Actavis and Error Costs

Actavis and Error Costs – Aaron S. Edlin (University of California at Berkeley ; National Bureau of Economic Research), C. Scott Hemphill (Columbia University – Law School). Herbert J. Hovenkamp (University of Iowa – College of Law) and Carl Shapiro (University of California, Berkeley – Haas School of Business)

ABSTRACT: The Supreme Court’s opinion in Federal Trade Commission v. Actavis, Inc. provided fundamental guidance about how courts should handle antitrust challenges to reverse payment patent settlements. In our previous article, Activating Actavis, we identified and operationalized the essential features of the Court’s analysis. Our analysis has been challenged by four economists, who argue that our approach might condemn procompetitive settlements. As we explain in this reply, such settlements are feasible, however, only under special circumstances. Moreover, even where feasible, the parties would not actually choose such a settlement in equilibrium. These considerations, and others discussed in the reply, serve to confirm the wisdom of the Actavis inference, in which the observation of a large reverse payment serves as a “surrogate” for patent-case weakness and therefore for lost competition.