Permanent injunctions are good: eBay decked the innovation economy by enabling predatory infringement.

In 2006, the Supreme Court changed the landscape of patent law with its decision in eBay v. MercExchange,1 creating a new test for injunctions that significantly altered this longstanding remedy for patent infringement. Injunctive relief for patent infringement was no longer certain. In fact, some patent owners could be almost certain that they would not be granted a permanent injunction against an infringer, with courts instead setting “ongoing royalties” for the continuing infringement. Infringers, knowing that they are unlikely to be enjoined, are—in certain cases—taking the risk to “infringe now, pay later.” This mindset is known as predatory infringement.2

As the twentieth anniversary of this landmark opinion looms, evidence of a more insidious fallout from eBay is accumulating. Not only does the lack of injunctive relief no longer serve as a deterrent to infringement, but it also negatively impacts the functioning of efficient markets and negotiations of fair market value. As economists have long explained, injunctions are the legal means by which property owners are able to set terms in commercial negotiations that result in business deals and other economic activities in the innovation economy. Specifically, when an injunction is available, a patent owner, like any other property owner, can say during the course of negotiations, “No, I will not license my patent to you at the price you are offering to me.” Parties who wish to use the patented technology will either need to pay the patent owner’s asking price or will need to opt for different technology.

In contrast, where an injunction is not available, parties who wish to use the technology have no need to negotiate in good faith—or at all. These parties can coerce a “compulsory license” to use the technology through predatory infringement, having only to accept whatever “price” is set after the fact by courts or regulators. Of course, not all parties will be willing to infringe, whether due to an ongoing relationship with the patent owner or reputational concerns. However, this lack of injunctive relief leads to a distorted market in which patents are devalued as an asset class.

While this could be considered simply a side effect of predatory infringement, it is actually a more significant problem. The lack of injunctive relief is harming patent owners even where predatory infringement is not occurring; the value of all patents is diminished because the lack of injunctions alters licensing negotiations. Most patent licensing occurs in secret, so it is difficult to measure the harm that eBay has caused in this respect. However, a recent study conducted by AUTM (known previously as the Association of University Technology Managers) provides an insight into the eBay effect: exclusive licenses, which are generally higher-valued, have decreased while non-exclusive licenses, which are generally lower-valued, have increased in the years since the eBay decision. This is evidence of how the loss of injunctions, resulting in a zero value for exclusivity in a license deal, has negatively impacted commercial transactions and devalued patents generally.

Before presenting this important data, this policy memo first explains the law of injunctions for patent infringement, both before and after eBay. It then details the evidence of how eBay has resulted in courts issuing fewer injunctions against infringers of patents. Many policy analysts and commentators focus only on this litigation data and stop there, but this legal fact matters because of its negative impact on markets for technology and the innovation economy. The policy memo thus describes how the lack of injunctive relief is negatively impacting the ability of patent owners to successfully negotiate high-valued licenses in the marketplace. Policy discussions about eBay and injunctive relief must account for the economic function of injunctions—how this remedy for infringement facilitates the commercial transactions that grow the innovation economy and create jobs.