Hatch-Waxman infringement settlements that involve a flow of consideration from the patent holder/innovator to the alleged infringer/generic are not presumptively unlawful and should be analyzed under the Rule of Reason. This standard requires a trial court to weigh the settlement’s possible pro-competitive benefits against its potential anticompetitive effects. Applying the Rule of Reason is often difficult in practice because the analysis requires a comprehensive review of the economics associated with the examined conduct or agreement. This is especially true in the reverse payment context, which involves settlement of high-stakes litigation and a mix of diverse incentives with murky competitive effects. Unfortunately, the Supreme Court did not offer specific guidance to lower courts and pharma companies addressing the complexities of analyzing reverse payment settlements under the Rule of Reason.

Below we offer an approach that brings the antitrust analysis under the purview of the court presiding over the patent litigation and suggests that the analysis be performed at the time of settlement. Further, we propose that given the unique incentives created by the Hatch-Waxman Act, the Rule of Reason analysis of such a settlement can be distilled to a comparison of the settlement consideration received by both the innovator and the generic. The procedure and calculus outlined here is meant to determine in an efficient manner whether the innovator is appropriately mitigating against an adverse decision on its patent or instead simply is “paying for delay” of generic competition.