On the Economics of Injunctions in Patent Cases

Abstract

Courts in many countries continue to follow the traditional practice of awarding the prevailing patent owner a permanent injunction, absent exceptional circumstances. First-generation law-and-economics scholarship, building on Calabresi and Melamed’s work on property and liability rules, largely supported this practice, based upon the perceived advantages of injunctions (as opposed to damages awards) in inducing bargaining and reducing valuation errors. More recent scholarship, however, has questioned the wisdom of automatic injunctions, particularly in cases in which the conditions conducive to patent holdup are present — among them, cases involving standard essential patents, patents incorporated into complex, multipatent devices, and actions brought by patent assertion entities. Building upon this more recent work, I argue that the social benefits and costs of injunctions vary depending on the circumstances. To assist policymakers in rendering decisions in the real world, I propose two simplifying assumptions that would enable courts to compare the expected cost of holdup with the expected cost of valuation error. A simple set of recommendations follows, namely that courts generally should (1) grant injunctions when the probability of holdup is low, and (2) deny them when the probability of holdup is great and the expected harm from valuation error low to moderate. For indeterminate cases — for example, when the probability of holdup and the expected harm from valuation error are both high — courts can mitigate both risks to some degree by granting injunctions subject to stays pending design-around.