eBay and a thought on uncertainty

The Supreme Court has vacated the Federal Circuit opinion and (re)established that the grant of injunctive relief in a patent infringement action (as in a copyright infringement action and many other disputes) “is an act of equitable discretion by the district court,” subject to “well-established principles of equity” (including the traditional 4-factor test) and “reviewable on appeal for abuse of discretion”. The Court emphasized that lower courts must apply the four-factor test on a case-by-case basis and should not develop categorical rules in favor of or against injunctive relief. After a rather quick read (it is only a 6 page opinion) and a few minutes of thought, I think the opinion strikes the right chord. The concurrences are also interesting, not so much for how they may impact injunctive relief, but, as Joe Miller and Randy Picker note, for how they reflect a divide among the Justices on their views of the patent system and how well it is working. The opinion and two short concurrences are available on Patently-O.

Ok, what follows is an off the cuff, spur of the moment thought on Ebay and uncertainty – let’s see how this goes…

There will likely be plenty of criticism of the opinion because of increased uncertainty (applying a four factored test inevitably means more uncertainty than applying no test at all and instead granting an injunction automatically) and concerns that such uncertainty breeds more litigation and raises transaction costs. My view is that the magnitude of both the uncertainty and the consequenses that flow from uncertainty (litigation costs, transaction costs) may be overstated. We deal with this 4 factored test all the time; in many cases, we can assess the risk and understand the expected outcomes. Ans so we litigate and bargain in the face of risk. The real problem is uncertainty (or uncertain risk), where the likelihood of each outcome (injunction / no injunction) is hard to estimate ex ante. In many cases, though, the increase in uncertainty (as a result of the SCT ruling) will not be that great because the expected outcome under the 4 factor test will be reasonably predictable (my guess: in most cases, the risk of no injunction will be quite small and quite predictible). If I am right (which might not be the case), the additional litigation and transaction costs attributable to additional uncertainty may not be that dramatic. (Yes, there will be some additional costs — assessing risk itself means involving lawyers, and of course, there may be some significant adjustment costs in the short term)

Perhaps the real issue is with the risk itself. (Not an issue that I have with the opinion, but perhaps the issue that will motivate strong criticism of the opinion.) Prior to this ruling, the risk of no injunction was tiny across the board; after this ruling, it may increase across the board, certainly more for some than for others. The increase in risk can itself be understood (I think) as a wealth transfer from patent owners to patented invention users (infringers + licensees who get a better deal). By transfer, I do not mean to suggest that the transfer involves taking something that belongs to one person and giving it to another because we’re talking about how the patent system itself allocates rights and wealth (see Spillovers). The transfer accomplished in eBay reflects a move away from an absolutist view of patents, and it may be the very nature of that move that generates strong criticisms.