It is increasingly common for patent infringers to sink substantial resources into a product’s development, manufacture, and marketing before a patentee alleges infringement. Infringers may sign contracts, hire employees, and purchase specialized facilities and equipment—all before realizing that their product might infringe someone else’s patent. If a patent holder successfully proves infringement, the court must remedy the infringement by awarding the patentee either forward-looking damages or an injunction. Often, neither presents a particularly palatable option.
To award the patentee damages, the court must assign a value to the patentee’s invention. Judicial valuation of technology is simultaneously expensive and prone to significant error. The patent system is designed to reward those who innovate in ways the market endorses; when courts, rather than markets, dictate the value of an invention, they distort the economic incentives the patent system relies on to promote innovation.
But if the court issues an injunction instead, the infringer may suffer catastrophic losses on its sunk investments if the injunction is actually enforced. Knowing this, the patentee could wield the injunction to threaten those investments and demand payment for their continued safety. This type of strategic behavior, known as “patent hold-up,” allows patentees to capture payments not tied to the merits of their invention. Handing patentees this windfall distorts their incentives and encourages other parties involved in innovation to behave in undesirable ways.
This Comment explores how judicial misvaluation and patent hold-up distort incentives in ways that cause harm to research and innovation. It then sketches guidelines for estimating the magnitude of these distortions in specific cases and urges courts to weigh these distortions when considering injunctive relief. When neither damages nor an injunction presents a palatable solution to infringement, a court that understands the adverse consequences of misvaluation and hold-up will be able to choose the lesser of two evils.