ABSTRACT

Assessing the fairness of settlements is a fundamentally difficult task, because settlement forecloses the determination of litigants' entitlements that would have occurred at trial. Courts can litigate the merits after the fact, but this undermines the purpose of settlement. In FTC v. Actavis, a case involving an antitrust challenge to a pharmaceutical patent settlement, the Supreme Court announced a novel solution to this problem. The Court held that the terms of the patent settlement do not need to be compared to the parties' underlying rights as determined by patent law. Rather, the fairness of the settlement could be inferred using economic analysis of the settlement terms themselves; the magnitude of a payment from the patentee to the challenger could serve as a surrogate for the weakness of the patent. In this Article, I argue that this inference is problematic on both jurisprudential and economic grounds. The jurisprudential critique is that Actavis implicitly relies on the prediction theory of law—the widely disparaged conception of law as consisting merely of predictions about what courts will do. To the extent that the settlement terms are probative of the merits of the patent infringement case, they reflect the parties' expectations about the outcome of the litigation. In using the settlement terms as a surrogate for a legal conclusion, Actavis displaces legal reasons with predictions about what courts will do. The economic critique is that the Actavis inference fails to account for feedback effects between the court and the litigants. In settling the initial patent dispute, rational litigants will anticipate the inference that a subsequent court may draw from their settlement, which will distort the terms of their bargain. In drawing an inference from the settlement, a court must therefore account for the distorting effect of its own inference.