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 overestimates 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.

Research Progress of Information Asymmetry in Recent Ten Years

“…Asymmetric information about obvious power means that reconciliation is not constantly possible, so supplementary general asset due to reverse payment can eventually lead to litigation. Lemus and Temnyalov show that in the absence of asymmetric information, subsequent products can lead to litigation and may have a vague impact on delay [11].…”

Pay‐for‐delay with settlement externalities

“…As a consequence, subsequent entrants may optimally choose to stay out of the market. Lemus and Temnyalov (2020) also study the incentives to introduce a follow-on product by the incumbent. They focus on the case when the follow-on products are protected by an indisputable patent and cannibalize the original product.…”