Economics of Injunctions in Patent Law Thomas F. Cotter Briggs and Morgan Professor of Law University of Minnesota Law School

Property rules and liability rules Terminology comes from Calabresi & Melamed, Property Rules, Liability Rules and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972). Property rule = entitlement is backed up by a right to injunctive relief. Liability rule = entitlement is backed up by a right to damages only; defendant can choose to breach and pay damages.

Property rules and liability rules Advantages of property rules: Minimize error and administrative costs associated with having a third party determine value. Encourage private bargaining. Advantages of liability rules: May be preferable when there is reason to believe that private bargaining will fail to achieve the optimal outcome. Minimizes risk that owner will exercise its right in a manner that disserves the public interest.

Property rules and IP law Conventional wisdom: property rules are a good fit for IP rights. Difficult to value. Parties have an informational advantage over courts. Courts’ errors might be systematically undercompensatory? Or not? Transaction costs normally will not impede bargaining. And when transaction costs do pose a problem, firms in a given industry can establish institutions to reduce them (pools, collective rights organizations, etc.). Property rules more effective in enabling owners to coordinate follow-up investment, disseminate information? Possible exceptions when social costs (lack of access) outweigh social benefits of injunctions or social costs of liability rules. Life-saving medicines, other emergencies; rare.

Some reasons to question the conventional wisdom Concern that some patent owners use injunctions to extract ex post royalties that exceed the ex ante value of the invention. Otherwise known as patent holdup. Contrary to the conventional wisdom: Sometimes transaction costs may preclude voluntary ex ante bargaining. Can’t necessarily wait for private solutions to emerge. Threat of an injunction ex post encourages implementer to agree to a royalty that exceeds the ex ante value of the technology in comparison with alternatives. See, e.g., Thomas F. Cotter, Erik N. Hovenkamp & Norman V. Siebrasse, Demystifying Patent Holdup, 76 Washington & Lee Law Review ___ (forthcoming 2019), https://papers.ssrn.com/abstract_id=3338026.

Some reasons to question the conventional wisdom One possible implication might be that courts should deny injunctions in cases in which the risk of holdup is great. E.g., SEP cases, complex device cases, trolls. Though maybe this recommendation is too broad. Information, error, and adjudication costs incident to calculating an ongoing royalty persist. May encourage “holdout” if damages are not fully compensatory. May discourage private efforts to reduce transaction costs. Then again: Maybe the difficulty of determining the value of technology is exaggerated. Appropriate response to holdout is to award injunctions (or other sanctions) against unwilling licensees, reform any gaps in damages law.

So, what to do? Ideally, courts should award injunctions when the social benefits of injunctions outweigh the social costs; deny when the social costs outweigh the social benefits. But that’s not very informative . . . A more detailed alternative: Make an educated guess about the impact of various rules and standards for granting injunctions based on the relative probability, magnitude, direction, and materiality of errors, based on economic theory and empirical evidence. In this regard, Filippo Mezzanotti & Timothy Simcoe, Patent policy and American innovation after eBay: An empirical examination, Research Policy, https:doi.org/10.1016/j.respol.2019.01.004, finds no evidence that the U.S. eBay decision has negatively impacted U.S. innovation . . . See also Filippo Mezzanotti, Roadblock to Innovation: The Role of Patent Litigation in Corporate R&D (Oct. 24, 2018), https://www.kellogg.northwestern.edu/faculty/mezzanotti/documents/innovation.pdf (concluding that eBay has had a positive impact on R&D spending by established firms).

For example, when a court estimates: High risk of harm from valuation error, low risk of harm from holdup: Grant an injunction. Pharma cases? Low risk of harm from valuation error, low risk of harm from holdup: Grant an injunction, because doing so conserves on adjudication costs? Non-pharma discrete product cases?

For example, when a court estimates: Low risk of harm from valuation error, high risk of harm from holdup: Reasonable grounds for denying an injunction, as long as the defendant is a willing licensee? Most SEP, complex device, troll cases? Intermediate to high risk of harm from valuation error, intermediate to high risk of harm from holdup: Deny an injunction, if holdup harm appears to outweigh valuation harm? Or consider “tailored” injunctions, Aufbrauchfristen as a compromise solution? That is, delay the entry of an injunction to enable the implementer to design around?

Some final points about implementation In the common law countries, injunctions are discretionary, but this can mean different things. Courts in the U.S. tend to apply the eBay standard in a somewhat formalistic fashion, rather than within an explicitly economic framework. Moreover, when courts deny permanent injunctions, they typically award ongoing royalties using a royalty rate that exceeds the rate used for calculating pre-judgment reasonable royalties—which seems wrong from an economic standpoint. Potential availability of near-mandatory “injunctive” relief in cases before the International Trade Commission encourages forum shopping. Commonwealth countries: Patent owners still almost always obtain injunctions. Burden rests on defendant to establish why injunctive relief is not appropriate.

Some final points about implementation In the civil law countries, the prevailing patentee is usually entitled to an injunction, unless the conditions for granting a compulsory license are in place (rare). But perhaps the Intellectual Property Rights Enforcement Directive’s language regarding proportionality provides some space for courts to take economic considerations into account. Alternatively, courts sometimes can cite competition law, the abuse of rights doctrine, perhaps even contract law as a basis for denying injunctions. Though not clear that any of these would readily apply outside the SEP context. Maybe it is time for a new paradigm to emerge.