Injunctions solve but removing them causes more litigation

Removing the injunction option, however, not only changes the bargaining range (and makes infringement a valid business option), but, by extension, it lowers the expected returns of investing in the creation and commercialization of patents, in the first place.[35] Further, lack of an effective injunction remedy perversely incentivizes more litigation activity relative to the baseline. With a no-injunction presumption, a potential licensee has a diminished incentive to negotiate with a patent holder. Instead, it can refuse to license, infringe the patent, try its hand in court, avoid royalties entirely until litigation is finished, and in the end never be forced to pay a higher royalty in damages than it would have if it had negotiated at the outset. As long as the expected cost of litigation is less than the expected gain from infringing without paying any royalties, potential licensees will always have an incentive to pursue this strategy. The net result is a shift in bargaining power so that, even when license agreements are struck, royalty rates are lower than they would otherwise be, as well as an increased likelihood of infringement. It also establishes this lower royalty rate as the “customary” rate, which ensures that subsequent royalty negotiations, particularly in the standard-setting context, are artificially constrained. This effect is multiplied in the SEP context in which the nominal fair, reasonable, and non-discriminatory (“FRAND”) royalty rate is said to be determined with reference to the ex ante bargaining position—that is, before the true value of the patent is known once it has been implemented and commercialized. As a result, the inability to seek an injunction against an infringer further ensures that patent holders operate with reduced incentives to invest in technology and to enter into standards because they are precluded from benefiting from any subsequent increase in the value of their patents once they do so. As Richard Epstein, Scott Kieff, and Dan Spulber write: The simple reality is that before a standard is set, it just is not clear whether a patent might become more or less valuable. Some upward pressure on value may be created later to the extent that the patent is important to a standard that is important to the market. In addition, some downward pressure may be caused by a later RAND commitment or some other factor, such as repeat play. The FTC seems to want to give manufacturers all of the benefits of both of these dynamic effects by in effect giving the manufacturer the free option of picking different focal points for elements of the damages calculations. The patentee is forced to surrender all of the benefit of the upward pressure while the manufacturer is allowed to get all of the benefit of the downward pressure.[36] The importance of injunctions in the SEP context, and their effect on licensing rates, has been well-recognized by policymakers. For instance, in a report published in 2011, the FTC argued that: The threat of an injunction can lead an infringer to pay higher royalties than the patentee could have obtained in a competitive technology market. *** The patentee can use the threat of an injunction to obtain royalties covering not only the market value of the patented invention, but also a portion of the costs that the infringer would incur if it were enjoined and had to switch.[37] In other words, the FTC endorses the idea that injunctions affect bargaining range during infringement proceedings, which in turn affects their ex ante bargaining range. The FTC thus concludes that courts award damages that exclude the value derived from the threat of injunctions.[38] But while the premise is correct, the normative conclusion that the FTC draws does not follow. The higher licensing fees obtained by the threat of injunctions are a feature, not a bug, of the system. They reward licensees that have concluded ex ante license agreements (and who have not, therefore, wasted judicial resources when private bargaining was available), relative to those that have declined to do so. This is precisely the return on risk and innovation that patents are intended to secure. Compounding this miscalculation, opponents of injunctions overestimate the extent of the threat of patent holdup by employing an inappropriate estimation of the proper willingness of potential licensees to negotiate. It is, of course, not optimal to set remedies such that patent holders are over-incentivized to withhold licenses by threatening litigation in order to increase their royalties over the efficient level. But determining whether a potential licensee is really willing to license at a reasonable rate, or is instead holding up negotiation to gain its own litigation-driven bargaining power, is not straightforward. And the measure of willingness commonly employed by commentators—including the FTC—is mistaken.