A. SEPs and the eBay Factors

Based on the four-factor test set forth in the Supreme Court’s eBay opinion, SEP owners are unlikely to obtain injunctive relief in most cases due to the FRAND commitment the SEP owner made to the SDO. This section explains how the FRAND commitment interacts with the eBay factors.

SDOs generally have intellectual property (IP) rights policies that address issues surrounding the IP of the companies who participate in the SDO. One typical provision of IP rights policies requires SDO participants to disclose patents and patent applications covering technology that the participant has submitted to the SDO for potential incorporation into the standard. If that technology becomes part of the standard and the participant deems the patent or patent application to be essential for the practicing of a standard, it becomes known as an SEP. Another common provision of an SDO’s IP rights policy is a commitment by SDO participants to license any SEPs related to the standard on fair, reasonable, and nondiscriminatory (FRAND) terms to any company who wants to make or offer standards-compliant goods or services.Footnote ¹⁰ The purpose of the FRAND commitment is to facilitate widespread adoption of the standard while still providing SEP owners an opportunity to recoup their investments in the research and development of the technology, as well as to promote the standardization process.

Courts are likely to deny injunctive relief, based on the eBay factors, to an SEP owner that has made a FRAND commitment. Specifically, courts will generally find that SEP owners fail to meet the first two eBay factors – irreparable harm and money damages are inadequate. The argument is that, by accepting a FRAND commitment, an SEP owner has voluntarily relinquished its exclusive rights in exchange for having its patented technology incorporated into the standard. Because the SEP owner has committed to license its patent to all-comers, it cannot claim irreparable harm in the form of loss of exclusive rights, and similarly, because the SEP owner has accepted the FRAND commitment, it has signaled to all that money is sufficient to make it whole. As one commentator summed it up, an SEP owner that has obligated itself to FRAND “is, by definition, willing to license rather than exclude, and benefits from the widespread adoption of its technology resulting from standardization.”Footnote ¹¹

Some courts have also found that the FRAND commitment also causes the third and fourth eBay factors to support a denial of injunctive relief. The balance of the hardships argument weighs in favor of the infringer because the FRAND commitment means that the SEP owner has given up its rights, while the infringer would be greatly harmed if they were unable to make standards-compliant products like everyone else. The public interest argument also weighs in favor of the infringer being allowed to continue infringing, because the public has an interest in having access to standards-compliant products from multiple implementers. This interest of the public in innovative devices takes precedent over both the public’s interest in a robust standardization ecosystem and a strong and reliable patent system.

While superficially appealing, the aforementioned application of the eBay factors to SEP owners is too facile and is exactly the type of categorical denial that the Supreme Court warned against in that case. Although the FRAND commitment obligates the patent owner to offer and accept a license to use its SEP on fair, reasonable, and nondiscriminatory terms, there is no concomitant obligation on the potential infringer to accept, or even negotiate in good faith for, these terms. While this one-sidedness is more accurately a problem with the overall construct of the FRAND commitment, it does play a role in both the eBay analysis as well as the infringer’s decision to infringe. As to the eBay factors, FRAND affects the acceptability of monetary damages as sufficient and, because the infringer has no obligation to negotiate, implicates the irreparability of harm to the patent owner’s exclusive rights. Finally, while the public does have an interest in standards-compliant products, the fact that SEPs are licensed on FRAND terms to any desiring manufacturer means that the infringer is unlikely to be the only source of any standards-compliant product. An injunction issued against any particular manufacturer will likely not deprive the public of its much-loved and useful devices.

Looming behind the flawed, or at least thoughtless, application of the eBay factors to SEPs is Kennedy’s callout to patent holdup in his concurrence in that case. Patent holdup is the idea that a patent owner could force a firm wishing to make or offer standards-compliant goods or services to pay an excessively high royalty rate, relying on the fear of injunctive relief if the infringer fails to pay the royalty. This is particularly acute where the patented technology may be just a small portion of a standard encompassing hundreds or thousands of patents.Footnote ¹² Although there has been much research and debate over whether patent holdup is merely theoretical or actually occurs, courts have openly reflected a concern about holdup when deciding not to grant injunctive relief for infringement of SEPs.Footnote ¹³

Despite objections to how courts view SEP owners under the eBay factors and a largely misplaced concern about patent holdup, the examples in the next section demonstrate that courts will generally decline to issue an injunction for infringement of an SEP.

B. Courts, eBay, and SEPs

Very few cases exist that illustrate how courts assess the eBay factors after a finding of patent infringement of a SEP. The dearth of cases may be, in part, because SEP owners do not seek injunctive relief – even as they avail themselves of other remedies. This failure to seek an injunction could be due to an SEP owner’s determination that they are unlikely to obtain this remedy or because another consideration prevents it. Both of these situations are described in the following sections. The cases that exist, however, provide interesting insight into how courts think about SEPs and injunctions. The following section provides a few examples of these insights.

C. Injunctions Are Being Denied

Efficient infringement is only an attractive option when the infringing firm believes it is unlikely to be enjoined, even if adjudged to be infringing a valid patent. Numerous studies have been conducted post-eBay to understand whether and when injunctive relief is being denied. Although most of these studies are focused on non-practicing entities, rather than SEP owners, the reasons provided for denying injunctive relief to non-practicing entities overlaps with the reasons given to SEP owners. That courts are willing to deny injunctive relief in a significant portion of patent infringement cases provides the necessary foundation for efficient infringement to occur.

Studies of injunction grants prior to eBay found that injunctive relief was granted in 95–100% of cases where patent infringement was found.Footnote ⁴⁵ Studies done in the first decade after eBay found that requests for permanent injunction were granted in approximately three-quarters of the cases where patent infringement was found (and an injunction was requested). In a widely cited study covering the time period between eBay in 2006 and 2013, Professor Christopher Seaman found that requests for permanent injunction were granted in 72.5% of cases.Footnote ⁴⁶ Similar numbers were shown in studies by Professors Colleen Chien and Mark Lemley (70% covering June 2006 through August 2011) and Professor Jay Kesan and Kirti Gupta (80% between June 2006 and December 2012).Footnote ⁴⁷ In the study conducted by Professor Seaman, discussed previously, requests for injunction were granted 16% of the time when the patent holder was not practicing the patent.Footnote ⁴⁸ Similar low grant rates for non-practicing entities were seen in the studies by Chien and Lemley, as well as Kesan and Gupta.

Current research shows that these numbers have remained steady since the eBay case. This chapter’s author has looked at decided patent infringement cases since the eBay decision where permanent injunctive relief was disputed. Cases decided by default (due to defendant’s failure to answer) or cases where an injunction was issued by consent, stipulation, or settlement were not considered. This resulted in 342 cases with written opinions. Of those 342 cases, 249 resulted in the issuance of an injunction and 93 cases where injunctive relief was denied. This is approximately a 73% grant rate for permanent injunction requests and is generally consistent with the earlier noted studies ( Figure 5.1).

Figure 5.1. Graph of injunction grants & denials June 2006–December 2020

From this data, it is fair to assert that courts are willing to deny injunctive relief in cases that do not, in the court’s estimation, satisfy the eBay factors. However, it is difficult to say much else, particularly about SEPs. Of the cases represented in the data, only seven implicate SEPs and only one resulted in the grant of a permanent injunction (the CSIRO case). There are significant selection effects in the data overall, in that very few cases of patent infringement are actually litigated and even fewer reach the stage where a court must decide a dispute about injunctive relief. Beyond that, there are concerns that, especially in SEP cases, the SEP owner does not seek injunctive relief, as will be discussed later. Further, some SEP cases address the injunction question even before tackling infringement and validity (such as the Apple v. Motorola case) and so were not captured in the data set. Given the data and the discussion previously, parties considering efficient infringement may find that the likelihood of being enjoined upon infringing an SEP is sufficiently low enough that it is a prudent decision.

A. SEP Owners Are Dissuaded by eBay and SEP Case Law from Seeking Injunctive Relief

As described previously, case law precedent and general conceptions surrounding the eBay factors are likely to dissuade SEP owners from seeking injunctive relief. It is quite difficult for an SEP owner to successfully argue irreparable harm or insufficiency of monetary damages, unless that SEP owner happens to be a governmental research organization. Except in very narrow circumstances, the presence of a FRAND commitment is likely to prove fatal to any sort of injunction being issued. These narrow circumstances – including willful infringement or failure to either negotiate or pay – are difficult to prove and, as will be illustrated later, do not seem to encourage SEP owners to seek injunctive relief in any case.

B. Additional Considerations Affecting Seeking Injunctive Relief for SEP Infringement

SEP owners are not just discouraged from seeking injunctions by eBay and the SEP cases that have followed. There are also additional considerations that have made injunctive relief nearly impossible for SEP owners to obtain and, in some cases, even prohibit SEP owners from seeking injunctive relief. Some of these considerations are driven by the government, from the White House to administrative agencies like the Federal Trade Commission (FTC) and the Department of Justice’s Antitrust Division (DOJ). Other considerations come straight from SDOs as part of their IP rights policies. In addition to directly impacting an SEP owner’s decision to seek injunctive relief, these considerations also have influenced courts’ decisions about whether to grant injunctions in favor of SEP owners.Footnote ⁴⁹

C. Showings Indicative of Efficient Infringement

Although it is difficult to fully grasp how often efficient infringement is occurring, there are anecdotes and circumstantial data that support its existence. Anecdotes, while difficult to find, often provide very compelling illustrations of infringers making conscious choices to not negotiate licenses with SEP owners. Circumstantial data, on the other hand, is easier to obtain but complicated to interpret. It is possible to gauge how often SEP owners seek injunctive relief by considering their filed complaints, but this does not often address why they made this choice. Similarly, SEP owners often allege willful infringement when companies refuse to negotiate a license or in the wake of failed negotiations, but this too does not fully capture whether and how much efficient infringement is occurring in the SEP space. In lieu of better information, however, this section briefly considers these data points.

In another chapter in this book – Restoring Deterrence: The Case for Enhanced Damages in a No-Injunction Patent System by Jonathan M. Barnett and David J. Kappos – the authors provide a number of anecdotes illustrating efficient infringement. One of the more striking is worth recounting here – Core Wireless v. LG Electronics.Footnote ⁶⁴ In that case, Core Wireless, a joint endeavor of Microsoft and Nokia, assigned its portfolio to Conversant Intellectual Property Management.Footnote ⁶⁵ Conversant initiated licensing talks with LG Electronics, which ultimately responded with a “terse one-page presentation stating that a lawsuit was … ‘preferable’ to a license and that LG would prefer to wait until another major cell phone manufacturer licensed the portfolio” before taking a license.Footnote ⁶⁶

Following the precedent and other considerations described previously, it would be expected that SEP owners seek injunctive relief less often than other patent owners. A quick text search of complaints filed in patent cases between eBay and March 1, 2022, seems to bear this out,Footnote ⁶⁷ although more in-depth analysis is warranted and beyond the scope of this chapter (Figure 5.2).

Figure 5.2. Graph of complaints seeking injunctive relief

It is difficult to draw many conclusions from this data, other than if a complaint includes the term “standard essential,” it is slightly less likely to also include the terms “permanent injunction” or “injunctive relief.” The data is, of course, subject to significant selection effects, as described previously, and also is simply a text-based search for relevant terms. However, this could signal that SEP owners are less likely to seek injunctive relief in some circumstances, particularly when coupled with the case law precedent and additional considerations detailed in the previous sections.

Performing a similar textual search based on the presence of “willful” in patent infringement complaints also may provide some insight about efficient infringement, subject to the same caveats and need for further research analysis (Figure 5.3).Footnote ⁶⁸

Figure 5.3. Graph of complaints indicating “willful”

Again, it is difficult to draw any certain conclusions from this data, but in reading from the complaints for patent infringement of an SEP that include the term “willful,” there are many cases where licensing negotiations are hindered by the infringer, where negotiations continue for multiple years often attributed to delay tactics by the infringer, and where multiple offers are made by the SEP owner but are declined by the infringer.Footnote ⁶⁹ What is interesting is that, as these negotiations continue and are, in essence extended by the infringer, that same party is continuing to use, without paying, the patented technology of the SEP. This is the very essence of efficient infringement.

A. The Disappearance of the Patent Injunction

To fully appreciate the eBay decision, it is helpful to recall the context in which it was rendered.

A few months prior to the eBay decision, Research in Motion (more commonly known as “RIM”), the maker of the then-ubiquitous Blackberry device, had agreed to a $612 million settlement of a patent infringement litigation brought by NTP, Inc., a NPE cofounded by an individual inventor. The litigation and settlement had been widely reported as a windfall for the patent owner who reportedly “held up” RIM by threatening to shut down the Blackberry network given the lack of an immediately available design-around for the infringing component. Given this characterization, it might naturally follow that, at least in certain circumstances, injunctions should be limited in order to deter patent owners from engaging in opportunistic litigation and settlement strategies. This was precisely the motivating principle behind the eBay decision, issued later that same year.

Following the law of unintended consequences (at least for the four Justices who supported the decision but did not sign on to the Kennedy concurrence), the eBay decision has been applied expansively by the lower courts to encompass proliferating categories of patent owners that are perceived to pose an elevated holdup risk. With some qualification in specific cases, there is now generally a low likelihood that NPEs, SEP owners, and the owners of patents on components of a larger complex product can secure injunctive relief. It should be noted that the latter two categories encompass significant portions of the information technology markets. Even in a patent infringement litigation involving Apple and Samsung, two operating companies in head-to-head competition, the district court initially denied Apple even a phased-in “sunset” injunction on the grounds that, under the eBay test, “the principles of equity do not support the issuance of an injunction.”Footnote ³ While the district court’s decision was ultimately overturned by the Federal Circuit, it nonetheless illustrates the extent to which eBay has been applied well beyond the limited circumstances in which at least some members of the Court most likely envisioned their decision would alter patent remedies.

B. The Normalization of Patent Infringement

Any license can be understood as a preemptive settlement of a potential infringement litigation. Hence the impact of eBay (or more precisely, post-eBay case law) extends well beyond the remedies issued in infringement litigation and permeates everyday licensing and other transactions involving patent-protected assets. Even if litigation is infrequent, sophisticated business parties must take into account whether there is any credible threat that the patent owner could ultimately secure an injunction against an infringing user. Generally speaking, the greater the threat of an injunction, the greater the bargaining leverage enjoyed by the patent owner in negotiating license terms, and vice versa. Given the limited availability of injunctive relief under post-eBay case law (and assuming that treble damages are a low-probability outcome), firms that are primarily users of patented technology may often, if not typically, conclude that the expected net payoff from infringement exceeds the expected net payoff from negotiating and paying an up-front license fee. While eliminating injunctive relief may deter patent owners from adopting holdup strategies that can yield settlement payouts that overvalue the relevant technology, it encourages well-resourced users to adopt holdout strategies that lead to license fees that undervalue the relevant technology. In effect, eBay has rendered patent infringement a rational business strategy for significant categories of intermediate users.

We can identify more precisely the conditions under which this “use, then maybe litigate” strategy will be preferred by users versus a “license, then use” strategy in a no-injunction regime. These conditions are as follows:

1. 1. It is costly for the user to acquire or develop a design-around substitute for the patented technology.

2. 2. The user has sufficient resources to fund a prolonged infringement litigation.

3. 3. The user will retain access to, and therefore derive revenues or other economic benefits from use of, the patented technology during the litigation.

4. 4. There is a sufficiently low likelihood that a court would award attorneys’ fees or treble damages.

5. 5. Reasonable royalty damages are likely to approximate, or at least will not exceed significantly, the royalty that the user and the patent owner would likely negotiate prior to entering into litigation.

If at least some of these conditions are satisfied, then the user is likely to conclude that infringement delivers a higher expected net payoff than agreeing to a license and avoiding the risks and costs of an extended litigation with the patent owner. The rationale is as follows. By electing to invite litigation, rather than settle it preemptively through a negotiated license, the user incurs the direct and indirect costs of litigation but, in exchange, “purchases” the opportunity to either invalidate the patent entirely (in which case the royalty falls to zero) or negotiate a reduced or equivalent royalty rate. Even in the scenario in which the patent owner ultimately prevails on liability, the previously stated conditions (in particular, the low likelihood of treble damages and fee-shifting) imply that the user can expect to pay a damages award equal to the royalty fee it would have incurred initially, plus prejudgment interest (if included).Footnote ⁴ The only incremental cost incurred by the infringer are attorneys’ fees, which constitute a fee paid by the user for the opportunity to reduce or eliminate the royalty rate through the litigation and settlement process.

The likelihood that infringement outperforms licensing increases if the user is a more “patient” litigator than the patent owner. This will be the case if the user has substantially greater resources to fund litigation as compared to the patent owner and the patent owner relies substantially on licensing revenues from the patented technology. Moreover, given the absence of any risk of preliminary injunctive relief, the infringer extracts revenues and other economic benefits from use of the patented technology while the patent owner, who incurred the costs of developing the technology (or acquiring the patent covering the technology), receives nothing. Assuming this asymmetry in both litigation resources and opportunity costs – up to and including insolvency on the part of the patent owner – bargaining leverage shifts to the infringer in any settlement discussions that take place concurrently with litigation, likely resulting in a negotiated royalty that is lower than the amount that would be awarded in a fully adjudicated litigation or would have been awarded in a pre-litigation negotiation.

These observations have an important implication for the ultimate consequences of the limitations on injunctive relief that have arisen in post-eBay case law. While eBay may have identified a situation in which the availability of injunctive relief can enable a patent owner to secure an “overvalued” royalty from a well-resourced user, the unavailability of injunctive relief sometimes enables a well-resourced user to negotiate an “undervalued” royalty with the patent owner. Unless there is reason to believe that patent owners are systematically securing royalty rates that are excessive relative to a socially optimal royalty rate,Footnote ⁵ this is clearly an inefficient state of affairs that runs counter to the public interest in providing a level playing field for open-market negotiation of royalty rates for IP assets among willing licensors and licensees.

C. Existing Damages Enhancements

The likelihood that infringement will be privately efficient for the user, as compared to negotiating and paying a license fee up front, depends on whether a user has a sufficiently low expectation of being held liable for damages enhancements, such as a court shifting attorney fees or applying a multiplier to a reasonable royalty damages award. As discussed subsequently, this result is consistent with applicable case law, which emphasizes that these tools are reserved for exceptional cases, and available data, which shows that an informed infringer should anticipate a low likelihood of financial exposure to damages enhancements.

A. Core Wireless v. LG (US District Court for the Eastern District of Texas, 2014–2016)

In 2014, Core Wireless (a subsidiary of Conversant Intellectual Property Management), the holder of patents relating to user interfaces, battery life, and voice recognition in smartphone devices, brought two infringement suits against LG, a leading manufacturer of tablets, handsets, and other electronic devices.Footnote ³⁰ When each of the cases went to trial in 2016, Core Wireless prevailed on patent validity and infringement in both litigations, and juries awarded Core Wireless $3.5 and $2.28 million in damages, respectively.Footnote ³¹ In the second of the two trials, the judge awarded enhanced damages of $456,000 in light of evidence that LG had “undisputed” knowledge of Core Wireless’s patents and “abruptly terminated” licensing discussions.Footnote ³² Specifically, the judge cited weak invalidity and noninfringement defenses and evidence that, after an extended negotiation period, LG had invited Core Wireless representatives to its offices in South Korea purportedly to resolve the matter, but “[r]ather than make an offer or engage in serious, good faith negotiations, LG delivered a terse one-page document stating that a lawsuit at that time between the parties was ‘preferable’ to a license.”Footnote ³³ Among recent SEP litigations, this is perhaps the only case in which a prospective licensee explicitly adopted a policy of ignoring the patent and inviting litigation, even arguing in court that “infringement is an expected part of the standard-setting model.”Footnote ³⁴ This may explain why, to our knowledge, it is the only SEP litigation in which the court awarded enhanced damages. Few implementers are likely to repeat this mistake.

B. Qualcomm v. Apple (US District Court for the Southern District of California, 2017–2019)

This complex sequence of litigations involved Qualcomm, the leading chip supplier and innovator in the wireless communications market, and Apple, one of the world’s leading handset device manufacturers and the most valuable brand in this market. In the context of a dispute over rebate payments allegedly owed by Qualcomm, Apple sued Qualcomm in January 2017 for engaging in licensing practices that allegedly violated the antitrust laws.Footnote ³⁵ In response, Qualcomm filed in May 2017 a breach of contract suit against Apple’s contract manufacturers, which had stopped paying fees under their licensing agreements with Qualcomm, purportedly at Apple’s direction.Footnote ³⁶ In July 2017, Qualcomm filed a patent infringement suit against Apple for use of its patents in certain Apple devices.Footnote ³⁷ These litigations took place while the Federal Trade Commission (FTC) concurrently pursued an antitrust suit against Qualcomm, seeking a dramatic remedy that purported to operate on a worldwide basis and would have required Qualcomm to renegotiate virtually all of its licensing agreements. The result would have been a reengineering of a critical element of the contractual infrastructure behind the global wireless communications industry.

To appreciate the dynamics in the Apple/Qualcomm litigation, it is important to note three key facts. First, the size of Apple, which is regularly ranked as the world’s largest or second-largest company by market capitalization, means that it faced virtually no constraints on litigation funding. Second, while Qualcomm derived no revenue from Apple’s use of its patent-protected assets during the two-year litigation, Apple enjoyed billions of dollars in revenue through the sale of devices that used and relied upon Qualcomm’s technology. Third, given the low likelihood of an injunction, Apple never faced any material prospect that it would be forced to withdraw devices for which it had already incurred the costs of manufacture and distribution.

These factors naturally tilted bargaining leverage in favor of Apple, which effectively made a litigation “investment” in an effort to reduce its input costs (and increase its profit margins) from a technology supplier through the vehicle of an antitrust litigation.Footnote ³⁸ For Apple, the costs of the litigation were nominal relative to the potential benefits in the form of reduced royalty fees during the lifetime of the current wireless technology generation. This was not true for Qualcomm, which was deprived during the litigation of a principal revenue stream and, together with the antitrust suit brought against it concurrently by the FTC, faced legal challenges that, if successful, would have threatened the viability of its business model. This asymmetry can be observed in the fact that, following settlement of the Apple/Qualcomm litigation on April 16, 2019, Qualcomm’s stock rose 23%, while Apple’s stock only rose 1%.Footnote ³⁹

To be clear, Apple’s actions are neither nefarious nor surprising; rather, they represent a rational business response to a truncated property rights environment that favors users over originators of IP assets. As observed by Apple’s former head of licensing,Footnote ⁴⁰ a well-resourced user that faces no real threat of injunctive relief is best off infringing and then litigating the royalty rate in court (or settling the rate in the context of litigation), rather than entering initially into a license. In a post-eBay environment, Apple (and any other sufficiently resourced user) would be foolish to do otherwise.

C. Unwired Planet v. Huawei (UK, 2014–2020)

In 2013, Unwired Planet, the owner of patents relating to wireless communications, approached Huawei, a leading handset manufacturer, to enter into discussions concerning a license agreement for use of Unwired Planet’s SEP-protected technology. After several inquiries, Huawei’s IP department entered into protracted discussions with Unwired Planet over the terms of a nondisclosure agreement (a straightforward document that is typically uncontroversial). Unable to conduct constructive negotiations with Huawei, Unwired Planet elected to file an infringement suit in March 2014 against Huawei, Samsung, and Google for the infringement of six UK-issued patents, including five claimed SEPs.Footnote ⁴¹ During the litigation, Unwired Planet made several license offers to the defendants. Google and Samsung settled while Huawei made counteroffers, but the parties were unable to resolve the dispute.

The court ultimately held that Huawei had infringed two valid patents held by Unwired Planet and, for purposes of damages, calculated the FRAND royalty to which the patent owner was entitled. The court also rejected the view that Unwired Planet had breached its FRAND commitment by initiating infringement litigation and seeking injunctive relief. Most importantly, the court held that, while the FRAND commitment in general precludes SEP owners from seeking injunctive relief, this bar is lifted once the alleged infringer is deemed to be an “unwilling licensee” who acts opportunistically to prolong licensing negotiations.Footnote ⁴² On the basis of this principle (which refined a holding by the European Court of Justice in a 2015 decisionFootnote ⁴³), the court issued an injunction against further use by Huawei of the infringed patents, unless Huawei elected to enter into a license based on the FRAND royalty as determined by the court. Upon appeal, the UK Supreme Court upheld the lower court’s royalty determination and agreed that Unwired Planet had not acted “abusively” given its stated willingness to license upon FRAND-compliant terms.Footnote ⁴⁴ This decision represents one of the few cases in which a court has appreciated seriously the “holdout” risk faced by innovators that are practically precluded from seeking a legal order to block infringement.

D. Optis Wireless v. Apple (UK, 2017–Present; US District Court for the Eastern District of Texas, 2019–2021)

Optis Wireless holds patents that have been declared essential to the 4G LTE standard. In 2017, Optis had approached Apple offering a license for use of the patented technology. In February 2019, after two years of unresolved negotiations, Optis Wireless filed suit against Apple for infringement based on alleged use of the patented technology in Apple’s iPhone, iPad, and Apple Watch devices.Footnote ⁴⁵ In August 2020, a jury reached a finding of willful infringement and awarded Optis $506 million in reasonable royalty damages, which did not include a damages enhancement.Footnote ⁴⁶ In light of jury instructions concerning the FRAND obligation that were deemed to be defective, the court subsequently ordered a new damages proceeding.Footnote ⁴⁷ In August 2021, that proceeding resulted in a reduced award of $300 million.Footnote ⁴⁸ The judge declined to award enhanced damages.Footnote ⁴⁹

Optis concurrently filed infringement suits against Apple in the United Kingdom. In one of these suits, the court found in October 2020 that Optis’ patent claims were valid and infringed.Footnote ⁵⁰ Additionally, the court granted Optis’ motion for a separate proceeding to determine whether Apple is an “unwilling licensee,” on the ground that it has purportedly declined to commit to pay a FRAND-compliant royalty once that royalty is determined through litigation.Footnote ⁵¹ Under the Unwired Planet decision described previously, an “unwilling licensee” finding is the only circumstance in which SEP owners under British law may be entitled to injunctive relief. In September 2021, the High Court stated that Apple may be enjoined from selling the infringing products in the UK market unless it commits up front to taking a FRAND-compliant license from Optis, the terms of which will be determined at trial.Footnote ⁵² (Apple had previously threatened to withdraw its products out of the British market if the trial resulted in a “commercially unacceptable” royalty award.Footnote ⁵³) In June 2023, the High Court determined a global FRAND rate for the relevant portion of Optis’ SEP portfolio, which Apple must accept or it may face an injunction barring sales of some iPhone and iPad models in the UK market.Footnote ⁵⁴

A. Historical Background

The notion that infringers should be subject to enhanced damages is not new.Footnote ⁵⁵ In an amendment made in 1793 to the patent statute (only three years after its original enactment), Congress required that infringers pay damages at least equal to three times “the amount the patentee usually received for either selling the patented invention or licensing the invention.”Footnote ⁵⁶ That is: Treble damages were mandatory, and judges had authority to select an even higher damages multiplier. The amendment is thought to have reflected the fact that injunctions were rarely awarded by federal courts (due in part to the Anti-Injunction Act, which generally precluded federal courts from exercising equitable powers reserved for state courts) and therefore treble damages were deemed necessary to correct for undercompensation.Footnote ⁵⁷ In 1800, the statute was amended to set treble damages as the maximum multiplier. In 1819, Congress allowed federal courts to exercise equitable jurisdiction in all patent cases, and in 1836, the patent statute was amended so that treble damages became a discretionary, rather than mandatory, component of patent damages, as remains the law today. Since that time, changes in the incidence of enhanced damages have arisen as a result of changes in the standards adopted by courts to determine the threshold for finding willfulness and awarding enhanced damages, as discussed in Section I.

B. Mandating Enhanced Damages

Legal scholars have long recognized that supercompensatory damages can be a sound policy tool in cases where the identification and prosecution of individual legal violations is sufficiently costly and would not meet a cost–benefit test. In these circumstances, the “windfall” enjoyed by any individual plaintiff is the price paid to maintain deterrence generally since, without a credible threat of supercompensatory damages, prospective violators would have no rational incentive to comply with the relevant legal obligation. Under a patent regime in which injunctive relief is unavailable and infringers’ maximum “downside” is a reasonable royalty damages award (plus interest if awarded), the patent regime is unlikely to deter infringers with sufficient litigation resources. Absent concerns about preserving goodwill with actual or potential business partners (including the necessity of securing complementary know-how from the patentee), a well-resourced party will rationally choose to use the patented technology and invite the patentee to initiate infringement litigation. As discussed previously, this underdeterrence effect is likely to lead to undercompensation where patentees with limited litigation funding or high opportunity costs are prone to agree to royalty rates that undervalue the relevant technology. This is especially likely to be the case with smaller entrants, including disruptive start-ups, universities, and independent inventors. As a broader consequence, a downward distortion in royalty rates would then be expected to arise in all licensing negotiations involving patent owners that are effectively ineligible for injunctive relief. This effectively transfers wealth from entities that specialize in generating innovations to well-resourced entities that specialize in using them, a result that runs counter to the policy objective behind the patent system.

Assuming it is not feasible to institute a legal presumption favoring injunctive relief for prevailing patentees (which would require overturning eBay by judicial or legislative action), the deterrence and compensatory functions of the patent system can be restored (at least in part) by requiring that courts award enhanced damages in any litigation in which injunctive relief is highly unlikely as a matter of case law or judicial practice. Courts would then select a multiplier based on an adaptation of the “Read” factors that courts already use to determine the “egregiousness” of the defendant’s conduct, which in turn impacts whether enhanced damages are awarded and, if so, the size of the selected multiplier.Footnote ⁵⁸

Some of the most relevant Read factors in this context include “whether the infringer deliberately copied the ideas or design of another; whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed; … [d]efendant’s size and financial condition; [and] [c]loseness of the case.”Footnote ⁵⁹ In a typical “efficient infringement” scenario, at least two of these factors would favor selecting a high multiplier for purposes of enhanced damages: the infringer is well-resourced financially and deliberately copies the patentee’s patented technology. The court could then adjust the multiplier upward or downward depending on the extent to which the facts indicated whether the infringer had investigated the scope of the patent and formed a good faith belief that the patent was invalid. While our proposal goes beyond existing statutory and case law in mandating enhanced damages in all cases in which injunctive relief is not practically available, the factors that would be used to calibrate the multiplier largely track the existing Read factors and arguably encompass the “affirmative duty” standard that, as discussed earlier,Footnote ⁶⁰ courts had used to assess willfulness following the Underwater Devices decision in 1983 until the Seagate decision in 2007.

Enabling patentees to credibly threaten infringers with the prospect of enhanced damages in lieu of injunctive relief would discourage well-resourced users from infringing by increasing the user’s anticipated “downside” losses in the event the patentee prevailed in an infringement litigation. This would correct for the underdeterrence and undercompensation effects that arise in a legal environment in which patent owners cannot credibly threaten to deny access to their patented technology. Whether or not a user would determine that negotiating a license outperforms infringing and litigating would then depend on its level of confidence in being able to show that the patent is invalid or not infringed, rather than being dependent on the user’s litigation resources and opportunity costs relative to the patent owner. This would constructively lead potential infringers to proactively invest resources in investigating the validity and scope of relevant patents, which may often lead infringers to conclude that negotiating a license, rather than expending funds on litigators, is the preferred business option. Hence, our proposal has the virtuous effect that it renders the user’s license v. infringe decision dependent on the strength of the patent, rather than the relative litigation resources available to the user and patent owner. This levels the playing field by precluding well-resourced implementers from leveraging the costs and delay of the litigation and settlement process to secure a downward adjustment in the royalty rate from a less well-resourced innovator, irrespective of the value of the underlying patent.

The prospect of enhanced damages (and, in particular, courts’ ability to adjust the multiplier upward in response to infringer opportunism) would also unwind the distortionary effects that the current “almost no” injunction patent regime exerts in the patent licensing market. Negotiated royalty rates would more closely track a patent’s economic value, since those rates would no longer reflect the artificially depressed levels that can arise under the threat of protracted litigation with well-resourced infringers. Over time, improved accuracy in negotiated royalties would likely improve the accuracy of judicially determined royalty awards since courts could more confidently rely on established royalties as an accurate measure of economic value.Footnote ⁶¹

C. Calibrating Enhanced Damages

It can nonetheless be objected that awarding enhanced damages would invite a return to opportunistic litigation from certain patent owners for the purpose of securing enhanced damages or favorable settlement payouts from cash-rich users. That is: While substituting enhanced damages for injunctive relief mitigates “holdout” behavior by prospective licensees, it restores the risk of “holdup” behavior by patent owners. To be clear, we do not expect that mandating enhanced damages would give rise to holdup behavior in general. Insisting on exorbitant royalty rates would be a self-defeating strategy for repeat-play innovators that seek to maximize returns by inducing adoption of their existing technology and accruing reputational goodwill to induce adoption of their future technologies.Footnote ⁶² Holdup incentives may arise, however, in the case of certain patent owners that do not have R&D investments at stake, hold a patented technology to which there is no cost-feasible substitute, and are not repeat players in the technology ecosystem. In that specific set of circumstances, long-term incentives to maintain reputational goodwill might not discourage the short-term use of opportunistic litigation strategies and hence, mandating enhanced damages could invite entry by opportunistic litigants, resulting in overcompensation and overdeterrence effects.

These concerns are addressed by design through our proposal, which mandates enhanced damages in “almost no” injunction scenarios but always invests courts with discretion to select the specific multiplier.Footnote ⁶³ We anticipate that courts would calibrate the multiplier to achieve a rough trade-off between correcting undercompensation and underdeterrence effects (which favor a higher multiplier) and overcompensation and overdeterrence effects (which favor a lower multiplier), which would in turn depend on the facts demonstrated in any particular litigation. This concept is already reflected in the patent statute, which empowers courts to select a multiplier within a bounded range, and case law outcomes, which exhibit variation in the multipliers used by courts when awarding enhanced damages and show that courts infrequently reach the upper bound.

More specifically, as noted earlier, courts already use the Read factors to determine the size of the damages multiplier and our proposal would build upon this existing framework. Specifically, one of the Read factors takes into account whether the infringer “investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed.”Footnote ⁶⁴ Courts could apply a lower damages multiplier if an infringer showed that it had satisfied this factor. Additionally, we anticipate that courts would select lower damages multipliers if the infringer could demonstrate that it was unaware of the contested patent after due diligence or was aware of the patent and had made good faith efforts to negotiate a license from the patent owner. This would also preserve incentives for good faith users to reject a license when, after due diligence, they are reasonably confident that the patent owner would be unlikely to defend validity and demonstrate infringement (in which case the probability that the patent owner would secure a liability finding, a willfulness finding, and a meaningful enhanced damages award would most likely reach asymptotic levels).Footnote ⁶⁵

Another Read factor is the duration of the defendant’s misconduct.Footnote ⁶⁶ The longer the duration of the defendant’s misconduct, the higher the enhanced damages. In the context of our proposal for mandatory enhanced damages, courts may take into account the period of time during which negotiations and litigation have played out, enhancing damages to account for the increasing holdout costs borne by the patentee during a protracted negotiation and litigation process. These costs extend beyond mere attorney fees, as the delays incurred by negotiation and litigation can have dramatic adverse effects on a firm’s position in the market (for example, it can forfeit the first mover advantage that is often critical in technology markets).

Closely related to the duration of negotiations and litigation and the defendant’s good faith belief is whether one of the parties made a credible offer of arbitration as to either the entire dispute or the royalty determination Arbitration is less time-consuming and costly than litigation, so a defendant’s refusal to participate in arbitration may be grounds to increase the enhanced damages multiplier, and a plaintiff’s refusal may be grounds to decrease the enhanced damages multiplier. Of course, a party may have a legitimate reason for preferring federal court litigation, and showing a legitimate reason (such as a defendant’s good faith belief that the patent was invalid or not infringed) can rebut any increase or decrease in enhanced damages.

Appropriately applied, mandating enhanced damages subject to a judicially applied multiplier (in the absence of injunctive relief) would not only deter litigations induced by bad faith users that infringe against likely valid patents but also litigations brought by bad faith holders of likely invalid patents. The net result would likely be a reduction in the quantity, and an improvement in the “quality,” of patent infringement litigation on the judicial docket, offsetting some of the unintended consequences of the eBay decision.

D. The Legislative Fix

There is no perfect solution to the inevitable trade-off between undercompensation and underdeterrence effects, which can arise in certain circumstances when courts infrequently award enhanced damages or typically apply low damage multipliers, and overcompensation and overdeterrence effects, which can arise in certain circumstances when courts regularly award enhanced damages or typically apply high multipliers. Following our proposal, courts can roughly balance these effects by combining mandatory enhanced damages with variable damages multipliers, which courts can adjust downward if there is sufficient evidence of good faith motivations behind the infringer’s action or upward if there is sufficient evidence of bad faith motivations behind the infringer’s conduct. Courts already have authority to make these adjustments under the enabling language in the patent statute, which provides that courts “may increase the damages up to three times” (our emphasis). These discretionary powers are illustrated by the district court’s decision in Core Wireless Licensing S.A.R.L. v. LG Electronics, Inc.,Footnote ⁶⁷ a litigation brought by a SEP owner and therefore without any prospect of injunctive relief. Following the jury’s finding of willfulness, the judge elected to impose a 20% damages enhancement based on evidence of bad faith negotiation conduct by the infringer and weak patent invalidity and noninfringement defenses. In SRI International Inc. v. Cisco Systems,Footnote ⁶⁸ the Federal Circuit upheld an enhanced damages award on the ground that the defendant not only had infringed willfully but also had engaged at trial in “aggressive tactics,” such as making dubious arguments that appeared to be contradicted by the infringer’s internal documents.

These decisions might suggest that our proposal could be largely implemented through increased judicial willingness to apply the existing damages multiplier for purposes of awarding enhanced damages following a finding of willfulness. SRI International shows why this would not be sufficient to restore the missing deterrence effects in the current patent system. In that case, the Federal Circuit clarified that enhanced damages can only be awarded based on a finding that the defendant had engaged in both willful infringement and “wanton and malicious” conduct. Given this arguably heightened threshold for awarding enhanced damages, meaningful implementation of our proposal could not rely on courts’ discretion under existing case law to award enhanced damages for the simple reason that courts would often not have the opportunity to exercise such discretion. Our proposal therefore requires amending the patent statute to clarify that courts must select a damages enhancement, subject to the existing statutory maximum of treble damages, in any infringement litigation in which the patent owner prevails on validity and infringement and there is no reasonable likelihood of injunctive relief.Footnote ⁶⁹

Interestingly, German legislators have recently implemented a version of our proposal. A recent statutory amendment to the German Patent Act precludes injunctive relief “if the claim would lead to disproportionate hardship for the infringer or third parties.”Footnote ⁷⁰ This amendment, which codifies German case law,Footnote ⁷¹ allows courts to deny injunctive relief in special circumstances – injunctive relief is no longer “automatic.” While the German Patent Act amendment does not go as far as eBay, which (as interpreted by the lower courts) flipped the United States from an “automatic” injunction regime to an “almost no” injunction regime, the German Patent Act amendment does play a similar role by making injunctive relief more difficult to obtain. What is significant, however, is that the shift in the German patent injunction regime is paired – as this chapter proposes – with an increased ability to obtain enhanced damages. In the same amendment making injunctive relief more difficult to obtain, the German Patent Act was also amended to provide “[i]n th[e] case [where injunctive relief is denied], the injured party shall be granted appropriate financial compensation [that] shall not affect the claim for damages pursuant to Paragraph 2 [traditional patent remedies of actual damages, unjust enrichment and reasonable royalties].”Footnote ⁷² Thus, as the German system transitions away from an “automatic” injunction regime, legislators had the foresight to implement an enhanced damages regime to deter infringers from engaging in holdout tactics. Hopefully, Congress can look to Germany as an example of our proposal in action.

Absent restoration of the historical presumption favoring injunctive relief for prevailing patentees (which would more directly correct the underdeterrence effect), we encourage Congress to consider making this adjustment to the patent statute. In 1793, Congress recognized the necessity for mandating enhanced damages for patent owners when injunctive relief is unavailable; today that same rationale applies once again.