Thursday, September 8, 2011

Sarah R.W. Rajec: Tailoring Remedies To Spur Innovation

Will we ever find a perfect remedial scheme in patent law? Ever since the dawn of the patent system, our law has sought to tailor the patent system so that it optimally balances its grants of exclusive monopoly power with the incentives it provides to prospective inventors. In Tailoring Remedies To Spur Innovation, Sarah R. Wasserman Rajec, a Visiting Associate Professor at GW, has written a thought-provoking draft paper in which she seeks to move us one step closer to that ideal balance. Incorporating useful insights from the economics and antitrust literatures, she argues that the law surrounding permanent injunctions in patent suits can be better adapted to promote innovative ends.

Rajec sees an opportunity in the Court’s 2006 ruling in eBay v. MercExchange. In eBay, the Court recognized the dangers posed to innovation by non-innovative patent trolls and rejected the Federal Circuit’s “general rule” that infringement plaintiffs were necessarily entitled to permanent injunctions against infringers. Instead, permanent injunctions are now only granted at a court’s equitable discretion, and plaintiffs will only receive an injunction if they show that (1) they have suffered irreparable injury; (2) they cannot be adequately compensated by damages; (3) a balancing of the equities warrants an injunction; and (4) the public interest would not be disserved by an injunction. By entertaining greater limitations on permanent injunctions, the Court made a clear statement that lower courts, in tailoring their remedies, could effectively “cut back” the scope of a patentholder’s exclusive rights.

Rajec notes, however, that the opportunity to have better patent remedies has been largely missed by the lower courts. These courts, performing analysis under the first two prongs of the four-part test, have maintained a laser-beam focus on a patent-holder’s “market share” in gauging the propriety of injunctions. (In general, the assumption has been that patentees with high-market shares should be entitled to injunctions because, without the injunction, they would lose that market share--also, firms with high market share are presumably innovative). Rajec emphasizes, though, that “[i]f the ultimate goal of patent law is producing the optimal level of innovation, and if eBay was meant to correct for instances in which incentives to innovate are skewed, the current test is formally incorrect and too narrow in practice.” The market share rule is underinclusive because it does not grant injunctions to innovative entities with low market shares, such as universities, and it is overinclusive because it may grant injunctions to entities with high market share who do not have incentives to innovate (firms with large market shares, for example, will not want to innovate in ways that would cannibalize their existing market share).

Ultimately, then, Rajec advocates for more thorough analyses of market structure and incentives to innovate under the “public interest” prong of the standard for permanent injunctions. The public interest prong, to her, should be used to reject permanent injunctions when access to an emerging technology may outweigh the private interest of the litigating party (such as in the health context), or when a company with high market power effectively denies access to competing technologies by suppressing competing patents through injunctions. Meanwhile, innovative entities like universities could still obtain injunctions under Rajec’s proposed rule, in contrast to under the “market share rule,” as their innovative efforts would promote access to emerging technologies and promote competition among those technologies (despite the fact that universities may not technically have market share).

Rajec’s contribution is valuable because she highlights the complexity of questions of technology and innovation in today’s marketplace. Indeed, it is because of the changing nature of IP and the complexity of modern technologies—many of which incorporate several underlying patented technologies—that we face holdup problems with non-innovative firms and “suspect entities.” We are no longer in a world with discrete, relatively simple inventions such as the lightbulb. We are in a world of interconnected networks, gene patents, and nanotechnology. Moreover, in the Internet age, we are faced with markets that are far more complex than the market for salt. Rajec forces us to grapple with these modern complexities in a more nuanced way when reflecting on our remedial framework for patent injunctions, and she productively fosters much-needed dialogue in this area.

Of course, many questions remain after reading Rajec’s piece. Throughout, Rajec seems to assume that innovation is the sine qua non of the patent system, and that this goal should drive the public interest prong of patent injunction analysis. But incentives to innovate are not always compelled in our IP law, such as in the copyright context, where laws such as the Sonny Bono Copyright Term Extension Act are upheld by the Supreme Court without regard to empirical effects on innovation. Also, there are legitimate questions of predictability and consistency when relying on a “public interest” standard to determine the outcome of injunctions moving forward. Perhaps a “rule of reason” could evolve, as in antitrust, to give the public interest prong a doctrinal anchor. Still, though, there is the lingering empirical question about which patent injunctions truly will promote access and innovation—Rajec concedes that there is a debate in the literature over the effects of market share and innovation, so there may be legitimate empirical arguments on both sides of a particular case when assessing market structure and the propriety of an injunction. So, while Rajec’s rule will assist courts by encouraging them to look at this literature, it may ultimately produce more questions than answers. Finally, I wonder if, empirically, denying injunctions to promote innovation will ultimately matter, given that a non-innovative entity will still be able to obtain a damage award—will courts’ damage awards be sufficiently low such that the prospect of a “mere” damages remedy will deter non-innovative activities—and the infringement lawsuits—of “suspect entities?”

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