Pay For Delay Debate Post Actavis Decision

By Dr. Robert Kneuper

Since the Supreme Court’s decision in Actavis (2013), there have been many “pay for delay” class action suits with a wide variety of legal outcomes.  Given the emphasis in the Actavis decision on the size of the reverse payment, many Court decisions in this area have involved how to evaluate the relationship between the type and size of “reverse payment” and the implications for liability, anticompetitive effects and antitrust injury.  What type of payment (e.g., only cash) is necessary to meet the Actavis standard?  What size of payment is necessary to infer a likelihood of anticompetitive effects?  What type of analyses and weight should be given to procompetitive explanations of “reverse payments”?

I grappled with these same issues during my six plus years analyzing “pay for delay” cases as an economist working at the Federal Trade Commission.  I was fortunate enough to be part of the FTC team that developed the Commission’s policy in this area and the appropriate economic and financial tools that could be used to analyze the likely competitive effects associated with certain types and sizes of “reverse payments.”  These same economic and financial tools can also be of great assistance to legal practitioners currently working on “pay for delay” cases.

For example, standard and well accepted financial techniques, such as net present value, can be used to evaluate the relationship between the size of the payment and the length of time that the generic firm is incentivized to delay its entry.  This type of analysis generally shows that relatively small “reverse payments” (e.g., in the millions) can be used to incentivize a generic firm to be willing to substantially delay its entry (e.g., more than six months).  Also, not surprisingly, this relationship applies regardless of if the form of “reverse payment” is cash or some other type of compensation such as what is commonly referred to as a “No AG” provisions.  However, the actual relationship between size of payment and incentive to delay depends on various factors such as market growth and the relevant discount rate.  Careful evaluation of these market factors is crucial towards developing a reliable economic model that can be used to not only support a finding of liability and antitrust injury, but also form a basis for measuring damages and evaluating common impact.