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The Role of Risk Aversion in Reverse Payment Agreements

Both the courts and the economists have identified risk aversion as a justification for reverse payment agreements, especially the risk aversion of brand-name companies. However, existing economic researches show whether risk aversion can be a rationale for reverse payment agreements depends on the type of reverse payment agreements reached. In “complete” settlement agreement where a brand-name drug manufacturer provides consideration to a generic drug company to completely settle the patent litigation, with agreed-upon entry dates for the generic, risk aversion does not provide a justification for reverse payment, but asymmetry in risk aversion can be a rationale for reverse payment. In “partial” settlement agreement where a branded drug manufacturer provides consideration to a generic drug company in exchange for the generic to agree not to enter the market while they continue the patent litigation, it is not the risk aversion of the brand company, but the risk aversion of the generic company that can facilitate the parties to reach a partial settlement agreement with reverse payment that serves the procompetitive purpose.