Are Settlements in Patent Litigation Collusive?

Evidence from Paragraph IV Challenges

by Eric Helland, Seth A. Seabury

Download eBook for Free

FormatFile SizeNotes
PDF file 0.4 MB

Use Adobe Acrobat Reader version 10 or higher for the best experience.

The use of so-called "pay-for-delay" settlements in patent litigation — in which a branded manufacturer and generic entrant settle a Paragraph IV patent challenge and agree to forestall entry — has come under considerable scrutiny in recent years. Critics argue that these settlements are collusive and lower consumer welfare by maintaining monopoly prices after patents should have expired. We estimate the impact of Paragraph IV challenges and settlements on generic entry and evaluate the implications for drug prices and quantity. To address the potential endogeneity of Paragraph IV challenges and settlements we estimate the model using instrumental variables. Our instruments include standard measures of patent strength and a measure of settlement legality based on a split between several Circuit Courts of Appeal. We find that Paragraph IV challenges increase generic entry, lower drug prices and increase quantity, while settlements effectively reverse the effect. These effects persist over time, inflating price and depressing quantity for up to 5 years after the challenge. We also find that eliminating settlements would result in a relatively small reduction in research and development (R&D) expenditures.

The research described in this report was conducted by the RAND Institute for Civil Justice.

This report is part of the RAND Corporation working paper series. RAND working papers are intended to share researchers' latest findings and to solicit informal peer review. They have been approved for circulation by RAND but may not have been formally edited or peer reviewed.

Permission is given to duplicate this electronic document for personal use only, as long as it is unaltered and complete. Copies may not be duplicated for commercial purposes. Unauthorized posting of RAND PDFs to a non-RAND Web site is prohibited. RAND PDFs are protected under copyright law. For information on reprint and linking permissions, please visit the RAND Permissions page.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.