'Exit' Agreements in the Pharmaceutical Industry

The Hatch-Waxman Act was intended to encourage makers of generic drugs to seek early entry into drug markets controlled by patents, in part by challenging the patents before they expire. Some patentees have settled these challenges by agreeing to pay the challengers tens or hundreds of millions of dollars to drop their challenges and therefore early market entry. Some settlements of this kind also leverage the Hatch-Waxman Act's exclusivity period to exclude entry or discourage patent challenges from other would-be generic entrants not parties to the settlement. (The Act provides a 180-day period of statutory market exclusivity as an incentive to the first generic challenger, and certain features of the Act can extend that period, as a practical matter, to thirty months.) This article provides economic and antitrust analysis of these "exit" or "no entry" agreements. In the usual case in which the would-be generic entrant has no sunk investment in entry (apart from the litigation), these large payments are essentially payments not to challenge the patent and therefore payments not to complete. They are self-evidently anticompetitive and contrary to the policy of both patent law (under Lear, Inc. v. Adkins) and the Act. Settlements that leverage the first generic challenger's statutory exclusivity period to exclude other generic entrants appear to have no possible competitive justification and therefore to be illegal per se. Settlements that do not leverage the Hatch-Waxman Act exclusivity period should be governed by the rule of reason. Yet in many cases a "quick look" should condemn them because they are facially anticompetitive and no efficiencies or procompetitive benefits are cited to justify them. Although a few courts have found them justified by a general policy favoring dispute settlement, that is not an antitrust policy. It is well established that justification in antitrust law requires benefits specifically to competition. In the absence of a specific procompetitive benefit - for example, early or more vigorous entry by the would-be generic entrant receiving the large payments - these "exit" agreements should fail scrutiny under the rule of reason