Tailoring Remedies to Spur Innovation

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