Pay-for-delay with Follow-on Products

Abstract

We study pay-for-delay settlements between a patent holder and a challenger when the patent holder can introduce follow-on products. We show that ignoring follow-on products biases the inferred competitive harm of pay-for-delay settlements (the "Actavis inference"). The reason is that patent invalidation triggers an earlier introduction of follow-on products which changes pay-for-delay negotiation's payoffs relative to the case of no follow-on products. When follow-on products are ignored, we show that an inference based on a reverse payment over-estimates patent strength. If parties cannot use payments (as in pure-delay settlements), follow-on products may push the parties to settle on an earlier entry date relative to the entry date negotiated in the absence of follow-on products, and litigation may arise in equilibrium.

Reverse payments, patent strength, and asymmetric information

“…Dickey, Orszag, and Tyson (2009) discuss the role of risk aversion on settlement decisions. Lemus and Temnyalov (2020) show that follow‐on products can cause litigation in the absence of asymmetric information and may have an ambiguous effect on delays. Harris, Murphy, Willig, and Wright (2014) argue that reverse payments in excess of the originator's litigation costs are anticompetitive only under specific circumstances.…”