Earning Exclusivity : Generic Drug Incentives and the Hatch-Waxman Act

“Reverse” or “exclusion” payments to settle pharmaceutical patent lawsuits are facilitated because the Hatch-Waxman Act has been interpreted to give 180 days of generic exclusivity to the first generic company to file for FDA approval, whether or not that company succeeds in invalidating the patent or finding a way to avoid infringement. As a result, the patentee can “buy off” the first generic entrant, paying them to delay their entry into the market while still offering them the valuable period of generic exclusivity. And if that first generic is entitled to its 180 days, no one else can enter until after the exclusivity period has expired or been forfeited. The result is that the 180-day exclusivity period is not serving its purpose of eliminating weak patents. True, it is encouraging lots of challenges to those patents. But it is encouraging the challengers to accept compensation to drop those challenges, rather than taking them to judgment and benefiting the rest of the world. We propose a change to the Hatch-Waxman statutory scheme. Our alternative is straightforward: first-filing generic drug companies should be entitled to 180 days of exclusivity only if they successfully defeat the patent owner, for example, by invalidating the patent or by proving that they did not infringe that patent. The point of 180-day exclusivity was to encourage challenges to patents because the invalidation of bad patents benefits society as a whole. Society doesn’t benefit from a private deal to drop a challenge. That doesn’t mean settlement is never a good idea; it is a commonplace in our legal system. But it seems bizarre to insulate a company from competition just because it settles the case. Indeed, we expect that our proposal, if implemented, would facilitate more rational settlements, in which the settlements that result accurately reflect the likelihood of success in litigation