Part III - Patent Holdout and the Rise of “Efficient” Infringement

5 Efficient Infringement in the SEP Space

Kristen Osenga

I. Introduction

Many of the most innovative companies in the 5G and Internet of Things (IoT) spaces rely on patent rights. Not only do patents provide property rights over the technology invented and submitted to standards development organizations (SDOs), but the ability to license their patents allows these companies to recoup their research expenditures and invest in further development of innovative technologies. Unfortunately, due to a variety of legal and policy decisions, these companies’ ability to effectively license their patents is being hindered; instead, manufacturers of standards-compliant goods are opting to engage in efficient infringement before, or even in lieu of, negotiating and accepting a license to use these patents.

To understand efficient infringement, it is helpful to think first about patent infringement more generally. A patent grants to the owner an exclusive right, or the ability to exclude others from making, using, selling, or offering for sale the subject matter of the patent without permission.¹ If a patent owner believes a party is infringing the patent, the patent owner can bring a lawsuit for patent infringement in a US District Court. The accused infringer will often defend by asserting that the patent claims are invalid. The court will then determine infringement and invalidity, as well as reviewing other raised defenses. If the patent is determined to be infringed and not invalid, the court will generally award damages, either actual damages or a reasonable royalty, for past infringement and issue a permanent injunction to prohibit infringement going forward. Through the damages award, the patent owner is made whole for previous trespasses upon their exclusive right, and through the injunction, the patent owner’s exclusive right is restored.

Not only is injunctive relief entirely consistent with the patent grant of an exclusive right, but it also plays a role in maintaining an effective private ordering system surrounding patent rights. Specifically, the knowledge that an injunction would result in the case of patent infringement serves as a good deterrent to those considering whether to infringe. Anticipating that their actions could lead to injunctive relief, most potential infringers would instead seek a license to use the patent or, alternatively, endeavor to design around the patent, rather than face having to revamp their entire manufacturing and distribution system ex post to abide by the injunction.² In addition to encouraging pre-infringement negotiations between potential infringers and patent owners, the possibility of injunction also incentivizes pre-litigation negotiations and settlements of lawsuits.³ In short, the availability of injunctive relief creates a viable ecosystem for nonjudicial transactions surrounding patent rights. This ecosystem of transactions surrounding patent rights then provides a viable business model for innovative companies wishing to participate in SDOs.

On the other hand, if there is no credible threat of injunction for patent infringers, this balanced ecosystem is upset. Instead, a more nefarious course of action is allowed to flourish that forces patent transactions into the judicial system at great cost to patent owners. Efficient infringement is the idea that, if an injunction is unlikely to issue in the future, it may be more rational for a party to “infringe now, pay later.” Because the worst expected outcome for the infringer will be to pay damages for past infringement and an ongoing royalty for any future infringement, the infringer is no worse off than it would have been had it negotiated a license before commencing infringement. In fact, because damages are not awarded until after the trial, which could be years after the infringement began, the infringer ends up with what is essentially an interest-free loan for the period of time preceding the lawsuit. Perversely, the infringer may even end up in a better position, if the royalty rate set by the court is lower than the parties would have arrived at via negotiation.⁴

Of course, the calculus behind efficient infringement is only attractive if the infringer is relatively certain that an injunction will not be issued should a court make a finding of infringement. Relevant to this book, in fields where technology standards are prevalent – including 5G and IoT – the availability of injunctive relief is not certain and, in fact, injunctions are rarely granted. While injunctive relief used to be essentially guaranteed in cases of patent infringement, in part due to the acknowledgment of a patent’s grant of exclusive rights, the Supreme Court’s 2006 decision in eBay, Inc. v. MercExchange, LLC⁵ altered this landscape. Stating that injunctive relief should not be categorically granted, as the US Court of Appeals for the Federal Circuit (Federal Circuit) had long done, nor categorically denied, as the district court in the eBay case had presumed, the Supreme Court instead imposed a four-factor test to be used when deciding to issue injunctive relief. The four factors to be considered include: (i) irreparable harm to the patent owner; (ii) remedies at law (damages) are inadequate; (iii) balance of hardship; and (iv) public interest.⁶ In most cases, these factors weigh in favor of granting an injunction because the patent owner’s exclusive right is irreparably harmed by infringement and money damages cannot restore that exclusivity after the fact.⁷ Further, the public has a strong interest in a reliable and effective patent system, which respects the patent owner’s exclusive rights.

Despite the exhortation that categorical grants or denials of injunctions are inappropriate, Justice Kennedy concurred to explain that injunctions perhaps should not issue in cases where the patent owner is a non-practicing entity, where the patent covers only a small component of a much larger product, and where the patented technology is a business method.⁸ Kennedy warned against injunctions being used in cases of “patent holdup,” although he did not reference it as such. Specifically, he noted that “an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent,” and that “[w]hen the patented invention is but a small component of the product the companies seek to produce,” injunctive relief is “employed simply for undue leverage in negotiations.”⁹ Because of these issues highlighted in Justice Kennedy’s concurrence and because of how courts have applied the four-factor eBay test, there are two particular groups of patent owners for whom injunctive relief is uncertain or possibly even unlikely – non-practicing entities and owners of standard-essential patents (SEPs).

Efficient infringement is of particular concern in the SEP space, including 5G and IoT, because injunctive relief is generally unavailable to SEP owners. This chapter explains that courts are unlikely to grant requests for permanent injunctions and SEP owners are unlikely to even seek injunctive relief, setting up the necessary condition for efficient infringement to flourish. Unsurprisingly, there is evidence that infringers are selecting to “infringe now, pay later” when it comes to SEPs, and this chapter sets out the case why this is problematic for a well-functioning innovation system.

II. Courts Are Unlikely to Grant Injunctive Relief in SEP Cases

It is difficult to accurately quantify whether efficient infringement is occurring because it presumes a mental calculus by the infringer that infringing first, paying later would be a viable option. However, it is possible to determine if the conditions are favorable for efficient infringement by assessing the relative threat of being enjoined in the face of infringement. This section explains why the eBay factors present difficulties for SEP owners and then provides some exemplary cases where this analysis was performed by a court. This section concludes with some data about the current state of injunctive relief in patent infringement cases.

A. SEPs and the eBay Factors

Based on the four-factor test set forth in the Supreme Court’s eBay opinion, SEP owners are unlikely to obtain injunctive relief in most cases due to the FRAND commitment the SEP owner made to the SDO. This section explains how the FRAND commitment interacts with the eBay factors.

SDOs generally have intellectual property (IP) rights policies that address issues surrounding the IP of the companies who participate in the SDO. One typical provision of IP rights policies requires SDO participants to disclose patents and patent applications covering technology that the participant has submitted to the SDO for potential incorporation into the standard. If that technology becomes part of the standard and the participant deems the patent or patent application to be essential for the practicing of a standard, it becomes known as an SEP. Another common provision of an SDO’s IP rights policy is a commitment by SDO participants to license any SEPs related to the standard on fair, reasonable, and nondiscriminatory (FRAND) terms to any company who wants to make or offer standards-compliant goods or services.¹⁰ The purpose of the FRAND commitment is to facilitate widespread adoption of the standard while still providing SEP owners an opportunity to recoup their investments in the research and development of the technology, as well as to promote the standardization process.

Courts are likely to deny injunctive relief, based on the eBay factors, to an SEP owner that has made a FRAND commitment. Specifically, courts will generally find that SEP owners fail to meet the first two eBay factors – irreparable harm and money damages are inadequate. The argument is that, by accepting a FRAND commitment, an SEP owner has voluntarily relinquished its exclusive rights in exchange for having its patented technology incorporated into the standard. Because the SEP owner has committed to license its patent to all-comers, it cannot claim irreparable harm in the form of loss of exclusive rights, and similarly, because the SEP owner has accepted the FRAND commitment, it has signaled to all that money is sufficient to make it whole. As one commentator summed it up, an SEP owner that has obligated itself to FRAND “is, by definition, willing to license rather than exclude, and benefits from the widespread adoption of its technology resulting from standardization.”¹¹

Some courts have also found that the FRAND commitment also causes the third and fourth eBay factors to support a denial of injunctive relief. The balance of the hardships argument weighs in favor of the infringer because the FRAND commitment means that the SEP owner has given up its rights, while the infringer would be greatly harmed if they were unable to make standards-compliant products like everyone else. The public interest argument also weighs in favor of the infringer being allowed to continue infringing, because the public has an interest in having access to standards-compliant products from multiple implementers. This interest of the public in innovative devices takes precedent over both the public’s interest in a robust standardization ecosystem and a strong and reliable patent system.

While superficially appealing, the aforementioned application of the eBay factors to SEP owners is too facile and is exactly the type of categorical denial that the Supreme Court warned against in that case. Although the FRAND commitment obligates the patent owner to offer and accept a license to use its SEP on fair, reasonable, and nondiscriminatory terms, there is no concomitant obligation on the potential infringer to accept, or even negotiate in good faith for, these terms. While this one-sidedness is more accurately a problem with the overall construct of the FRAND commitment, it does play a role in both the eBay analysis as well as the infringer’s decision to infringe. As to the eBay factors, FRAND affects the acceptability of monetary damages as sufficient and, because the infringer has no obligation to negotiate, implicates the irreparability of harm to the patent owner’s exclusive rights. Finally, while the public does have an interest in standards-compliant products, the fact that SEPs are licensed on FRAND terms to any desiring manufacturer means that the infringer is unlikely to be the only source of any standards-compliant product. An injunction issued against any particular manufacturer will likely not deprive the public of its much-loved and useful devices.

Looming behind the flawed, or at least thoughtless, application of the eBay factors to SEPs is Kennedy’s callout to patent holdup in his concurrence in that case. Patent holdup is the idea that a patent owner could force a firm wishing to make or offer standards-compliant goods or services to pay an excessively high royalty rate, relying on the fear of injunctive relief if the infringer fails to pay the royalty. This is particularly acute where the patented technology may be just a small portion of a standard encompassing hundreds or thousands of patents.¹² Although there has been much research and debate over whether patent holdup is merely theoretical or actually occurs, courts have openly reflected a concern about holdup when deciding not to grant injunctive relief for infringement of SEPs.¹³

Despite objections to how courts view SEP owners under the eBay factors and a largely misplaced concern about patent holdup, the examples in the next section demonstrate that courts will generally decline to issue an injunction for infringement of an SEP.

B. Courts, eBay, and SEPs

Very few cases exist that illustrate how courts assess the eBay factors after a finding of patent infringement of a SEP. The dearth of cases may be, in part, because SEP owners do not seek injunctive relief – even as they avail themselves of other remedies. This failure to seek an injunction could be due to an SEP owner’s determination that they are unlikely to obtain this remedy or because another consideration prevents it. Both of these situations are described in the following sections. The cases that exist, however, provide interesting insight into how courts think about SEPs and injunctions. The following section provides a few examples of these insights.

1. Hynix Semiconductor Inc. v. Rambus Inc.

While this case is more commonly known for a number of other issues, how the court assessed injunctive relief is instructive.¹⁴ The SEP in question covered DRAM technology, patented by Rambus and found to be infringed by Hynix. The bulk of Hynix’s DRAM fell under the JEDEC standard. Rambus developed and licensed chipset technology; although Rambus did not make a product that competed with Hynix, there was competition because Rambus’ design competed with the JEDEC standard.

In determining whether to grant Rambus injunctive relief, the court begins by recounting the eBay factors, but then instantly proceeds to a section entitled “Injunctions Should Not Encourage Holdup.”¹⁵ The court cites the holdup language from Justice Kennedy’s concurrence in eBay, but then proceeds to examine some very old cases (from 1882 to 1900) that address holdup and arrives at the propositions that injunctive relief poses a disproportionate cost on the infringer and that injunctions are not meant to be punitive. The court then returns to analyze the eBay factors, specifically the factors of irreparable harm and inadequacy of monetary damages. The court determined that, although Rambus does not lose sales to Hynix because Rambus does not sell competing products, Rambus did stand to “lose” due to Hynix’s continued infringement because the JEDEC standard would “win” over Rambus’ proprietary design. The court, however, determines this to be a minimal harm, because Rambus has multiple other licensees.¹⁶ Rambus also argues irreparable harm and inadequacy of money damages due to diminished royalty rates and harm to its innovation-based model, after the CSIRO case (described in Section 4). The court was unpersuaded by these arguments, stating that Rambus was in the business of seeking money because it has a licensing program and thus money damages were indeed sufficient.¹⁷ As to the remaining eBay factors of balance of the hardships and public interest, the court found that Hynix would go out of business in the face of injunctive relief, which would be disproportionately more harmful than the “slight” harm faced by Rambus.¹⁸

In deciding the Hynix case, the judge drew comparisons between that case and Broadcom v. Qualcomm, calling it the most significant case since eBay.¹⁹ The Broadcom case also involved telecom chipsets falling under different standards. The court there found irreparable harm, even where the chipsets were under different standards, because the competition between the companies was not sale for sale, but for domination of design.²⁰ The judge then issued injunctive relief on a sunset basis, giving the infringer 20 months to stop infringing, while paying an ongoing royalty, as a means to protect the public.²¹ For the Broadcom court, the bottom line was that a company who builds their business on infringement cannot complain that their business will fail if an injunction is granted. However, the Hynix court noted that if the infringement was clearly not willful, or where there exist serious questions about the patent’s validity, the balance may tip back in favor of not enjoining the infringer.²² Ultimately, in the Hynix case, the court denied injunctive relief.

2. Apple Inc. v. Motorola Inc.

In this case involving cross-infringement suits,²³ Judge Posner, sitting by designation at the district court, determined that neither side would be entitled to an injunction or damages even upon a finding of infringement, and so dismissed the case.²⁴ Although the case is a bit messy because Judge Posner found that neither side had presented an adequate case with respect to damages, the case does present a commonly held viewpoint with respect to injunctions. As Judge Posner noted: “I do not see how, given FRAND, I would be justified in enjoining Apple from infringing the ‘898 unless Apple refuses to pay a royalty that meets the FRAND requirement.”²⁵ Essentially, in the face of outright refusal, courts are unable to see how an SEP owner can meet the eBay factors for injunctive relief. On appeal to the Federal Circuit, that court took note of Judge Posner’s statement presented earlier.²⁶ The Federal Circuit then acknowledged that while it is difficult to establish irreparable harm in cases involving SEPs, there is no categorical prohibition on awarding injunctive relief.²⁷ Specifically, injunctions may be justified where the infringer unilaterally delays FRAND negotiations or rejects FRAND offers.²⁸ Although this interpretation is more generous than that of the Hynix court that limited injunctive relief to willful infringement, it still creates a quite narrow set of difficult facts that an SEP owner must prove to obtain injunctive relief.

3. Microsoft Corp. v. Motorola, Inc.

While the Hynix case provided a fairly standard perspective on the eBay factors and SEPs, it did allow for a small ray of hope in a case where the patent owner could show willfulness and the Apple v. Motorola case gave two additional pathways to injunctions. On the other hand, the Microsoft v. Motorola case takes the idea of injunctive relief for infringement of SEPs in an entirely different direction.²⁹ Mid-case, Microsoft moved to dismiss Motorola’s request for injunctive relief based on the argument that the eBay factors could not be met in the case.³⁰ After discussing SEPs and Motorola’s FRAND commitments under the H264 and 802.11 standards, the court determined without much analysis that there is no irreparable harm given the FRAND commitment and further that monetary damages are perfectly sufficient to make Motorola whole in this case.³¹

The situation became much more interesting when, a year later, Microsoft argued to a jury that Motorola breached its FRAND commitment in even seeking injunctive relief.³² The jury found in favor of Microsoft on this point, and the judge denied Motorola’s motion for judgment as a matter of law, leaving intact the finding that a mere request for injunctive relief by a SEP owner was incompatible with a FRAND commitment.³³ The US Court of Appeals for the Ninth Circuit (Ninth Circuit) went on to affirm this finding.³⁴ This notion that an SEP owner may not even seek an injunction for fear of breaching a duty of good faith and fair dealing with respect to the FRAND obligation creates a difficult choice for an SEP owner.³⁵

4. CSIRO v. Buffalo Tech Inc.

There is, of course, an exception that proves the rule. Although the CSIRO case is better known as a rare decision where an injunction is granted to a non-practicing entity, it is also a case involving an SEP.³⁶ Commonwealth Scientific and Industrial Research Organisation (CSIRO) is a research arm of the Australian government, not unlike the National Science Foundation or National Institutes of Health in the United States. CSIRO received a patent on WLAN technology, and IEEE reached out to CSIRO to inquire whether the organization would commit to FRAND licensing of this patented technology. When CSIRO agreed, IEEE incorporated the technology into the 802.11a and 802.11 g standards, although the more popular 802.11b standard does not include CSIRO’s technology.³⁷ CSIRO then sued Buffalo Tech for infringement based on their making and selling of WLAN products compliant with 802.11a and 802.11 g. In the infringement case, the patent was found to be not invalid and infringed on summary judgment.³⁸ CSIRO then sought a permanent injunction.

The court applied the eBay factors. As to irreparable harm, CSIRO argued that it is difficult to incentivize a manufacturer to take a license when other manufacturers are infringing. As expected in these cases, Buffalo Tech argued that there is no irreparable harm due to the FRAND commitment and that CSIRO is in the business of licensing patents. The court recognized that the harm to CSIRO was not merely financial, because the organization used its licensing program to fund its research and development activities, compete for ideas and scientists, and more. Because funding makes these activities possible, infringement represents a lost opportunity and an irreparable harm.³⁹ For similar reasons, money damages were insufficient to make CSIRO whole.⁴⁰ The balance of the hardships was found to favor CSIRO, as the infringing products were only a small amount of Buffalo Tech’s business and Buffalo Tech opted to infringe rather than license.⁴¹ Finally, the court recognized that the public has a strong interest in an effective patent system, particularly where there are no health or safety concerns at issue.⁴²

While this case could represent a path forward for SEP owners to obtain injunctive relief, as was tried in the Hynix case described earlier, the CSIRO court drew two distinctions that make it difficult to extend that case to more typical SEP cases. First, the court noted that CSIRO’s patented technology was not a small component of a larger product, but was instead the whole of the invention.⁴³ This is generally not true of today’s standardized technologies, such as 5G and IoT. Second, the court found CSIRO’s mission as a research organization particularly compelling, noting that “the work of research institutions has produced enormous benefits to society” and is “fundamental to scientific advancement.”⁴⁴ It is unlikely courts would extend the same sort of reasoning to innovative for-profit firms, despite any societal benefits or scientific advancements.

C. Injunctions Are Being Denied

Efficient infringement is only an attractive option when the infringing firm believes it is unlikely to be enjoined, even if adjudged to be infringing a valid patent. Numerous studies have been conducted post-eBay to understand whether and when injunctive relief is being denied. Although most of these studies are focused on non-practicing entities, rather than SEP owners, the reasons provided for denying injunctive relief to non-practicing entities overlaps with the reasons given to SEP owners. That courts are willing to deny injunctive relief in a significant portion of patent infringement cases provides the necessary foundation for efficient infringement to occur.

Studies of injunction grants prior to eBay found that injunctive relief was granted in 95–100% of cases where patent infringement was found.⁴⁵ Studies done in the first decade after eBay found that requests for permanent injunction were granted in approximately three-quarters of the cases where patent infringement was found (and an injunction was requested). In a widely cited study covering the time period between eBay in 2006 and 2013, Professor Christopher Seaman found that requests for permanent injunction were granted in 72.5% of cases.⁴⁶ Similar numbers were shown in studies by Professors Colleen Chien and Mark Lemley (70% covering June 2006 through August 2011) and Professor Jay Kesan and Kirti Gupta (80% between June 2006 and December 2012).⁴⁷ In the study conducted by Professor Seaman, discussed previously, requests for injunction were granted 16% of the time when the patent holder was not practicing the patent.⁴⁸ Similar low grant rates for non-practicing entities were seen in the studies by Chien and Lemley, as well as Kesan and Gupta.

Current research shows that these numbers have remained steady since the eBay case. This chapter’s author has looked at decided patent infringement cases since the eBay decision where permanent injunctive relief was disputed. Cases decided by default (due to defendant’s failure to answer) or cases where an injunction was issued by consent, stipulation, or settlement were not considered. This resulted in 342 cases with written opinions. Of those 342 cases, 249 resulted in the issuance of an injunction and 93 cases where injunctive relief was denied. This is approximately a 73% grant rate for permanent injunction requests and is generally consistent with the earlier noted studies ( Figure 5.1).

Figure 5.1. Graph of injunction grants & denials June 2006–December 2020

From this data, it is fair to assert that courts are willing to deny injunctive relief in cases that do not, in the court’s estimation, satisfy the eBay factors. However, it is difficult to say much else, particularly about SEPs. Of the cases represented in the data, only seven implicate SEPs and only one resulted in the grant of a permanent injunction (the CSIRO case). There are significant selection effects in the data overall, in that very few cases of patent infringement are actually litigated and even fewer reach the stage where a court must decide a dispute about injunctive relief. Beyond that, there are concerns that, especially in SEP cases, the SEP owner does not seek injunctive relief, as will be discussed later. Further, some SEP cases address the injunction question even before tackling infringement and validity (such as the Apple v. Motorola case) and so were not captured in the data set. Given the data and the discussion previously, parties considering efficient infringement may find that the likelihood of being enjoined upon infringing an SEP is sufficiently low enough that it is a prudent decision.

III. SEP Owners Are Unlikely to Seek Injunctive Relief

One of the difficulties in gathering data about efficient infringement in the SEP space, or at least understanding the favorability of the conditions surrounding it, is that SEP owners do not always (or even often) seek injunctive relief when bringing a patent infringement lawsuit. Of course, if an SEP owner does not seek injunctive relief, none will be granted – again setting up conditions where efficient infringement is likely to flourish. This section will discuss why SEP owners are unlikely to seek an injunction, as well as consider.

A. SEP Owners Are Dissuaded by eBay and SEP Case Law from Seeking Injunctive Relief

As described previously, case law precedent and general conceptions surrounding the eBay factors are likely to dissuade SEP owners from seeking injunctive relief. It is quite difficult for an SEP owner to successfully argue irreparable harm or insufficiency of monetary damages, unless that SEP owner happens to be a governmental research organization. Except in very narrow circumstances, the presence of a FRAND commitment is likely to prove fatal to any sort of injunction being issued. These narrow circumstances – including willful infringement or failure to either negotiate or pay – are difficult to prove and, as will be illustrated later, do not seem to encourage SEP owners to seek injunctive relief in any case.

B. Additional Considerations Affecting Seeking Injunctive Relief for SEP Infringement

SEP owners are not just discouraged from seeking injunctions by eBay and the SEP cases that have followed. There are also additional considerations that have made injunctive relief nearly impossible for SEP owners to obtain and, in some cases, even prohibit SEP owners from seeking injunctive relief. Some of these considerations are driven by the government, from the White House to administrative agencies like the Federal Trade Commission (FTC) and the Department of Justice’s Antitrust Division (DOJ). Other considerations come straight from SDOs as part of their IP rights policies. In addition to directly impacting an SEP owner’s decision to seek injunctive relief, these considerations also have influenced courts’ decisions about whether to grant injunctions in favor of SEP owners.⁴⁹

1. Government Interventions against SEPs

Government entities are increasingly calling for injunctive relief to be unavailable to SEP owners, although these appeals date back nearly a decade or longer. In 2013, the DOJ and the United States Patent and Trademark Office (PTO) issued a policy statement strongly suggesting that injunctive relief was generally inappropriate in patent infringement cases involving SEPs.⁵⁰ Specifically, the statement stated that, absent extraordinary circumstances, an injunction for infringement of an SEP “may be inconsistent with the public interest.”⁵¹ This notion, coupled with the idea that an SEP owner who has committed to FRAND licensing cannot suffer irreparable harm and is made whole by money damages, makes application of the eBay factors a near certainty for the infringer. The basis for this position, as described by the statement, is a concern over patent holdup, although no evidence about the existence and extent of patent holdup was presented in the statement.⁵²

Under the previous administration, there was a shift away from a near-categorical bar to injunctive relief for infringement of SEPs. The DOJ and PTO withdrew their support for the 2013 policy statement and jointly issued a new policy statement on remedies for SEPs subject to FRAND obligations in December 2019, together with the National Institute of Standards and Technology (NIST).⁵³ This statement noted that “All remedies available under national law, including injunctive relief and adequate damages, should be available for infringement of standards-essential patents subject to a F/RAND commitment.”⁵⁴ One stated purpose of this position is to encourage good faith licensing negotiations between SEP owners and companies wishing to make or offer standards-compliant goods or services.⁵⁵ Although unstated, the policy was also intended both to make efficient infringement less attractive and to reinvigorate a viable ecosystem for nonjudicial transactions surrounding patent rights.

With the Biden Administration, however, government policy has shifted back to disfavoring injunctive relief for infringement of SEPs. In July 2021, President Joseph Biden issued the Executive Order on Promoting Competition in the American Economy, where, among other things, he “encouraged [the Attorney General and the Secretary of Commerce] to consider whether to revise their position on the intersection of intellectual property and antitrust laws, including by considering whether to revise” the 2019 DOJ-PTO-NIST joint policy statement.⁵⁶ In response, the three agencies issued a Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments in December 2021.⁵⁷ Under this new guidance, injunctions are again unlikely to issue for SEP infringement: “Where a SEP holder has made a voluntary F/RAND commitment, the eBay factors, including the irreparable harm analysis, balance of harms, and the public interest generally militate against an injunction.”⁵⁸

This latest policy statement does recognize the importance of a viable ecosystem for patent licensing, acknowledging the value of “widespread and efficient licensing of SEPs” and recognizing the “efficient negotiation of F/RAND licenses is likely to improve standardization efforts and support competition and innovation.”⁵⁹ The agencies, however, fail to understand that efficient infringement is an attractive option where injunctive relief is unavailable and that efficient infringement is the antithesis of efficient licensing. In any case, where the government has come out repeatedly and strongly against the availability of injunctive relief, the likelihood of a court granting an injunction or an SEP owner seeking injunctive relief is quite low.

As of June 8, 2022, the three agencies withdrew the 2019 DOJ-PTO-NIST joint policy statement and, at this point, have not adopted the 2021 Draft Policy Statement.⁶⁰ In announcing the withdrawal, the agencies noted that the issues of injunctive relief will be addressed on a case-by-case basis, but no additional guidance has been provided, and the direction of the path forward is unclear.

2. SDO’s Prohibition on Injunctive Relief

SDOs have also weighed in on whether injunctive relief should be permitted for infringement of SEPs. While some SDOs have remained neutral, at least one major SDO has restricted the ability of its participants to seek injunctive relief. This certainly has a great impact in making efficient infringement a reasonable choice for makers of standards-compliant products.

In 2015, under the purported basis of addressing patent holdup, the Institute for Electronics and Electrical Engineers (IEEE) amended its IP rights policy to, among other things, address injunctive relief.⁶¹ Unfortunately, the process by which these amendments were made was not the usual open, consensus-driven activity that is typical for SDO activity, but was driven largely by implementers, or those that make standards-compliant products, over the objection of SEP owners.⁶² Specifically, the amended IEEE policy stated that a FRAND commitment to the IEEE “precludes seeking or seeking to enforce” an injunction unless the infringer “fails to participate in, or to comply with the outcome of, an adjudication including an affirming first-level appellate review” or “where the failure to request a Prohibitive Order in a pleading waives the right to seek a Prohibitive Order at a later time.”⁶³ This prohibition is even more restrictive than what had been seen in the courts, where at least there was a possibility of injunctive relief where the infringer had refused to negotiate, as described earlier. In September 2022, the IEEE withdrew this language from its policy, effective January 1, 2023.

C. Showings Indicative of Efficient Infringement

Although it is difficult to fully grasp how often efficient infringement is occurring, there are anecdotes and circumstantial data that support its existence. Anecdotes, while difficult to find, often provide very compelling illustrations of infringers making conscious choices to not negotiate licenses with SEP owners. Circumstantial data, on the other hand, is easier to obtain but complicated to interpret. It is possible to gauge how often SEP owners seek injunctive relief by considering their filed complaints, but this does not often address why they made this choice. Similarly, SEP owners often allege willful infringement when companies refuse to negotiate a license or in the wake of failed negotiations, but this too does not fully capture whether and how much efficient infringement is occurring in the SEP space. In lieu of better information, however, this section briefly considers these data points.

In another chapter in this book – Restoring Deterrence: The Case for Enhanced Damages in a No-Injunction Patent System by Jonathan M. Barnett and David J. Kappos – the authors provide a number of anecdotes illustrating efficient infringement. One of the more striking is worth recounting here – Core Wireless v. LG Electronics.⁶⁴ In that case, Core Wireless, a joint endeavor of Microsoft and Nokia, assigned its portfolio to Conversant Intellectual Property Management.⁶⁵ Conversant initiated licensing talks with LG Electronics, which ultimately responded with a “terse one-page presentation stating that a lawsuit was … ‘preferable’ to a license and that LG would prefer to wait until another major cell phone manufacturer licensed the portfolio” before taking a license.⁶⁶

Following the precedent and other considerations described previously, it would be expected that SEP owners seek injunctive relief less often than other patent owners. A quick text search of complaints filed in patent cases between eBay and March 1, 2022, seems to bear this out,⁶⁷ although more in-depth analysis is warranted and beyond the scope of this chapter (Figure 5.2).

Figure 5.2. Graph of complaints seeking injunctive relief

It is difficult to draw many conclusions from this data, other than if a complaint includes the term “standard essential,” it is slightly less likely to also include the terms “permanent injunction” or “injunctive relief.” The data is, of course, subject to significant selection effects, as described previously, and also is simply a text-based search for relevant terms. However, this could signal that SEP owners are less likely to seek injunctive relief in some circumstances, particularly when coupled with the case law precedent and additional considerations detailed in the previous sections.

Performing a similar textual search based on the presence of “willful” in patent infringement complaints also may provide some insight about efficient infringement, subject to the same caveats and need for further research analysis (Figure 5.3).⁶⁸

Figure 5.3. Graph of complaints indicating “willful”

Again, it is difficult to draw any certain conclusions from this data, but in reading from the complaints for patent infringement of an SEP that include the term “willful,” there are many cases where licensing negotiations are hindered by the infringer, where negotiations continue for multiple years often attributed to delay tactics by the infringer, and where multiple offers are made by the SEP owner but are declined by the infringer.⁶⁹ What is interesting is that, as these negotiations continue and are, in essence extended by the infringer, that same party is continuing to use, without paying, the patented technology of the SEP. This is the very essence of efficient infringement.

IV. Conclusion

Efficient infringement, or the decision by an infringer to “infringe now, pay later,” is only an attractive option where injunctive relief is unavailable to a patent owner who has successfully demonstrated infringement of its patent. One sector where injunctions are routinely unavailable is in the SEP space, particularly where the SEP owner has obligated itself to FRAND licensing. Under these circumstances, it is difficult for the SEP owner to make a satisfactory showing against the eBay factors, used by courts to grant injunctive relief. Policymakers and SDOs have also weighed in, in favor of denying injunctions to SEP owners, concerned about the unproven phenomenon of patent holdup. SEP owners are often discouraged, or even prohibited, from seeking injunctive relief.

In these conditions, where injunctive relief is routinely unavailable (or even not sought), efficient infringement is able to flourish. Although it is difficult to measure efficient infringement, there are indications that it is occurring in the SEP space. From anecdotes to alleged facts in complaints to court determinations, it is clear that at least some makers of standards-compliant goods and services are willing to delay or even decline licensing of SEPs and to take their chances in court instead. Because the worst that could happen for these infringers is a damages award reflecting past infringement and providing a royalty for future infringement, the option of efficient infringement seems rational. What is missing from these anecdotes and the circumstantial data is how efficient infringement is harming SEP owners. It is time to stop acting as though efficient infringement does not exist; there are plenty of theoretical reasons and actual indicia that it does. Instead, it is time to study the negative effects it is having on standardization and innovation.

6 Restoring Deterrence The Case for Enhanced Damages in a No-Injunction Patent System

Jonathan M. Barnett and David J. Kappos

I. Introduction

In May 2006, the US Supreme Court issued a decision that dramatically changed the landscape of patent enforcement, and with it the respect paid to patent rights. In eBay, Inc. v. MercExchange, LLC,¹ the Court departed from the long-standing principle that a patent owner is presumptively entitled to an injunction once it defends validity and demonstrates infringement. While the decision was unanimous, it produced two concurring opinions, one of which (authored by Chief Justice Roberts) emphasized the historical practice of usually granting injunctions to prevailing patentees and the other of which (authored by Justice Kennedy) emphasized that non-practicing entities (NPEs) abuse patent litigation to “hold up” users² for windfall payouts. In post-eBay case law, the latter opinion has not only prevailed but also been applied expansively. As a result, proliferating categories of patent owners, extending significantly beyond NPEs, no longer have any reasonable expectation of securing an injunction against infringers.

In this chapter, we ask a simple question. If a patent owner has no or a low expectation of securing injunctive relief against infringers, is it necessary to enhance damages for infringement to fully compensate the patent owner and deter infringement?

The Kennedy concurrence, and the bulk of the post-eBay case law, has implicitly answered this question in the negative. Courts have generally adopted the view that a patent licensing entity (or even an operational entity in certain circumstances) is made whole by monetary damages appropriately calculated based on the “reasonable royalty” standard. We contest this reasoning. For patent owners that have no realistic expectation of securing injunctive relief, reasonable royalty damages must be enhanced to achieve full compensation and deter infringement. This is true even if a court could calculate without error reasonable royalty damages in a hypothetical willing buyer-willing seller negotiation. So long as the infringer is sufficiently well-resourced (and can therefore fund a prolonged litigation), and there is a sufficiently low likelihood that the court will shift attorneys’ fees or award treble damages, the infringer will usually find that agreeing to pay a license fee for use of a patented technology is economically irrational. Absent concerns about preserving goodwill with business partners, the infringer is better off using the technology and effectively negotiating the royalty rate through the litigation and settlement process, with some possibility that the patent will be invalidated altogether.

This reasoning is not merely theoretical. As we show through case studies of selected litigations involving owners of standard-essential patents (SEPs), for whom the likelihood of securing injunctive relief approaches zero, device makers and other intermediate users adopt the “use, then litigate” strategy, rather than paying a license fee up front. This behavior has an important implication. Rather than reducing patent litigation, a judicial standard that eliminates or significantly limits the availability of injunctive relief encourages infringement, promotes stalling tactics by users, and therefore increases litigation. These counterproductive effects are exacerbated in cases where infringers have greater litigation funding and lower opportunity costs than patent owners, who may settle for an amount that undervalues the patented technology or, by anticipation, never bother to enter the market at all. Contrary to the Kennedy concurrence and much of the post-eBay case law, a no-injunction regime is unlikely to leave patent owners – even a patent owner that relies principally on licensing revenues – in an economically equivalent position. So long as litigation is costly and uncertain and the risks of fee-shifting and treble damages are low, infringers have weak incentives to agree to a license and, depending on litigation resources and opportunity costs, patent owners are likely to agree to undercompensatory settlements. Given that all licensing takes place “in the shadow” of potential infringement remedies, a no-injunction regime with a low likelihood of enhanced damages is prone to distort even negotiated royalty rates to the advantage of licensees.

To translate our analysis into an immediately actionable policy proposal, we assume that neither the Supreme Court nor Congress is likely to take action to restore the historical presumption favoring injunctive relief for prevailing patent owners. Given this background assumption, we propose that, in any infringement litigation in which the injunction remedy is unlikely to be granted as a matter of law or practice, courts should apply a multiplier to enhance the monetary damages owing to the patentee under the reasonable royalty standard. The multiplier is designed to mitigate or correct the underdeterrence and undercompensation effects of a no-injunction regime by making even a well-resourced infringer worse off by electing to infringe (and invite litigation) rather than negotiating a license fee up front. Additionally, we discuss how courts can set the multiplier at an appropriate level to minimize any overcompensation and overdeterrence effects under an enhanced damages regime. While this proposal departs from current doctrine by using a damages multiplier in the conventional rather than exceptional case (in infringement litigation without an injunction option), it is consistent (as we explain in Section IV) with the original purpose of treble damages in US patent law – namely, to compensate patentees who were unable to petition for injunctive relief (due to procedural reasons that are now obsolete). Post-eBay case law has placed increasingly large portions of the patentee population in the same position.

Our discussion is organized as follows. In Section II, we discuss in theory how a no-injunction regime induces “efficient infringement” by users, resulting in undercompensation and underdeterrence effects in a wide range of circumstances. In Section III, we provide brief case studies of selected litigations, showing how well-resourced infringers act strategically to defer negotiation and payment of license fees to patent owners that cannot credibly threaten to secure an injunction remedy. In Section IV, we present our proposed adjustment to patent remedies to mitigate undercompensation and underdeterrence effects in a no-injunction regime.

II. eBay and “Efficient” Infringement

A. The Disappearance of the Patent Injunction

To fully appreciate the eBay decision, it is helpful to recall the context in which it was rendered.

A few months prior to the eBay decision, Research in Motion (more commonly known as “RIM”), the maker of the then-ubiquitous Blackberry device, had agreed to a $612 million settlement of a patent infringement litigation brought by NTP, Inc., a NPE cofounded by an individual inventor. The litigation and settlement had been widely reported as a windfall for the patent owner who reportedly “held up” RIM by threatening to shut down the Blackberry network given the lack of an immediately available design-around for the infringing component. Given this characterization, it might naturally follow that, at least in certain circumstances, injunctions should be limited in order to deter patent owners from engaging in opportunistic litigation and settlement strategies. This was precisely the motivating principle behind the eBay decision, issued later that same year.

Following the law of unintended consequences (at least for the four Justices who supported the decision but did not sign on to the Kennedy concurrence), the eBay decision has been applied expansively by the lower courts to encompass proliferating categories of patent owners that are perceived to pose an elevated holdup risk. With some qualification in specific cases, there is now generally a low likelihood that NPEs, SEP owners, and the owners of patents on components of a larger complex product can secure injunctive relief. It should be noted that the latter two categories encompass significant portions of the information technology markets. Even in a patent infringement litigation involving Apple and Samsung, two operating companies in head-to-head competition, the district court initially denied Apple even a phased-in “sunset” injunction on the grounds that, under the eBay test, “the principles of equity do not support the issuance of an injunction.”³ While the district court’s decision was ultimately overturned by the Federal Circuit, it nonetheless illustrates the extent to which eBay has been applied well beyond the limited circumstances in which at least some members of the Court most likely envisioned their decision would alter patent remedies.

B. The Normalization of Patent Infringement

Any license can be understood as a preemptive settlement of a potential infringement litigation. Hence the impact of eBay (or more precisely, post-eBay case law) extends well beyond the remedies issued in infringement litigation and permeates everyday licensing and other transactions involving patent-protected assets. Even if litigation is infrequent, sophisticated business parties must take into account whether there is any credible threat that the patent owner could ultimately secure an injunction against an infringing user. Generally speaking, the greater the threat of an injunction, the greater the bargaining leverage enjoyed by the patent owner in negotiating license terms, and vice versa. Given the limited availability of injunctive relief under post-eBay case law (and assuming that treble damages are a low-probability outcome), firms that are primarily users of patented technology may often, if not typically, conclude that the expected net payoff from infringement exceeds the expected net payoff from negotiating and paying an up-front license fee. While eliminating injunctive relief may deter patent owners from adopting holdup strategies that can yield settlement payouts that overvalue the relevant technology, it encourages well-resourced users to adopt holdout strategies that lead to license fees that undervalue the relevant technology. In effect, eBay has rendered patent infringement a rational business strategy for significant categories of intermediate users.

We can identify more precisely the conditions under which this “use, then maybe litigate” strategy will be preferred by users versus a “license, then use” strategy in a no-injunction regime. These conditions are as follows:

1. 1. It is costly for the user to acquire or develop a design-around substitute for the patented technology.

2. 2. The user has sufficient resources to fund a prolonged infringement litigation.

3. 3. The user will retain access to, and therefore derive revenues or other economic benefits from use of, the patented technology during the litigation.

4. 4. There is a sufficiently low likelihood that a court would award attorneys’ fees or treble damages.

5. 5. Reasonable royalty damages are likely to approximate, or at least will not exceed significantly, the royalty that the user and the patent owner would likely negotiate prior to entering into litigation.

If at least some of these conditions are satisfied, then the user is likely to conclude that infringement delivers a higher expected net payoff than agreeing to a license and avoiding the risks and costs of an extended litigation with the patent owner. The rationale is as follows. By electing to invite litigation, rather than settle it preemptively through a negotiated license, the user incurs the direct and indirect costs of litigation but, in exchange, “purchases” the opportunity to either invalidate the patent entirely (in which case the royalty falls to zero) or negotiate a reduced or equivalent royalty rate. Even in the scenario in which the patent owner ultimately prevails on liability, the previously stated conditions (in particular, the low likelihood of treble damages and fee-shifting) imply that the user can expect to pay a damages award equal to the royalty fee it would have incurred initially, plus prejudgment interest (if included).⁴ The only incremental cost incurred by the infringer are attorneys’ fees, which constitute a fee paid by the user for the opportunity to reduce or eliminate the royalty rate through the litigation and settlement process.

The likelihood that infringement outperforms licensing increases if the user is a more “patient” litigator than the patent owner. This will be the case if the user has substantially greater resources to fund litigation as compared to the patent owner and the patent owner relies substantially on licensing revenues from the patented technology. Moreover, given the absence of any risk of preliminary injunctive relief, the infringer extracts revenues and other economic benefits from use of the patented technology while the patent owner, who incurred the costs of developing the technology (or acquiring the patent covering the technology), receives nothing. Assuming this asymmetry in both litigation resources and opportunity costs – up to and including insolvency on the part of the patent owner – bargaining leverage shifts to the infringer in any settlement discussions that take place concurrently with litigation, likely resulting in a negotiated royalty that is lower than the amount that would be awarded in a fully adjudicated litigation or would have been awarded in a pre-litigation negotiation.

These observations have an important implication for the ultimate consequences of the limitations on injunctive relief that have arisen in post-eBay case law. While eBay may have identified a situation in which the availability of injunctive relief can enable a patent owner to secure an “overvalued” royalty from a well-resourced user, the unavailability of injunctive relief sometimes enables a well-resourced user to negotiate an “undervalued” royalty with the patent owner. Unless there is reason to believe that patent owners are systematically securing royalty rates that are excessive relative to a socially optimal royalty rate,⁵ this is clearly an inefficient state of affairs that runs counter to the public interest in providing a level playing field for open-market negotiation of royalty rates for IP assets among willing licensors and licensees.

C. Existing Damages Enhancements

The likelihood that infringement will be privately efficient for the user, as compared to negotiating and paying a license fee up front, depends on whether a user has a sufficiently low expectation of being held liable for damages enhancements, such as a court shifting attorney fees or applying a multiplier to a reasonable royalty damages award. As discussed subsequently, this result is consistent with applicable case law, which emphasizes that these tools are reserved for exceptional cases, and available data, which shows that an informed infringer should anticipate a low likelihood of financial exposure to damages enhancements.

1. Attorney Fees

Civil litigation in US courts has a long-standing commitment against shifting attorney fees to the losing party. Patent law shares this commitment. The patent statute provides that “the court in exceptional cases may award reasonable attorney fees to the prevailing party.”⁶ In 2005, the Federal Circuit set a high bar for shifting fees. Specifically, the court held that a court may only award attorney fees “if both (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.”⁷ Additionally, the court clarified that litigation is objectively baseless only if it is “so unreasonable that no reasonable litigant could believe it would succeed,” and that litigation is made in subjective bad faith if the plaintiff “actually know[s] that it is objectively baseless.”⁸ In Octane Fitness, LLC v. Icon Health & Fitness, Inc., decided in 2014, the Supreme Court rejected this standard, holding that a case is “exceptional” and therefore merits fee-shifting when the case “stands out from others with respect to the substantive strength of a party’s litigating position … or the unreasonable manner in which the case was litigated.”⁹ While the Court’s decision provides courts with some additional latitude to award attorney fees, a prevailing litigant seeking to shift its fees to the other litigant still faces significant hurdles and fee-shifting remains an atypical outcome in patent infringement litigation. Moreover, fee-shifting is most often applied in favor of prevailing defendants, so if anything, in the aggregate it would tend to encourage users to litigate rather than take licenses.¹⁰

2. Treble Damages

The patent statute provides that a “court may increase the damages up to three times the amount found or assessed.”¹¹ While not stated in the statute, courts have widely required a finding of willfulness as a predicate condition for even considering whether to exercise the statutory option to award enhanced damages.¹² Critically, a willfulness finding is a predicate condition for considering, not awarding, enhanced damages. Hence, it is entirely possible (and common) that a court may decline to award enhanced damages even if willfulness has been found. Moreover, as discussed subsequently, it is entirely possible (and again common) that a court may select a damages multiplier that is less than three times the damages amount.

The evidentiary threshold for showing willfulness has varied. In a 1983 opinion, Underwater Devices Inc. v. Morrison-Knudsen Co., the Federal Circuit lowered the threshold by holding that the willfulness standard implied that a potential infringer had “an affirmative duty to exercise due care to determine whether or not he is infringing.”¹³ In a 2007 opinion, In re Seagate Tech LLC, the Federal Circuit rejected this standard and raised the bar for finding willfulness, adopting a two-part test that required patentees to show that (1) “the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent,” and (2) the risk of infringement “was either known or so obvious that it should have been known to the accused infringer.”¹⁴ In 2016, the Supreme Court rejected the Seagate test in Halo Electronics, Inc. v. Pulse Electronics, Inc., emphasizing that the statute “gives district courts the discretion to award enhanced damages against those guilty of patent infringement.”¹⁵ Yet, the shift put in place by the Halo decision should not be exaggerated. Addressing arguments that the Seagate standard had protected inadvertent infringers from treble damages, the Court emphasized that the lower courts’ exercise of discretion under §284 should be guided by the “sound legal principles developed over nearly two centuries of application and interpretation of the Patent Act.”¹⁶ Additionally, the Court emphasized that treble damages “are not to be meted out in a typical infringement case, but are instead designed as a ‘punitive’ or ‘vindictive’ sanction for egregious infringement behavior.”¹⁷ As we discuss subsequently, a 2021 Federal Circuit decision, SRI International Inc. v. Cisco Systems,¹⁸ appears to heighten the standard for finding willfulness consistent with the guidance set forth in Halo.

Empirical studies of judicial determinations of willfulness and enhanced damages in infringement litigation show that these determinations are sensitive to the governing threshold for finding willfulness.¹⁹ During 1983–1999, when willful infringement was determined under the plaintiff-friendly “affirmative duty” standard, juries found willfulness in 71% of litigations in which they considered the issue and judges found willfulness in 53% of litigations in which they considered the issue.²⁰ Among litigations that found willfulness, enhanced damages were awarded 63% of the time if a jury found willfulness and 95% of the time if a judge found willfulness.²¹ In the aggregate, this data implies that, out of all fully adjudicated infringement trials during this period, 18% reached a positive willfulness determination and 12% then resulted in enhanced damages.²² In the three years prior to the 2007 Seagate decision (September 2004–August 2007), which adopted the more demanding “objective recklessness” standard, courts had found willfulness in 48.2% of litigations in which they considered the issue, compared to 37.2% in the three years after Seagate (August 2007–July 2010).²³ Following the 2016 Halo decision, which rejected Seagate and lowered the threshold for finding willfulness (but without reverting to the Underwater Devices “affirmative duty” standard), there was again an increase in willfulness findings and enhanced damages awards. Out of all district-court litigations that determined willfulness and enhanced damages during December 2013–December 2018, the percentage of such decisions that found willfulness increased after Halo (decided in June 2016) from 22.8% to 55.7%, and the percentage of such decisions that awarded enhanced damages increased from 10.1% to 29%.²⁴

It is important to emphasize that the likelihood that a fully adjudicated infringement suit will result in an enhanced damages award is inherently greater, and almost certainly significantly greater, than the likelihood that a filed infringement suit or a particular act of infringement will ultimately result in enhanced damages. There are several reasons why this would be the case: (1) the patent owner may not bring suit due to lack of knowledge, resources, or economic interest; (2) the patent owner brings suit, but the parties settle (probably the most common outcome); or (3) the parties do not settle, but the defendant prevails on invalidity, noninfringement , or other grounds so damages are a moot issue.²⁵ Even among cases that do not settle, the likelihood of enhanced damages is limited since adjudicated patent litigations only result in a finding of infringement liability about one-third of the time on average. During 1998–2017, only 34% of all patent litigations that proceeded to a final decision resulted in a finding of infringement,²⁶ of which (as shown by the data discussed earlier) a minority then resulted in both a willfulness finding and enhanced damages. Since the vast majority of filed infringement suits never reach adjudication (approximately 94% based on one estimate),²⁷ an infringer faces an insignificant likelihood of incurring an enhanced damages award at the time an infringement suit is filed (even without discounting for the less-than-certain likelihood that a patent owner will detect infringement and elect to bring suit in response).

While these estimates are necessarily imprecise to some extent and may vary on a case-specific basis depending on the strength of a particular infringement claim and the litigation resources available to a patent owner, it is nonetheless clear that informed infringers can in general anticipate a low likelihood of enhanced damages liability when electing whether to infringe upon, or take a license to, a patented technology, or to settle a patent infringement suit. Those expectations are consistent with our theoretical analysis that a prospective licensee in a no-injunction environment will expect that an infringement litigation would most likely result in either (1) zero liability (due to a finding of invalidity or noninfringement), or (2) a damages award approximately equivalent to the royalty rate that would have been paid in a negotiated transaction (plus prejudgment interest if awarded): in each case, excluding the infringer’s legal fees. These anticipated outcomes of a fully adjudicated litigation in turn impact settlement outcomes, which can even result in a settlement amount that leaves the infringer better off than if it had agreed initially to pay a royalty, given the fact that settlements do not typically include prejudgment interest to reflect the time value of money.²⁸ So long as the infringer is willing to bear the expected legal fees (which deliver a potential gain in the form of a zero royalty rate due to a finding of invalidity or noninfringement or a reduced royalty rate by settlement), the incentive to infringe is self-evident.

III. Efficient Infringement in Action

SEPs cover critical technologies behind 3G, 4G/LTE, and now 5G mobile communication standards. It is widely asserted that SEP owners have incentives to “hold up” potential licensees by demanding exorbitant royalty rates, which would in turn inflate retail prices for consumers at the end of the technology supply chain. To remedy this purported risk (which has yet to be empirically demonstrated), courts and regulators in the United States, European Union, and other jurisdictions have construed an SEP owner’s commitment to “fair, reasonable, and nondiscriminatory” (FRAND) licensing as implying a waiver by the SEP owner of its right to seek injunctive relief against infringers in most circumstances. As a result, SEP owners can only credibly threaten infringers with the prospect of monetary damages determined by a court based on a “reasonable royalty” standard (for which there are in turn a variety of calculation methodologies). Hence, SEP owners operate under the equivalent of the no-injunction regime imposed by eBay and post-eBay case law.

This nearly complete ban on injunctive relief for SEP owners logically incents well-resourced users to “hold out” by stalling licensing negotiations and compelling patentees to bear the costs and delay involved in pursuing litigation as a means of securing remuneration for use of their technology. The business case for infringement in a no-injunction environment is compelling. The former head of patent licensing at Apple has explained the logic, stating that “efficient infringement, where the benefits outweigh the legal costs of defending against a suit, could almost be viewed as a ‘fiduciary responsibility,’ at least for cash-rich firms that can afford to litigate without end.”²⁹

To explore these strategies in more detail (within the scope of this chapter), we describe four selected litigations between SEP owners and alleged infringers in US and UK courts. In each case, we indicate in parentheses the principal court and the period during which the litigation took place, which provides a sense of the delay involved when pursuing a royalty through infringement proceedings (which in turn often follows a substantial period of licensing negotiations). Each litigation provides qualitative evidence illustrating how the absence of injunctive relief leads device manufacturers to engage in stalling tactics that require patent owners to undertake costly and protracted litigation in an effort to secure a royalty through settlement or adjudication.

A. Core Wireless v. LG (US District Court for the Eastern District of Texas, 2014–2016)

In 2014, Core Wireless (a subsidiary of Conversant Intellectual Property Management), the holder of patents relating to user interfaces, battery life, and voice recognition in smartphone devices, brought two infringement suits against LG, a leading manufacturer of tablets, handsets, and other electronic devices.³⁰ When each of the cases went to trial in 2016, Core Wireless prevailed on patent validity and infringement in both litigations, and juries awarded Core Wireless $3.5 and $2.28 million in damages, respectively.³¹ In the second of the two trials, the judge awarded enhanced damages of $456,000 in light of evidence that LG had “undisputed” knowledge of Core Wireless’s patents and “abruptly terminated” licensing discussions.³² Specifically, the judge cited weak invalidity and noninfringement defenses and evidence that, after an extended negotiation period, LG had invited Core Wireless representatives to its offices in South Korea purportedly to resolve the matter, but “[r]ather than make an offer or engage in serious, good faith negotiations, LG delivered a terse one-page document stating that a lawsuit at that time between the parties was ‘preferable’ to a license.”³³ Among recent SEP litigations, this is perhaps the only case in which a prospective licensee explicitly adopted a policy of ignoring the patent and inviting litigation, even arguing in court that “infringement is an expected part of the standard-setting model.”³⁴ This may explain why, to our knowledge, it is the only SEP litigation in which the court awarded enhanced damages. Few implementers are likely to repeat this mistake.

B. Qualcomm v. Apple (US District Court for the Southern District of California, 2017–2019)

This complex sequence of litigations involved Qualcomm, the leading chip supplier and innovator in the wireless communications market, and Apple, one of the world’s leading handset device manufacturers and the most valuable brand in this market. In the context of a dispute over rebate payments allegedly owed by Qualcomm, Apple sued Qualcomm in January 2017 for engaging in licensing practices that allegedly violated the antitrust laws.³⁵ In response, Qualcomm filed in May 2017 a breach of contract suit against Apple’s contract manufacturers, which had stopped paying fees under their licensing agreements with Qualcomm, purportedly at Apple’s direction.³⁶ In July 2017, Qualcomm filed a patent infringement suit against Apple for use of its patents in certain Apple devices.³⁷ These litigations took place while the Federal Trade Commission (FTC) concurrently pursued an antitrust suit against Qualcomm, seeking a dramatic remedy that purported to operate on a worldwide basis and would have required Qualcomm to renegotiate virtually all of its licensing agreements. The result would have been a reengineering of a critical element of the contractual infrastructure behind the global wireless communications industry.

To appreciate the dynamics in the Apple/Qualcomm litigation, it is important to note three key facts. First, the size of Apple, which is regularly ranked as the world’s largest or second-largest company by market capitalization, means that it faced virtually no constraints on litigation funding. Second, while Qualcomm derived no revenue from Apple’s use of its patent-protected assets during the two-year litigation, Apple enjoyed billions of dollars in revenue through the sale of devices that used and relied upon Qualcomm’s technology. Third, given the low likelihood of an injunction, Apple never faced any material prospect that it would be forced to withdraw devices for which it had already incurred the costs of manufacture and distribution.

These factors naturally tilted bargaining leverage in favor of Apple, which effectively made a litigation “investment” in an effort to reduce its input costs (and increase its profit margins) from a technology supplier through the vehicle of an antitrust litigation.³⁸ For Apple, the costs of the litigation were nominal relative to the potential benefits in the form of reduced royalty fees during the lifetime of the current wireless technology generation. This was not true for Qualcomm, which was deprived during the litigation of a principal revenue stream and, together with the antitrust suit brought against it concurrently by the FTC, faced legal challenges that, if successful, would have threatened the viability of its business model. This asymmetry can be observed in the fact that, following settlement of the Apple/Qualcomm litigation on April 16, 2019, Qualcomm’s stock rose 23%, while Apple’s stock only rose 1%.³⁹

To be clear, Apple’s actions are neither nefarious nor surprising; rather, they represent a rational business response to a truncated property rights environment that favors users over originators of IP assets. As observed by Apple’s former head of licensing,⁴⁰ a well-resourced user that faces no real threat of injunctive relief is best off infringing and then litigating the royalty rate in court (or settling the rate in the context of litigation), rather than entering initially into a license. In a post-eBay environment, Apple (and any other sufficiently resourced user) would be foolish to do otherwise.

C. Unwired Planet v. Huawei (UK, 2014–2020)

In 2013, Unwired Planet, the owner of patents relating to wireless communications, approached Huawei, a leading handset manufacturer, to enter into discussions concerning a license agreement for use of Unwired Planet’s SEP-protected technology. After several inquiries, Huawei’s IP department entered into protracted discussions with Unwired Planet over the terms of a nondisclosure agreement (a straightforward document that is typically uncontroversial). Unable to conduct constructive negotiations with Huawei, Unwired Planet elected to file an infringement suit in March 2014 against Huawei, Samsung, and Google for the infringement of six UK-issued patents, including five claimed SEPs.⁴¹ During the litigation, Unwired Planet made several license offers to the defendants. Google and Samsung settled while Huawei made counteroffers, but the parties were unable to resolve the dispute.

The court ultimately held that Huawei had infringed two valid patents held by Unwired Planet and, for purposes of damages, calculated the FRAND royalty to which the patent owner was entitled. The court also rejected the view that Unwired Planet had breached its FRAND commitment by initiating infringement litigation and seeking injunctive relief. Most importantly, the court held that, while the FRAND commitment in general precludes SEP owners from seeking injunctive relief, this bar is lifted once the alleged infringer is deemed to be an “unwilling licensee” who acts opportunistically to prolong licensing negotiations.⁴² On the basis of this principle (which refined a holding by the European Court of Justice in a 2015 decision⁴³), the court issued an injunction against further use by Huawei of the infringed patents, unless Huawei elected to enter into a license based on the FRAND royalty as determined by the court. Upon appeal, the UK Supreme Court upheld the lower court’s royalty determination and agreed that Unwired Planet had not acted “abusively” given its stated willingness to license upon FRAND-compliant terms.⁴⁴ This decision represents one of the few cases in which a court has appreciated seriously the “holdout” risk faced by innovators that are practically precluded from seeking a legal order to block infringement.

D. Optis Wireless v. Apple (UK, 2017–Present; US District Court for the Eastern District of Texas, 2019–2021)

Optis Wireless holds patents that have been declared essential to the 4G LTE standard. In 2017, Optis had approached Apple offering a license for use of the patented technology. In February 2019, after two years of unresolved negotiations, Optis Wireless filed suit against Apple for infringement based on alleged use of the patented technology in Apple’s iPhone, iPad, and Apple Watch devices.⁴⁵ In August 2020, a jury reached a finding of willful infringement and awarded Optis $506 million in reasonable royalty damages, which did not include a damages enhancement.⁴⁶ In light of jury instructions concerning the FRAND obligation that were deemed to be defective, the court subsequently ordered a new damages proceeding.⁴⁷ In August 2021, that proceeding resulted in a reduced award of $300 million.⁴⁸ The judge declined to award enhanced damages.⁴⁹

Optis concurrently filed infringement suits against Apple in the United Kingdom. In one of these suits, the court found in October 2020 that Optis’ patent claims were valid and infringed.⁵⁰ Additionally, the court granted Optis’ motion for a separate proceeding to determine whether Apple is an “unwilling licensee,” on the ground that it has purportedly declined to commit to pay a FRAND-compliant royalty once that royalty is determined through litigation.⁵¹ Under the Unwired Planet decision described previously, an “unwilling licensee” finding is the only circumstance in which SEP owners under British law may be entitled to injunctive relief. In September 2021, the High Court stated that Apple may be enjoined from selling the infringing products in the UK market unless it commits up front to taking a FRAND-compliant license from Optis, the terms of which will be determined at trial.⁵² (Apple had previously threatened to withdraw its products out of the British market if the trial resulted in a “commercially unacceptable” royalty award.⁵³) In June 2023, the High Court determined a global FRAND rate for the relevant portion of Optis’ SEP portfolio, which Apple must accept or it may face an injunction barring sales of some iPhone and iPad models in the UK market.⁵⁴

IV. How to Make Efficient Infringement Inefficient

As apparent from both our theoretical analysis and our summary of exemplary cases, a patent regime that eliminates the possibility of injunctive relief but makes no offsetting change in the customary menu of patent remedies – namely, a reasonable royalty award that includes damages enhancement – will inherently result in a combination of undercompensation and underdeterrence effects in a wide range of circumstances. As discussed, qualitative evidence from selected infringement litigations, in which the likelihood of injunctive relief was essentially zero, is consistent with these expectations. In the following discussion, we show that these adverse effects can be significantly mitigated by mandating enhanced damages in cases where patent owners have no realistic expectation of injunctive relief. While the prospect of enhanced damages can give rise to windfall awards that invite opportunistic litigation in specialized circumstances, we show that this adverse effect can be mitigated through appropriate adjustment of the damages multiplier based on existing case law.

A. Historical Background

The notion that infringers should be subject to enhanced damages is not new.⁵⁵ In an amendment made in 1793 to the patent statute (only three years after its original enactment), Congress required that infringers pay damages at least equal to three times “the amount the patentee usually received for either selling the patented invention or licensing the invention.”⁵⁶ That is: Treble damages were mandatory, and judges had authority to select an even higher damages multiplier. The amendment is thought to have reflected the fact that injunctions were rarely awarded by federal courts (due in part to the Anti-Injunction Act, which generally precluded federal courts from exercising equitable powers reserved for state courts) and therefore treble damages were deemed necessary to correct for undercompensation.⁵⁷ In 1800, the statute was amended to set treble damages as the maximum multiplier. In 1819, Congress allowed federal courts to exercise equitable jurisdiction in all patent cases, and in 1836, the patent statute was amended so that treble damages became a discretionary, rather than mandatory, component of patent damages, as remains the law today. Since that time, changes in the incidence of enhanced damages have arisen as a result of changes in the standards adopted by courts to determine the threshold for finding willfulness and awarding enhanced damages, as discussed in Section I.

B. Mandating Enhanced Damages

Legal scholars have long recognized that supercompensatory damages can be a sound policy tool in cases where the identification and prosecution of individual legal violations is sufficiently costly and would not meet a cost–benefit test. In these circumstances, the “windfall” enjoyed by any individual plaintiff is the price paid to maintain deterrence generally since, without a credible threat of supercompensatory damages, prospective violators would have no rational incentive to comply with the relevant legal obligation. Under a patent regime in which injunctive relief is unavailable and infringers’ maximum “downside” is a reasonable royalty damages award (plus interest if awarded), the patent regime is unlikely to deter infringers with sufficient litigation resources. Absent concerns about preserving goodwill with actual or potential business partners (including the necessity of securing complementary know-how from the patentee), a well-resourced party will rationally choose to use the patented technology and invite the patentee to initiate infringement litigation. As discussed previously, this underdeterrence effect is likely to lead to undercompensation where patentees with limited litigation funding or high opportunity costs are prone to agree to royalty rates that undervalue the relevant technology. This is especially likely to be the case with smaller entrants, including disruptive start-ups, universities, and independent inventors. As a broader consequence, a downward distortion in royalty rates would then be expected to arise in all licensing negotiations involving patent owners that are effectively ineligible for injunctive relief. This effectively transfers wealth from entities that specialize in generating innovations to well-resourced entities that specialize in using them, a result that runs counter to the policy objective behind the patent system.

Assuming it is not feasible to institute a legal presumption favoring injunctive relief for prevailing patentees (which would require overturning eBay by judicial or legislative action), the deterrence and compensatory functions of the patent system can be restored (at least in part) by requiring that courts award enhanced damages in any litigation in which injunctive relief is highly unlikely as a matter of case law or judicial practice. Courts would then select a multiplier based on an adaptation of the “Read” factors that courts already use to determine the “egregiousness” of the defendant’s conduct, which in turn impacts whether enhanced damages are awarded and, if so, the size of the selected multiplier.⁵⁸

Some of the most relevant Read factors in this context include “whether the infringer deliberately copied the ideas or design of another; whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed; … [d]efendant’s size and financial condition; [and] [c]loseness of the case.”⁵⁹ In a typical “efficient infringement” scenario, at least two of these factors would favor selecting a high multiplier for purposes of enhanced damages: the infringer is well-resourced financially and deliberately copies the patentee’s patented technology. The court could then adjust the multiplier upward or downward depending on the extent to which the facts indicated whether the infringer had investigated the scope of the patent and formed a good faith belief that the patent was invalid. While our proposal goes beyond existing statutory and case law in mandating enhanced damages in all cases in which injunctive relief is not practically available, the factors that would be used to calibrate the multiplier largely track the existing Read factors and arguably encompass the “affirmative duty” standard that, as discussed earlier,⁶⁰ courts had used to assess willfulness following the Underwater Devices decision in 1983 until the Seagate decision in 2007.

Enabling patentees to credibly threaten infringers with the prospect of enhanced damages in lieu of injunctive relief would discourage well-resourced users from infringing by increasing the user’s anticipated “downside” losses in the event the patentee prevailed in an infringement litigation. This would correct for the underdeterrence and undercompensation effects that arise in a legal environment in which patent owners cannot credibly threaten to deny access to their patented technology. Whether or not a user would determine that negotiating a license outperforms infringing and litigating would then depend on its level of confidence in being able to show that the patent is invalid or not infringed, rather than being dependent on the user’s litigation resources and opportunity costs relative to the patent owner. This would constructively lead potential infringers to proactively invest resources in investigating the validity and scope of relevant patents, which may often lead infringers to conclude that negotiating a license, rather than expending funds on litigators, is the preferred business option. Hence, our proposal has the virtuous effect that it renders the user’s license v. infringe decision dependent on the strength of the patent, rather than the relative litigation resources available to the user and patent owner. This levels the playing field by precluding well-resourced implementers from leveraging the costs and delay of the litigation and settlement process to secure a downward adjustment in the royalty rate from a less well-resourced innovator, irrespective of the value of the underlying patent.

The prospect of enhanced damages (and, in particular, courts’ ability to adjust the multiplier upward in response to infringer opportunism) would also unwind the distortionary effects that the current “almost no” injunction patent regime exerts in the patent licensing market. Negotiated royalty rates would more closely track a patent’s economic value, since those rates would no longer reflect the artificially depressed levels that can arise under the threat of protracted litigation with well-resourced infringers. Over time, improved accuracy in negotiated royalties would likely improve the accuracy of judicially determined royalty awards since courts could more confidently rely on established royalties as an accurate measure of economic value.⁶¹

C. Calibrating Enhanced Damages

It can nonetheless be objected that awarding enhanced damages would invite a return to opportunistic litigation from certain patent owners for the purpose of securing enhanced damages or favorable settlement payouts from cash-rich users. That is: While substituting enhanced damages for injunctive relief mitigates “holdout” behavior by prospective licensees, it restores the risk of “holdup” behavior by patent owners. To be clear, we do not expect that mandating enhanced damages would give rise to holdup behavior in general. Insisting on exorbitant royalty rates would be a self-defeating strategy for repeat-play innovators that seek to maximize returns by inducing adoption of their existing technology and accruing reputational goodwill to induce adoption of their future technologies.⁶² Holdup incentives may arise, however, in the case of certain patent owners that do not have R&D investments at stake, hold a patented technology to which there is no cost-feasible substitute, and are not repeat players in the technology ecosystem. In that specific set of circumstances, long-term incentives to maintain reputational goodwill might not discourage the short-term use of opportunistic litigation strategies and hence, mandating enhanced damages could invite entry by opportunistic litigants, resulting in overcompensation and overdeterrence effects.

These concerns are addressed by design through our proposal, which mandates enhanced damages in “almost no” injunction scenarios but always invests courts with discretion to select the specific multiplier.⁶³ We anticipate that courts would calibrate the multiplier to achieve a rough trade-off between correcting undercompensation and underdeterrence effects (which favor a higher multiplier) and overcompensation and overdeterrence effects (which favor a lower multiplier), which would in turn depend on the facts demonstrated in any particular litigation. This concept is already reflected in the patent statute, which empowers courts to select a multiplier within a bounded range, and case law outcomes, which exhibit variation in the multipliers used by courts when awarding enhanced damages and show that courts infrequently reach the upper bound.

More specifically, as noted earlier, courts already use the Read factors to determine the size of the damages multiplier and our proposal would build upon this existing framework. Specifically, one of the Read factors takes into account whether the infringer “investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed.”⁶⁴ Courts could apply a lower damages multiplier if an infringer showed that it had satisfied this factor. Additionally, we anticipate that courts would select lower damages multipliers if the infringer could demonstrate that it was unaware of the contested patent after due diligence or was aware of the patent and had made good faith efforts to negotiate a license from the patent owner. This would also preserve incentives for good faith users to reject a license when, after due diligence, they are reasonably confident that the patent owner would be unlikely to defend validity and demonstrate infringement (in which case the probability that the patent owner would secure a liability finding, a willfulness finding, and a meaningful enhanced damages award would most likely reach asymptotic levels).⁶⁵

Another Read factor is the duration of the defendant’s misconduct.⁶⁶ The longer the duration of the defendant’s misconduct, the higher the enhanced damages. In the context of our proposal for mandatory enhanced damages, courts may take into account the period of time during which negotiations and litigation have played out, enhancing damages to account for the increasing holdout costs borne by the patentee during a protracted negotiation and litigation process. These costs extend beyond mere attorney fees, as the delays incurred by negotiation and litigation can have dramatic adverse effects on a firm’s position in the market (for example, it can forfeit the first mover advantage that is often critical in technology markets).

Closely related to the duration of negotiations and litigation and the defendant’s good faith belief is whether one of the parties made a credible offer of arbitration as to either the entire dispute or the royalty determination Arbitration is less time-consuming and costly than litigation, so a defendant’s refusal to participate in arbitration may be grounds to increase the enhanced damages multiplier, and a plaintiff’s refusal may be grounds to decrease the enhanced damages multiplier. Of course, a party may have a legitimate reason for preferring federal court litigation, and showing a legitimate reason (such as a defendant’s good faith belief that the patent was invalid or not infringed) can rebut any increase or decrease in enhanced damages.

Appropriately applied, mandating enhanced damages subject to a judicially applied multiplier (in the absence of injunctive relief) would not only deter litigations induced by bad faith users that infringe against likely valid patents but also litigations brought by bad faith holders of likely invalid patents. The net result would likely be a reduction in the quantity, and an improvement in the “quality,” of patent infringement litigation on the judicial docket, offsetting some of the unintended consequences of the eBay decision.

D. The Legislative Fix

There is no perfect solution to the inevitable trade-off between undercompensation and underdeterrence effects, which can arise in certain circumstances when courts infrequently award enhanced damages or typically apply low damage multipliers, and overcompensation and overdeterrence effects, which can arise in certain circumstances when courts regularly award enhanced damages or typically apply high multipliers. Following our proposal, courts can roughly balance these effects by combining mandatory enhanced damages with variable damages multipliers, which courts can adjust downward if there is sufficient evidence of good faith motivations behind the infringer’s action or upward if there is sufficient evidence of bad faith motivations behind the infringer’s conduct. Courts already have authority to make these adjustments under the enabling language in the patent statute, which provides that courts “may increase the damages up to three times” (our emphasis). These discretionary powers are illustrated by the district court’s decision in Core Wireless Licensing S.A.R.L. v. LG Electronics, Inc.,⁶⁷ a litigation brought by a SEP owner and therefore without any prospect of injunctive relief. Following the jury’s finding of willfulness, the judge elected to impose a 20% damages enhancement based on evidence of bad faith negotiation conduct by the infringer and weak patent invalidity and noninfringement defenses. In SRI International Inc. v. Cisco Systems,⁶⁸ the Federal Circuit upheld an enhanced damages award on the ground that the defendant not only had infringed willfully but also had engaged at trial in “aggressive tactics,” such as making dubious arguments that appeared to be contradicted by the infringer’s internal documents.

These decisions might suggest that our proposal could be largely implemented through increased judicial willingness to apply the existing damages multiplier for purposes of awarding enhanced damages following a finding of willfulness. SRI International shows why this would not be sufficient to restore the missing deterrence effects in the current patent system. In that case, the Federal Circuit clarified that enhanced damages can only be awarded based on a finding that the defendant had engaged in both willful infringement and “wanton and malicious” conduct. Given this arguably heightened threshold for awarding enhanced damages, meaningful implementation of our proposal could not rely on courts’ discretion under existing case law to award enhanced damages for the simple reason that courts would often not have the opportunity to exercise such discretion. Our proposal therefore requires amending the patent statute to clarify that courts must select a damages enhancement, subject to the existing statutory maximum of treble damages, in any infringement litigation in which the patent owner prevails on validity and infringement and there is no reasonable likelihood of injunctive relief.⁶⁹

Interestingly, German legislators have recently implemented a version of our proposal. A recent statutory amendment to the German Patent Act precludes injunctive relief “if the claim would lead to disproportionate hardship for the infringer or third parties.”⁷⁰ This amendment, which codifies German case law,⁷¹ allows courts to deny injunctive relief in special circumstances – injunctive relief is no longer “automatic.” While the German Patent Act amendment does not go as far as eBay, which (as interpreted by the lower courts) flipped the United States from an “automatic” injunction regime to an “almost no” injunction regime, the German Patent Act amendment does play a similar role by making injunctive relief more difficult to obtain. What is significant, however, is that the shift in the German patent injunction regime is paired – as this chapter proposes – with an increased ability to obtain enhanced damages. In the same amendment making injunctive relief more difficult to obtain, the German Patent Act was also amended to provide “[i]n th[e] case [where injunctive relief is denied], the injured party shall be granted appropriate financial compensation [that] shall not affect the claim for damages pursuant to Paragraph 2 [traditional patent remedies of actual damages, unjust enrichment and reasonable royalties].”⁷² Thus, as the German system transitions away from an “automatic” injunction regime, legislators had the foresight to implement an enhanced damages regime to deter infringers from engaging in holdout tactics. Hopefully, Congress can look to Germany as an example of our proposal in action.

Absent restoration of the historical presumption favoring injunctive relief for prevailing patentees (which would more directly correct the underdeterrence effect), we encourage Congress to consider making this adjustment to the patent statute. In 1793, Congress recognized the necessity for mandating enhanced damages for patent owners when injunctive relief is unavailable; today that same rationale applies once again.

V. Conclusion

The signature element of a property right is the ability to have effective legal recourse to maintain exclusivity of the underlying asset in response to unauthorized users. This principle is as true in intangible goods markets as in tangible goods markets. Contrary to widespread characterizations, the fundamental effect of a robust IP regime is not to entrench “idea monopolists” and enable them to extract maximal rents from intermediate and end users. In most cases, that would be an ill-advised business strategy that would invite some combination of infringing use, underuse, or competitive entry. Rather, the property rights “backstop” supplies a legal platform on which business parties can engineer a myriad of value-creating transactional arrangements that structure licensing, joint venture, and other relationships between parties that hold complementary assets and capacities. While the eBay decision may have targeted a specific type of opportunistic litigation, its effects have reverberated across the IP ecosystem, converting patents in many sectors from a property right priced by the market to a quasi-compulsory license priced in court. Absent legislative intervention to correct the “eBay effect,” we have proposed a simple remedy. If patentees have no realistic expectation of securing injunctive relief, even after having incurred the significant costs and delay involved in defending validity and demonstrating infringement, then the infringer must pay enhanced damages to restore in part the deterrence and compensation effects that have been eroded under the current patent regime.