Injunctions doom innovation in fast moving markets.

If open source innovation has great social benefits in fostering competition and innovation, it also has particular vulnerabilities. First, precisely because open source development takes place in a network and allows both small and large players to participate by building on a common technology, it is particularly susceptible to attack and disruption. A proprietary monopolist fully internalizes both the costs and benefits of policing its technology and its intellectual property. Members of an open innovation network, however, do not. Individual members can be “picked off,” forced to abandon promising lines of technological development, or to pay ruinous “stacked” royalties because the costs of litigation are too burdensome for any one member of the network to bear. It is in this context that the threat of injunctions is particularly worrisome. In fast-moving technology markets, the dead stop forced by an injunction can be enough to doom a product. An entire network of innovation could be shut down by an injunction obtained against a single small participant who lacks the resources necessary to challenge the patent or defend against the injunction.

Second, most of these markets are characterized by strongly cumulative innovation. A finished product may “read on” literally thousands of potential patents. In these markets, as Justice Kennedy noted in eBay, there are considerable concerns with low patent quality and with the vagueness of the patents themselves.5 Even the most scrupulous respecter of intellectual property can be subject to hold-up by a company claiming its patent has been infringed. To quote the Federal Trade Commission

Under some circumstances, however, the threat of an injunction can lead an infringer to pay higher royalties than the patentee could have obtained in a competitive technology market. At the time a manufacturer faces an infringement allegation, switching to an alternative technology may be very expensive if it has sunk costs in production using the patented technology. That may be true even if choosing the alternative earlier would have entailed little additional cost. If so, 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. This higher royalty based on switching costs is called the “hold-up” value of the patent. Patent hold-up can overcompensate patentees, raise prices to consumers who lose the benefits of competition among technologies, and deter innovation by manufacturers facing the risk of hold-up. 6

Large firms protect themselves from the vulnerability inherent in this situation by purchasing huge war chests of patents, not for their inherent value but to threaten “mutual assured destruction” should their (large) competitors start a patent war. But an open innovation or open source network is at best imperfectly protected by such tactics, and remains vulnerable in any event to hold-up by “non-practicing entities”—patent trolls who can use the threat of an injunction to extract large rents without being subject to attack in return because they never actually make anything.

Empirical studies and theoretical economic models confirm the dangers described here are real. For example:

• Preliminary injunctions claims are disproportionately more likely to be brought by plaintiffs that are financially stronger and larger than the defendants—a troubling barrier to entry in a supposedly dynamic market.7 Here, the desirable heterogeneity of open innovation networks becomes a vulnerability.

• Professors Mark Lemley and Carl Shapiro have shown the threat of injunctions allows for “holdup” and “royalty stacking,” 8 particularly in the type of cumulative innovation markets in which open source methods are most often found.