Pay for Go-Away: Reverse Payment Settlements and Holdup Under PTAB

Posted by Social Science Research Network

Pay for Go-Away: Reverse Payment Settlements and Holdup Under PTAB

Erik Hovenkamp (Northwestern University) & Jorge Lemus (University Of Illinois)

Abstract:     The Patent Trial and Appeal Board (PTAB) is an administrative forum in which parties can challenge the validity of granted patents at relatively low cost. Although efficient in most respects, PTAB may be exploited as a platform for striking potentially-anticompetitive “reverse payment” settlements – agreements in which a monopolist-patentee pays a potential entrant to terminate its challenge and stay out of the market. The Supreme Court recently held that such agreements may violate the antitrust laws. Although they are usually observed as litigation settlements, we provide empirical evidence suggesting they occur in PTAB petitions between generic drug makers and brand-name drug sellers. Although settlement terms are always confidential, we use data from the FDA’s “Orange Book” to infer whether the generic-petitioner received a patent license in the settlement. If it did not, then we infer a strong likelihood of reverse payment. About 75% of applicable PTAB settlements satisfy this inference criterion. We offer a number of proposals for policing reverse payment settlements in PTAB.

We also address the so-called “reverse patent troll” phenomenon. These are non-operating companies that use PTAB purely as a holdup device for extracting reverse payments from patentees. The practice appears rare, and is unlikely to be viable as a standalone business model, although it may be lucrative if employed selectively under certain (rare) conditions. We propose a rule that would deter attempts to exploit PTAB as holdup device, but would not discourage good faith petitions.