Injunctions are integral to strong property rights---that drives economic growth

Misunderstanding the Commercial Function of Injunctions for Patent Infringement

Feeding the misplaced and unverified arguments about “patent holdup” is a widespread misunderstanding about the function of injunctions in securing property rights and as a driver of economic activity in the U.S. innovation economy. Although some companies internalize many aspects of research and development, manufacturing, and commercializing products and services in their business models, most companies do not do this. Businesspersons regularly create innovative economic arrangements to efficiently produce new products and services, such as creating disaggregated supply chains among different companies distributed throughout the global economy, franchise business models formed around licenses of a portfolio of intellectual property rights, portfolio licensing of patents, and patent pools, among many others.53

The ability of inventors, businesspersons, and ultimately consumers to reap the benefits of these innovative markets is dependent on the ability of patent owners and businesspersons to transact freely in the marketplace. The setting of the market value in products and services comes about through freely negotiated contracts, which themselves are dependent on the exercise of exclusive control of property rights. This is why all property rights, including intellectual property rights, are a platform for commercial activities in which market participants benefit from specialization and division of labor in maximizing value creation, which leads to economic growth and a flourishing society.54 This key economic principle was first formulated by Adam Smith in The Wealth of Nations in 1776, and it is widely accepted as a foundational principle in economics today.55

Even more important, specialization and division of labor via market transactions is what makes possible value creation by undercapitalized innovators, such as independent inventors, startups, universities, and research companies. These individuals and corporate entities do not have the labor and capital necessary to establish their own manufacturing facilities, but they can license their patent rights and contract with other companies and entities who do have these capabilities to achieve efficiencies in the marketplace in producing and distributing new products and services to consumers. Professor Zorina Khan, an award-winning economist, has recognized that this was a fundamental economic byproduct of the historically unique American approach in securing patents as property rights in the nineteenth century:

[P]atents and…intellectual property rights facilitated market exchange, a process that assigned value, helped to mobilize capital, and improved the allocation of resources…. Extensive markets in patent rights allowed inventors to extract returns from their activities through licensing and assigning or selling their rights.56

This key economic function of property rights only works when owners have reliable and effective control over their property. If anyone can violate a property right by trespassing, and the only consequence they suffer is that they must pay the property owner some form of monetary compensation at an amount or rate set by a government official, then property owners can no longer determine how best to use their property in the marketplace.

This is the legal and economic function of injunctions. Continuing wrongs—ongoing violations of property rights—harm owners (and ultimately society) in ways that are not compensable merely by a government award of damages for the trespass. When a willful trespasser wantonly crosses a farmer’s field, the harm to the owner is not fungible with the $1 in compensatory damages for the trodden grass.57 The value to the farmer of the private property is not $1. If the trespasser wished to access and use the land, this person should have negotiated with the farmer and paid the market price of this access right based on what he was willing to pay and what the farmer was willing to accept, assuming they could agree on an amount that was mutually acceptable. The injunction secures this capacity of the farmer to require this negotiation by the would-be trespasser.

Continental Airlines v. Intra Brokers. This economic principle—injunctions facilitate market transactions by securing a property owner’s right to decide how it will use its assets and sell its products and services in the marketplace—is well recognized by courts in non-intellectual property cases. In Continental Airlines v. Intra Brokers,58 for example, the trial court granted Continental’s request for an injunction to stop Intra Broker reselling Continental’s discount airfare coupons, and Intra Brokers appealed.59 Intra Brokers argued that, even if it was liable for its resale of the coupons, the value of the coupons was easily measured by the face value of each coupon, and thus Intra Brokers maintained that Continental failed to prove that it suffered an irreparable injury justifying an injunction. Continental, Intra Brokers argued, deserved only a payment of damages as its remedy.

The 9th Circuit decisively rejected Intra Brokers’ argument, stating, “Continental was entitled to control whether its coupons were transferred.” The court held that Continental had proven irreparable injury because the “harm to Continental was to its power, not its purse. [Regardless w]hether Continental is right or wrong about the effect of coupon brokering on its profits…it is entitled to its own decisions about whether to give out discount coupons, and whether to make them transferrable or nontransferable. Neither Intra nor the courts are entitled to substitute their business judgment for Continental’s.”60

Historical Jurisprudence. In a famous case from 1911, the West Virginia Supreme Court of Appeals held that a trespasser who cut down the trees of the landowner could not simply elect to pay the landowner damages representing the fair market value of the trees.61 Although it was possible to identify and measure the monetary value of the trees, this economic fact did not make the legal injury to the landowner complete as a matter of law. The court recognized that the key legal and policy concern for “all forms of property either real or personal” is that courts “guarantee to the owner of property the right, not only to possession thereof and dominion over it, but also its immunity from injury.”62 The court further recognized that real estate is truly unique because “no two pieces of land are alike in all respects,” and thus courts cannot assume as a default rule that fair market value (money) is entirely fungible with the value of a parcel of real estate to its owner.63

In securing these control rights over property, courts protect the freedom to make commercial decisions that make possible private ordering in business models and market exchanges. They also secure the liberty interest in how people may choose to live their lives,64 secure their privacy rights,65 and create their own business models and develop corporate goodwill with a reputation as innovative companies.66 As the Wisconsin Supreme Court recognized in a famous trespass case, in these situations, “the actual harm is not in the damage done to the land…but in the loss of the individual’s right to exclude others from his or her property.”67

Historically, courts applied these same principles in presumptively securing the exclusive control rights in property rights in inventions.68 These principles are particularly salient for patented innovations because the patent laws require a valid patent to be unique—novel and nonobvious—just like a parcel of real estate. In Gilbert & Barker Manufacturing Co. v. Bussing, for example, the court denied the patent owner’s request for a preliminary injunction, but expressly noted that patent owners could not be subjected to compulsory licensing through denials of a final injunction after finding a defendant liable for ongoing infringement of a valid patent.69 The court stated bluntly: “The complainants cannot be compelled, against their will, to permit the defendant to use their invention.”70 As Circuit Justice McLean explained in another patent case in 1845: In “an ordinary case of infringement…an absolute injunction is the only adequate relief.”71 As noted earlier, the Supreme Court recognized in 1908 in Continental Paper Bag Co. v. Eastern Paper Bag Co. that all patent owners had a presumptive right to receive an injunction for ongoing violations of their valid property rights.72

In applying these principles in the increasingly uncommon cases today in which injunctions are affirmed or denials of injunctions by trial courts are reversed, the Court of Appeals for the Federal Circuit has recognized that “exclusivity is closely related to the fundamental nature of patents as property rights. It is an intangible asset that is part of the company’s reputation.”73 Courts have also recognized that patent infringement causes innumerable harms that are very difficult to identify, quantify, and measure in a way that affords complete relief with only monetary damages. These harms include “price erosion, loss of goodwill, damage to reputation, and loss of business opportunities” in the marketplace, which the Federal Circuit rightly recognized as “all valid grounds for finding irreparable harm.”74

These policy and economic concerns in patent law reflect the same concerns about loss of control rights over the use of real property. In both cases of patents and real property, long-standing legal doctrine recognizes that, even if monetary damages can be measured and awarded by a court, this does not put a property owner in the position the owner would have been but for the wrongful violation of one’s property right. The ability to secure personal values and commercial decisions in the use of one’s own property is an essential foundation of both a liberal political order and a free market. This principle applies to all forms of property, whether real estate or patents—as courts historically recognized.