4.2.1 Nature of Patent Rights and Injunctions

To many, the nature of patent rights as “rights to exclude” is determinative of a strong, if not overwhelming, presumption in favor of injunctive relief, particularly when a final determination of infringement has been made.Footnote ¹ The language and structure of international agreements, for example, is sometimes invoked in support of arguments that the nature of patent rights justifies a robust presumption in favor of injunctive relief.Footnote ² The TRIPS agreement, to which the over 150 members of the WTO are subject, provides that members must give a patent owner rights “to prevent third parties not having the owner’s consent from” acts such as using the invention, subject only to “limited exceptions” or the satisfaction of specific requirements for situations “[w]here the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder.”Footnote ³

Some also justify a strong presumption in favor of injunctive relief by analogy to remedies for violation of rights in tangible property, whether real or personal.Footnote ⁴ One factor contributing to liberal use of injunctive relief to remedy real property harms is a general assumption that each parcel of real property is unique – not just in an objective sense, but also often for subjective personal reasons unique to its owner – and thus not readily replaceable via the market for real estate.Footnote ⁵ A similar argument can be made with respect to patent rights. Because each patent claim is uniquely associated with a novel invention, as well as one or more inventors who may feel strongly invested in the novel idea they introduced to the world, monetary remedies can be difficult to calibrate properlyFootnote ⁶ and cannot return a patent holder to its rightful position by enabling the patent holder to purchase an essentially perfect substitute for what the infringer has taken.Footnote ⁷

Still others justify such a presumption through a mixture of formal and pragmatic concerns that points to practical difficulties in “protecting a right to exclude through monetary remedies that allow an infringer to use an invention against the patentee’s wishes.”Footnote ⁸ According to this view, the availability of injunctions to protect property-like “rights to exclude” might, as a practical matter, be critical to secure the benefit of such rights following a trespass or infringement. An injunction backed by potentially punitive sanctions for contempt might be presumed to have a greater deterrent effect on future infringement than would result from a mere repeat of compensatory monetary sanctions for past infringement.Footnote ⁹ At least in jurisdictions that do not permit an award of ongoing royalties, this added deterrence can help spare a rightsholder from the need to sue the same infringer again to obtain compensation for substantially the same form of infringement, and thus reduces the risk that uncompensated costs associated with repeat litigation will lead the rightsholder to eventually cease defending its rights altogether. It similarly prevents repeat damages awards or ongoing royalties, even fully compensatory ones, from serving as informal compulsory licenses, which are (formally) constrained by international accords, such as TRIPS.Footnote ¹⁰ Indeed, these arguments may be even stronger in the context of patent rights than property rights because patents protect publicly disclosed information (i.e., the enabling information disclosed in a patent), which the rightsholder has little ability to defend by means of self-help.Footnote ¹¹ That is, having disclosed the patented invention to the public in exchange for state-backed rights to exclude, a patentee has substantially surrendered a capacity to “fence in” that information in the manner of a real property owner building a fence to help prevent future trespass.

That said, even those advocating for strong property-like protection of patent rights commonly concede that the property-like nature of patent rights does not mandate injunctive relief in all situations.Footnote ¹² Indeed, TRIPS itself makes clear that “Members may limit the remedies available against [infringing] use to payment of remuneration,”Footnote ¹³ a provision that some commentators argue gives member nations broad discretion to limit injunctions.Footnote ¹⁴ In addition, even in the context of trespass to real property rights, common law countries have historically subjected injunctive relief to exceptions that consider whether awarding such relief inflict a burden on the trespasser or public that is disproportionate to the harm that the trespass has inflicted upon the property owner.Footnote ¹⁵ A quintessential example is found in the legal treatment of encroaching structures. Despite the nature of the underlying property right at stake, courts will generally refuse to order the demolition of buildings that were inadvertently built so that they extend slightly over the boundary with a neighboring property.Footnote ¹⁶ As courts have recognized, awarding such an injunction would allow the neighboring property owner to leverage the building’s entire value to extract a settlement from the building’s owner that is disproportionately large relative to the neighbor’s actual harm from losing a sliver of land.Footnote ¹⁷

Similar concerns arise as well in the context of patent infringement when an injunction might allow a patent holder to prevent, or at least to substantially tax, the use of much more than the patented technology itself. This can happen if, for example, an infringer must undergo high “switching costs” (e.g., from retooling or closing a factory) in order to terminate an ongoing course of infringement.Footnote ¹⁸ Awarding an injunction in such a circumstance can allow the patent holder to negotiate a settlement derived in part on the value of technology located outside the scope of his claims, extending the effective reach of patent rights potentially far beyond the scope of the inventor’s contribution to society. Even for those who believe that injunctions should generally issue against patent infringement, such extension of patents’ effective reach can outrun rights-based rationales for injunctive relief and lead to concessions that court practices in issuing injunctions should be qualified or tailored accordingly.Footnote ¹⁹

4.2.2 Economic Analysis and Complex Products

Economic arguments for or against injunctions often draw on more general debates about the relative economic efficiency of protecting legal entitlements through “property rules” associated with grants of injunctive relief or “liability rules” associated with awards of compensatory damages.Footnote ²⁰ As suggested by the discussion above of how rationales for injunctions can mix formal and pragmatic perspectives, these economic arguments can overlap with arguments that might at least initially be viewed as more fundamentally tied to the nature of patent rights. Sometimes the difference between more purely economic and more fundamentally rights-based arguments can appear to revolve principally around the extent to which an argument looks to vindication of underlying purposes of patent law, as opposed to vindication of patent rights that are assumed generally to serve those underlying purposes. Sometimes the difference can seem to reflect to a large degree the level of generality at which argument is conducted – for example, whether one primarily looks to achieve “right” outcomes in individual cases or on-average “right” outcomes in great masses of cases.

For purposes here, a more fundamentally economic approach is taken to be one that is concerned less with protecting rights to exclude as such and more with ensuring that rights are valued as accurately as possible. Proper judicial remedies for patent infringement can help secure this end by helping set properly calibrated expected values for rights that can then stimulate innovative activity in line with social goals. To this end, the primary benefit of “property rules” associated with a strong presumption of injunctive relief arises not from bare enforcement of the “right to exclude,” but rather from the fact that such a rule effectively demands that “someone who wishes to remove the entitlement from its holder … buy it from [the holder] in a voluntary transaction” at a price to which the holder agrees.Footnote ²¹ In contrast, a “liability rule,” generally associated with no more than compensatory damages, can effectively enable (litigation costs aside) a party to “destroy the initial entitlement” in exchange for payment of “an objectively determined value” to which the entitlement holder need not agree.Footnote ²²

Typical economic analysis suggests that property rules – and, hence, the presumptive issuance of injunctive relief – is socially desirable when the obstacles to voluntary transactions “are relatively low compared to the information and error costs associated with government determinations of proper amounts” of damages under a liability rule.Footnote ²³ As indicated above, it is generally accepted that the relative uniqueness of individual patent rights, combined with the lack of a thick public market for patent rights to which potential damages awards could be compared,Footnote ²⁴ makes it difficult for courts and jurors to assign a value to patent infringement. In addition, the public nature of the patent document and patents’ restriction to new technologies provide (at least in theory) some reason to hope that a private party looking to use a patented technology will be able to identify the relevant patent holder and to contract to use the technology in advance of any infringement. With these considerations in mind, some scholars have concluded that conventional economic analysis suggests that patent rights are good candidates for property-rule enforcement.Footnote ²⁵ Proponents of such treatment often also argue that injunction-enforced exclusivity will spur patent holders to improve and exploit the patented technology, as well as allow them to coordinate follow-on development in a way that limits wastefully duplicative downstream activities.Footnote ²⁶

Other scholars have called these contentions into question, however, particularly in light of the complexity of modern technology and the realities of the current patent landscape.Footnote ²⁷ Today, new products often incorporate a multitude of technologies, and when a relevant individual patent is likely to cover just one of these myriad technologies, achieving clearance of patent rights through voluntary transactions becomes problematic. For one, identifying all the patents that a new complex product might infringe can become a particularly difficult and expensive task – one that in many circumstances may not be possible at a cost that makes sense from a social welfare standpoint.Footnote ²⁸ In addition, the difficulty of determining the portion of the value of a complex product that should be attributed to a single patented technology can make it hard for private parties to agree on an appropriate license value, even if they are bargaining in good faith to agree on such a value (though by the same token, it makes it difficult for a court to accurately assess a reasonable royalty).

The concepts of “holdup” and “holdout” offer another, related lens through which to view economic debates about the propriety of injunctions. Parties on both sides of a patent transaction face strong temptations for strategic reasons to insist on payment of an amount that is higher or lower than a good-faith estimate of patented technology’s true value.Footnote ²⁹ One such temptation is for a patent owner to leverage the availability of injunctive relief to extract “holdup” value from potential licensees that have already incorporated the patented technology in a larger, complex product. By threatening to seek an injunction to shut down production and sale of the licensee’s entire product, a patent holder can effectively place at risk not just the value that the licensee derives from the patented technology, but also the value of all the other technologies bundled into the product. In other circumstances, a potential licensee might be tempted to adopt a “holdout” strategy by refusing to strike a deal either at all or at anything but an unreasonably low licensing rate, not just to delay eventual payment but perhaps in hopes of establishing a reputation as a tough negotiator or of leveraging the costs and risks of litigation against a smaller, less sophisticated patent holder.

Consequently, determining when injunctions should be available can at least in part be viewed as an exercise of efficiently weighing the risk that they will enable “holdup” against the prospect that they will deter “holdout.” Substantially because an injunction could deprive a potential infringer of more than the portion of the value of a patented technology that corresponds to a “reasonable royalty” or a patentee’s lost profits, the threat of injunctive relief can act as a strong deterrent to holdout. If an injunction is unavailable and patent damages simply require an infringer to pay an amount essentially equivalent to what an advance license would cost, a potential user of a patented technology might well be tempted to hold out and refuse to pay for such a license in advance.Footnote ³⁰ The possibility that the patent holder will not detect infringement or will ultimately decline to undergo the costs of enforcement might make holding out an economically sound strategy. Injunctions can check the temptation to engage in such a strategy. But as is commonly a risk with deterrence, there is danger that the deterrence from threatened injunctive relief will overreach, particularly where the complexity of a product or process has the dual effects of (1) making advance patent clearance difficult to achieve and (2) making a patent’s potential holdup value much greater than the properly apportioned value of the patented technology. Hence, especially with respect to complex products, there can be a significant danger that the holdup potential of injunctive relief will chill investment in innovation to a socially undesirable degree.

As a result, from an economic perspective, there is good reason to believe that neither a pure property rule nor a pure liability rule is an ideal fit for patent infringement. As discussed in greater detail below in Section 4.4, one way to help thread the needle – that is, to substantially retain the relative advantages of injunctive relief while limiting the likelihood of injunctive “over-reach” that places a greater burden on innovative activities than is socially desirable – is to make decisions on the issuance and tailoring of injunctions with particular attention to concerns about proportionality. Among those who favor greater emphasis on liability rules for patent infringement, the potentially disproportionate nature of injunctive relief, particularly when complex products are involved, is one of the main concerns with a property-rule approach.Footnote ³¹ Even scholars who are among the strongest proponents of property rules tend to acknowledge that it can make little economic sense to issue an injunction that provides a basis for “economic extortion” by placing at the patentee’s mercy the continued viability of a “complex product [that] has thousands of different components of which only one is covered by the plaintiff’s patent.”Footnote ³² Likewise, there is common concern about the risk of socially excessive holdout by potential infringers, with a threat of injunctive relief being one of the means by which such parties can be encouraged to clear others’ rights ex ante, rather than ex post.Footnote ³³ Hence, for a broad range both of theorists and of theories, there seems at least a baseline common ground: Courts or other enforcers of patent rights should have some power to issue injunctions or other, potentially supra-compensatory remedies, but economic analysis argues against injunctive relief in at least some situations where that relief will have effects disproportionate to the underlying rights at issue.

As Sections 4.2 and 4.3 will make clear, there are a variety of ways by which courts might try to alleviate such disproportionality, including not only denying injunctive relief altogether but also by delaying or otherwise tailoring injunctive relief to make it less burdensome. For purposes here, however, the key point is that, from a variety of theoretical viewpoints, engaging in such alleviation is something that can make good sense, whether the concern is respecting property rights, achieving fairness, or advancing overall social welfare.

4.2.3 Preliminary v. Permanent Injunctions

The above analysis focuses on the question of whether and to what extent injunctive relief is appropriate as a general matter, albeit at least sometimes with a background presumption that a patent has been adjudged to have been infringed. Further theoretical wrinkles come from considering the question of when in the context of patent infringement litigation such relief should go into effect. While “permanent” injunctions are almost universally available as a remedy for patent infringement, many patent systems also permit courts to award “preliminary” injunctive relief while a patent suit is pending.Footnote ³⁴

A preliminary injunction can play an important role in preventing irreparable harm to a patent holder’s market position during the months or years that elapse before a case is litigated to a final judgment. But preliminary injunctions are generally harder to justify on practical and theoretical grounds than their permanent counterparts. For one, at the time of a preliminary injunction an accused infringer is still only accused: there has not yet been a final judgment of actual infringement on the merits.Footnote ³⁵ Because it has not yet been determined that the activity to be enjoined falls within the scope of a valid patent right, the case for a preliminary injunction based on nature-of-the-right analysis is generally diluted. Moreover, under an economic analysis, the risks of inflicting a disproportionate burden on an accused infringer and of providing a disproportionate reward to a patent holder are also inflated by the possibility that the patent holder will not necessarily win on the merits. As Hoffmann J has said:

More formally, we can say that the court should focus on comparing the expected harm to each of the parties. The expected harm to the patentee can be expressed as P x H_P where P is the probability that the plaintiff will prevail on the merits and H_P is the harm that the patent holder is expected to suffer if the injunction is denied. Similarly, the expected harm to the defendant is (1–P) x H_D, where H_D is the harm the defendant is expected to suffer if the injunction is granted. If the expected harm to the patentee is greater than the expected harm to the infringer, the injunction should be granted; otherwise it should be refused.

One way to ensure that a preliminary injunction is not granted unless the risk of injustice is low, is to make the patent holder’s likelihood of success on the merits a significant factor in the decision whether to issue a preliminary injunction.Footnote ³⁷ If a patent holder is very likely to prevail in a patent infringement suit, the patent holder will have a greater likelihood of being able to obtain a preliminary injunction against allegedly infringing activity. In terms of the above formula, this approach focuses on ensuring the “P” is as high as possible. The difficulty with this approach is that if courts are required to make a preliminary conclusion on the merits, it may require parties to conduct, and courts to preside over, what amounts to a “mini-trial” that may well involve extensive discovery and a multiday evidentiary hearing covering topics that will be rehashed again in more detail if the case proceeds to trial. For that reason, this approach was abandoned in England forty years ago in favor of holding that the only question regarding the merits is whether the plaintiff has raised “a serious question to be tried,” so that the grant of a preliminary injunction will turn largely on the balance of hardships.Footnote ³⁸ Notably, the U.S. Court of Appeals for the Federal Circuit has taken effectively the opposite approach in patent cases; preliminary injunctions may be denied solely based on the defendant raising a substantial question regarding validity or infringement, a standard some judges have criticized as requiring denial if the defendant raises any defense “worthy of consideration.”Footnote ³⁹

An alternative approach to addressing disproportionality is to require the plaintiff to agree ex ante to compensate the defendant, either partially or fully, should the plaintiff fail to win the case on the merits. In the United States, plaintiffs are generally required as a condition for obtaining a preliminary injunction to post a bond that may be used to compensate the defendant if it is later found to have been wrongfully enjoined.Footnote ⁴⁰ However, the defendant may recover no more than the bond amount, which may result in undercompensation.Footnote ⁴¹ In many other countries, including at least the United Kingdom, Canada, France, Germany, and Spain, courts normally require a plaintiff to agree ex ante to fully compensate the defendant ex post should the plaintiff fail to win the case on the merits.Footnote ⁴² Whether full or partial compensation is required, this approach focuses on reducing H_D, because the harm to the defendant if the injunction is “wrongly” granted is only the difference between its true loss and the amount of the compensation. The patentee’s expected loss, H_P, is similarly minimized by the prospect of an award of damages if the injunction is refused and the patentee prevails. A court in a jurisdiction that requires full compensation to the defendant if the injunction is wrongly granted should be more willing to grant a preliminary injunction than a court in a jurisdiction that requires only partial indemnification.

A combination of these approaches – requiring compensation to the defendant as a condition of granting the preliminary injunction, while at the same time undertaking a modest examination of the merits – is also possible and arguably desirable. Appropriate case management may allow the merits to play a more substantive role in some cases while still avoiding the problem of mini-trials.

An additional concern with preliminary injunctions is that their issuance early in infringement proceedings can, absent appropriate safeguards, sometimes impose an especially high burden on accused infringers. Once accused of patent infringement, a technology user will often explore ways of “designing around” the patent or otherwise avoiding use of potentially infringing technology in future products or processes. The grant of a preliminary injunction early in the litigation process may make it expensive and disruptive for the accused infringer to shift to a less legally vulnerable position. If the accused infringer has to entirely suspend production and sale of a complex product during a period of redesign in order to comply with a preliminary injunction, this may allow the patentee to hold up the accused infringer, in the same manner as the grant of a permanent injunction. Refusing a preliminary injunction entirely mitigates the potential for this type of holdup, but may not adequately protect the interests of the patentee. An intermediate approach is to grant the preliminary injunction, subject to a stay. As with permanent injunctions, staying a preliminary injunction to allow more time for such switching can mitigate the possibility of disproportionate hardship to an accused infringer. But of course, a court needs to weigh this potential benefit of delay against the harm that a patent holder is expected to suffer in the meantime.

4.3.1 Overview

A permanent injunction is an available form of relief in all patent law systems.Footnote ⁴³ In all major legal systems injunctions have traditionally been available almost automatically in case of patent infringement, so long as there is some real threat of future infringement. This tradition has come under pressure recently, with the confluence of several factors, including the rise of patent assertion entities (PAEs), litigation over standard-essential patents subject to FRAND commitments, and the general rise in litigation involving complex products, where an injunction to prevent infringement by a minor feature may keep the entire product off the market.

For comparative purposes, the various legal systems can be divided into three broad categories: the United States, other common law countries, and civil law countries. In most civil law countries, such as Germany, a successful patentee is considered to be entitled to an injunction as a matter of right.Footnote ⁴⁴ The ability to obtain injunctive relief may be restrained, however, through various types of generally applied defenses, such as abuse of rights or lack of good faith, as well as by competition law. In countries with a common law tradition, such as England and the United States, injunctive relief has long been recognized as being discretionary in principle, notwithstanding the traditional practice of granting injunctions almost automatically in patent cases. However, since the Supreme Court of the United States decision in eBay, practice in the common law countries has diverged. In most countries, including England, there remains a strong presumption in favor of granting injunctive relief. In contrast, in the United States since eBay, there is no longer a presumption in favor of injunctive relief.

One noteworthy aspect of the divergence between England and Germany, for example, is that (for the time being) both nations are subject to the EU Enforcement Directive,Footnote ⁴⁵ which deals with civil remedies for violation of IP rights. It is directed to member states, which are left free to decide how they ensure that IP remedies are applied in a manner that complies with the rules prescribed by the directive. The general principles governing application of injunctions may be perfectly respected within a patent system that requires balancing patentees’ and implementers’ interests in each case, as is the case with systems where injunctive relief is rooted in equity. Equally, these principles may be respected in a patent system where injunctive relief may be denied by resorting to defenses placed “outside” of patent law, such as abuse of rights, breach of rules of good faith, or antitrust/competition law.

Substantively, Article 3 provides that remedies “shall … be effective, proportionate and dissuasive,” Article 11 requires that injunctive relief is an available remedy, and Article 12 provides that injunctive relief may be refused, and pecuniary compensation awarded instead, if the infringer “acted unintentionally and without negligence, if execution of the measures in question would cause him/her disproportionate harm and if pecuniary compensation to the injured party appears reasonably satisfactory.” While Article 11 provides that member states must ensure that an injunction aimed at prohibiting the continuation of the infringement “may issue,” Article 12 provides that courts “may” order pecuniary compensation in specified circumstances. This appears to contemplate that an injunction will normally issue except in those circumstances. To date, the EU Enforcement Directive does not appear to have had a significant impact on the jurisprudence of the member states with regard to injunctions, perhaps because each state considers that the principles are already embodied in national law (as is the view in England, discussed in more detail below), or because cases that require a deviation from traditional principles to conform with the Directive have not yet arisen. However, it is possible that this will change in the years to come, particularly in light of recent, additional Communications from the European Commission that emphasize the Enforcement Directive’s principle of proportionality.Footnote ⁴⁶

4.3.2 United States

4.3.3 England

In England, the principles on which an injunction is granted or denied in the context of patent law are the same as for property rights generally, including rights in land.Footnote ¹⁰⁴ It is well established in English law that the grant of a permanent injunction is discretionary in principle, but a plaintiff whose legal right has been violated is presumptively, or “prima facie,” entitled to the grant of an injunction, and it is said that “the court will only rarely and reluctantly permit such violation to occur or continue.”Footnote ¹⁰⁵ The primary test is whether the effect of the grant of the injunction would be grossly disproportionate to the right protected.Footnote ¹⁰⁶ The discretionary nature of injunctive relief is not considered inconsistent with proprietary rights, because the relief itself, as an equitable remedy, is inherently discretionary.Footnote ¹⁰⁷

If injunctive relief is refused, damages are normally awarded in lieu thereof.Footnote ¹⁰⁸ If actual loss cannot be proven as a consequence of the violation of the right, damages will normally be awarded on the basis of the amount of money that could reasonably have been demanded by the plaintiff for her consent to the breach.Footnote ¹⁰⁹ This is essentially the same “hypothetical negotiation” measure that is used when assessing damages for past infringement when the patentee does not, or cannot, claim lost profits.Footnote ¹¹⁰

4.3.4 Civil Law Systems

4.3.5 International Context and TRIPS

Finally, we note that a network of international agreements also influences the national rules discussed above. For example, the TRIPS Agreement, to which the United States, the United Kingdom, and all other EU Members are signatories, explicitly recognizes patentees’ right to demand an injunction from judicial authorities against an infringer.Footnote ¹⁵⁸ At the same time however, TRIPS also provides that remedies “shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse,”Footnote ¹⁵⁹ and requires that remedies be “fair and equitable,”Footnote ¹⁶⁰ a phrase that in the context of international trade agreements is usually equated with the principle of proportionality, good faith, due process and nondiscrimination.Footnote ¹⁶¹

In addition, TRIPS explicitly recognizes that signatories may deny injunctive relief in a number of circumstances, including when doing so would adversely impact competition (i.e., violate competition law),Footnote ¹⁶² when the accused infringer unwittingly acquired the infringing subject matter (e.g., the manufacturer of a complex product that is later revealed to incorporate an infringing component),Footnote ¹⁶³ and when doing so would otherwise “not unreasonably conflict with a normal exploitation of the patent [or] unreasonably prejudice the legitimate interests of the patent owner”Footnote ¹⁶⁴ (an exception in which the eBay standard arguably falls).Footnote ¹⁶⁵

4.4.1 Basic Principles for Injunctive Relief

First, and perhaps foremost, we recommend against the adoption of rules resulting in the automatic issuance of injunctive relief in all cases in which a patentee prevails in a suit for patent infringement. As discussed in greater detail below, we recommend instead that courts retain, and in appropriate circumstances exercise, discretion to deny injunctive relief when issuance of an injunction would otherwise generate costs or burdens for others that are disproportionate to the nature of the adjudged infringement and to the noncompensable harms the patentee would suffer in the absence of an injunction.

Consistent with the above recommendations, we recommend that courts be afforded the flexibility and discretion to tailor injunctive relief in appropriate circumstances to avoid imposing unnecessary hardship on infringers or the general public. Examples of potential forms of tailoring include granting a stay of the injunction’s enforcement to allow the infringer time to design around the patent, and limiting the scope of an injunction in a case involving a complex product so that the injunction precisely targets continued use of the infringing feature(s), rather than forbidding continued use or sale of an entire product.

Finally, in cases where injunctive relief is not granted, and damages have not separately compensated for future infringement,Footnote ¹⁶⁷ we recommend that additional monetary damages in the form of an “ongoing reasonable royalty” be normally awarded as a substitute. We recommend that this ongoing royalty be calculated in accordance with the principle for determining a “reasonable royalty” for past infringement, without any special enhancement due to the ongoing reasonable royalty’s association with activity that occurs after the judgment of infringement.Footnote ¹⁶⁸

4.4.2 Proportionality

We recommend that courts use the concept of “proportionality” as a limiting principle for injunctive relief. Attention to this principle can help balance concerns about patentee holdup and implementer holdout discussed in Section 2 of this chapter, and can likewise help balance interests in vindicating a patent owner’s rights and in protecting legitimate interests of the public as well as adjudged or accused infringers. We believe that this broad principle is consistent with the law of a number of jurisdictions, including the EU Enforcement Directive (especially as interpreted in HTC Corp. v. Nokia Corp.);Footnote ¹⁶⁹ more recent Communications from the European Commission;Footnote ¹⁷⁰ traditional equitable principles applied in common law jurisdictions, including the United Kingdom and Canada;Footnote ¹⁷¹ and the four-factor test for awarding permanent injunctions articulated by the Supreme Court of the United States in eBay v. MercExchange.Footnote ¹⁷² Further, some version of a proportionality principle appears consistent with the TRIPS Agreement, as noted above.Footnote ¹⁷³ Accordingly, we believe that proportionality-based tests can be applied in a broad variety of jurisdictions without need for legislative action.

That said, we also acknowledge that this recommendation leaves open various substantive, evidentiary, and procedural questions that impact the extent to which injunctive relief should be granted. Though we flesh out one framework for incorporating concerns of proportionality below, a degree of vagueness in our proposal is intentional. How individual jurisdictions answer these questions will depend on a multiplicity of factors, including general legal norms and commitments relating to the enforcement of private rights, the extent to which patent enforcement is treated as involving moral stakes, and perceptions about the relative dangers of abusive behavior by patentees and potential infringers, respectively.

4.4.3 Tailoring Injunctive Relief

As a corollary to our general recommendation on proportionality, we recommend that a proportionality-based test like the one described above be deployed in a system that gives courts latitude to construct injunctions that are tailored to avoid or mitigate disproportionate effects. In short, we do not envision a proportionality test that generally consists of a simple up-or-down vote on the appropriateness of a one-size-fits-all formulation of enjoined activities. Rather, we envision a process in which a court may consider the potential negative effects of an injunction together with ways in which those effects can be mitigated by tailoring injunctive relief. Put another way, tailoring should not necessarily be seen as a restriction on an injunction that would have been granted in any event; by mitigating the effects of an injunction, tailoring may enable an injunction to be granted when it would otherwise have been refused for disproportionality.

The two primary ways in which an injunction can be tailored to help ensure a proportionate effect are modifications to its scope or timing. For example, a court might stay an injunction or delay its effective date to allow time for an adjudged infringer to design around the patent.Footnote ¹⁸⁷ Alternatively, a court might exclude already existing products from the scope of the injunction. This proposal has been made by some commentators,Footnote ¹⁸⁸ and occasionally applied or at least considered by courts in the United States, the United Kingdom, and Canada.Footnote ¹⁸⁹ In at least some jurisdictions, however, tailoring along the lines we propose might require a substantial shift in judicial philosophy – though within the European Union some such movement may be possible in the years to come.Footnote ¹⁹⁰

Tailoring generally, and a stay in particular, can be especially impactful in the context of complex products, where infringement of a patent covering a minor component of the end product might result in the entire product being held off the market during the period of redesign. Such a consequence might allow the patentee to force a license that extracts not just the value of the patented technology, but also the value of the entire product line over the period during which it would otherwise be held off the market.Footnote ¹⁹¹ Consequently, we recommend that courts generally be willing to consider such tailoring whenever injunctive relief is sought in relation to a complex product.

In fact, we recommend that courts should consider tailoring injunctions in the normal course, even when a proportionality-based test like that in our general recommendation is otherwise satisfied. While the argument for tailoring an injunction may be particularly strong when the injunction would otherwise be refused as having a disproportionate effect, we recommend against any requirement that tailoring be permitted only after disproportionate harm is shown.

4.4.4 Ongoing Royalty in Lieu of Injunctive Relief

When a permanent injunction is refused, U.S. courts routinely grant monetary compensation that is to be paid to the patentee by the infringer for post-judgment infringing uses of the patented invention.Footnote ¹⁹² This compensation is known as an ongoing royalty. An ongoing royalty is awarded at the request of the patentee, who, in the absence of an injunction against further infringement, might otherwise be expected to bring a second lawsuit for infringement occurring after entry of final judgment in the initial lawsuit. The ongoing royalty may in principle be awarded as a lump sum, or on a per unit basis, calculated either as a fixed dollar amount or as a percentage of, for example, the sale price. Typically, the ongoing royalty is initially assessed on the basis of the same principles as reasonable royalty damages for past infringement (discussed in Chapter 1), but U.S. courts will often enhance that royalty on the view that any continuing infringement is automatically willful.Footnote ¹⁹³

We recommend that, at least when an injunction is refused on grounds of the disproportionality of negative effects on enjoined parties, the governing principles for ongoing royalties should generally be the same as those governing awards of past damages, without further enhancement.Footnote ¹⁹⁴ When an injunction is denied on grounds of disproportionality to enjoined parties, the general implication is that the infringer has become effectively “locked into” a course of infringement from which it is difficult to extricate itself at a reasonable cost. Such “lock-in” might be properly considered to constitute extenuating circumstances for continued use of the patented invention. Further, such circumstances suggest that further-enhanced damages for continued infringement might themselves impose a disproportionate burden that the infringer will be unable to contract around.Footnote ¹⁹⁵ It has been suggested that a modest increase in the ongoing (forward-looking) royalty rate may be needed if the royalty rate for past infringement would be inadequate to fully compensate the patentee.Footnote ¹⁹⁶ This may be appropriate in cases where future uses of the patented technology are more economically valuable than past uses.Footnote ¹⁹⁷ But the royalty rate should not be increased simply to compensate for the patentee’s loss of bargaining power that occurs when an injunction is denied. If it is indeed desirable on the facts of the case to force the infringer to negotiate a license as opposed to paying an ongoing royalty, we anticipate that it will commonly be preferable to do so by granting an injunction, stayed or otherwise, that is appropriately tailored to minimize any disproportionality to those burdened by it.

We further recommend that when a permanent injunction is not granted on grounds of disproportionality, an ongoing royalty should normally be granted in lieu thereof.Footnote ¹⁹⁸ Denying a sought-after ongoing royalty and forcing a patentee to relitigate a continuing course of infringement from scratch would threaten to unduly dilute the incentives that the patent system means to provide.Footnote ¹⁹⁹ Failure to award an ongoing royalty might also leave an adjudged infringer in a situation of uncertainty about its potential future liability.

We do not rule out the possibility that an ongoing royalty might be denied in some circumstances in which an injunction has been refused on grounds of disproportionality. However, we note that, even the fact that a patented technology is important to the public interest, as for example in the case of life-saving drugs or devices, does not provide generally sufficient grounds for refusing an ongoing royalty, just as it does not provide generally sufficient grounds for refusing past damages for infringement. General refusal to award ongoing royalties for important inventions would arguably undermine the patent incentive where it is needed most.

While we recommend against routine enhancement of ongoing royalties solely on the basis of the willfulness of the ongoing infringement, as just discussed, we do not rule out the possibility that ongoing royalties might be enhanced in exceptional circumstances, based on relevant equitable considerations, such as those discussed in Chapter 3 on enhanced damages.

Finally, we recommend that the assessment of an ongoing royalty take into account all information available at the time of trial, as well as any reasonably foreseeable changes to market demand or structure that might affect the royalty. This is consistent with our recommendation in Chapter 1 that the hypothetical negotiation used to assess a reasonable royalty for past infringement should take place with the benefit of ex post information. If that recommendation regarding reasonable royalties is followed, there will be no difference between the award for reasonable royalties and an ongoing royalty. If courts ignore ex post information in assessing reasonable royalty damages, we are nonetheless of the view that they should take such information into account in assessing an ongoing royalty, in which a divergence between the two rates would occur. Further, to the extent an ongoing royalty is paid out on a continuing basis, rather than in a lump sum, there might be grounds, under some circumstances, for a court to revisit the ongoing-royalty order on grounds that later developments have made it manifestly inappropriate.