Tailoring Remedies to Spur Innovation

There is an emerging rule in the district courts — thus far endorsed by the Court of Appeals for the Federal Circuit — that a victorious patent holder will receive a permanent injunction against an infringer if she is able to show that she has suffered a loss of market share due to the infringement. The larger the loss of market share, the more likely an injunction. This “market share rule” is a response to the Supreme Court’s ruling in eBay v. MercExchange, exhorting lower courts to engage in equitable balancing before awarding permanent injunctions. The case followed a flare-up of concern over entities — sometimes termed “patent trolls” — that do not practice their patents, but demand what some consider exorbitant licensing fees from those who would. These entities introduce inefficiencies into the patent system that impede innovation. Although academics and practitioners hoped eBay would address particular instances in which innovation is hindered by the grant of an injunction, market share is an imperfect indicator of innovative activity. Importantly, for the purpose of identifying entities that hinder innovation, market share is simultaneously over- and under-inclusive. It is over-inclusive because some of the business models that currently contribute the most to innovation lack market share. In order to protect these innovators, courts are contorting the emerging rule in order to grant these innovative companies permanent injunctions. It is under-inclusive because firms that possess high levels of market share have incentives not to bring innovation to market, and yet these incentives are not accounted for under the market share rule. A better rule would allow courts explicitly to evaluate the effects of permanent injunctions on incentives to innovate and provide access to that innovation under a public interest analysis. Although loss of market share should remain one measure of the need for injunctive relief to make a patent holder whole, its influence should be tempered by a serious analysis of the public’s interest in encouraging innovation, on the one hand, and access, on the other. This analysis will necessarily include information about market structure as well. This approach would allow courts to curtail remedies in situations likely to lead to holdups, while granting injunctions to entities with business models that rely on licensing fees to fund further research, thereby granting remedies tailored to the innovation and access goals that form the basis of the patent system