Information Costs and Reverse Payment Settlements: Bridging the Gap Between the Courts and the Antitrust Agencies

Reverse payment settlements have attracted increased scrutiny due to the controversial presence of a payment from a brand-name drug company to a generic company that is ostensibly preparing to infringe on the branded company’s patent. The antitrust agencies and the courts settled into an intergovernmental stalemate regarding the appropriate framework of analysis to apply when reviewing antitrust challenges to these settlements. The FTC and DOJ have viewed the deals skeptically as a vehicle for competitors to split monopoly profits, but the lower courts have generally been deferential to what they identified as an exercise of a patent holder’s lawful right to exclude. Much has been written about which side is correct, yet there has been relatively little exploration of the source of the persistent disagreement. Building off of Henry Smith’s property rights theory and the cognitive miser literature from Peter Lee, this Article explains that the long-standing disagreement stems from the judiciary’s application of information-cost-saving rules. Courts adopted a formalistic approach that would almost invariably uphold a reverse payment settlement because they tend to apply bright-line rules when dealing with property rights, and they are prone to adjudicate complex patent and patent-related cases in ways that economize on the costs of information processing. Although the Supreme Court resolved the disagreement by adopting a more information-demanding rule of reason approach in FTC v. Actavis, the cognitive miser phenomenon will continue to affect how courts adjudicate antitrust challenges to reverse-payment settlements