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Jonas Severin Frank and Wolfgang Kerber

Patent settlements between originator and generic firms in the pharmaceutical industry have been challenged by antitrust and competition authorities in the US and the EU. In particular, settlements with large ‘reverse payments’ to generic firms raise the concern of collusive behaviour for protecting weak patents and delaying price competition through generic entry and therefore harming consumers. However, it is still heavily disputed under what conditions such patent settlements are anticompetitive and violate antitrust rules. This chapter scrutinizes what economic analysis has so far contributed to our knowledge about the effects of these patent settlements and the possible rules for their antitrust treatment. An important claim of the chapter is that the problem of patent settlements can only be understood if analyzed from a narrow antitrust perspective and taking into account its deep interrelationship with the problems (and the economics) of the patent system. Therefore three different channels of effects are identified, through which patent settlements can influence consumer welfare: (1) price effects, (2) innovation incentive effects, and (3) effects via the incentives to challenge weak patents. The chapter critically analyzes the existing economic studies and identifies a number of research gaps, especially in regard to trade offs between different effects. It suggests that policy solutions for these patent settlements should also be sought in combination with patent law solutions.