Post-eBay Economic Standards for Assessing Irreparable Harm

Since the Supreme Court’s ruling in eBay v. MercExchange, permanent injunctions in patent infringement cases have issued in accordance with a four-factor equitable test.  One of the factors considers the presence of irreparable injury, which is harm not quantifiable or remediable as money damages.  For the factor to be satisfied – for an injunction to issue – it must be determined that damages associated with ongoing infringement are economically incalculable. This factor, unpopular as it may be among some observers, has regularly been pointed to by Courts as conclusive in their decisions to issue or deny injunctions.  Yet the factor is often analyzed only superficially, and even unpredictably.

Due to a lack of clarity about issues that render forward-looking damages quantifiable or not, Courts’ post-eBay analyses of irreparable harm have inconsistently addressed calculability.  As a result of this inconsistency, there has been significant uncertainty among litigants regarding the likelihood of injunction following a finding of infringement.  This was perhaps most visibly illustrated in the recent (and widely unexpected) denial of an injunction in the Apple v. Samsung matter.

Owing to this inconsistency and the uncertainty that stems from it, I recently undertook research to identify the root causes of unpredictability in irreparable harm findings and to evaluate whether consistency could be improved.  My research revealed some key findings.  First, the inconsistency stems from Courts’ reliance on “proxy” questions for identifying irreparable harm.  Second, reliable frameworks for determining whether damage from ongoing infringement is quantifiable have not been set.

Based on my findings, it appears consistency may be improved – and uncertainty reduced – by: 1) ending reliance on proxy questions; and 2) focusing instead on economically appropriate market indicators of forward-looking damage quantifiability.

Proxy questions, and particularly the “direct competition” question, have tended to form the basis for Courts’ irreparable harm inquiries.  Broadly, if direct competition exists, damages are presumed unquantifiable and an injunction tends to issue.

The direct competition question, however, is flawed.  The simple presence of direct competition between parties does not itself render forward-looking damages immeasurable.  Certain market structures in which direct competition may exist between litigants can be quite stable.  A stable market suggests that future market activity may be accurately forecast, thus allowing reasonable estimation of forward-looking economic damages.

The presence of direct competition is insufficient to show irreparable injury.  It is likely due to the insufficiency of this narrow competition analysis that Courts’ findings have been unpredictable and inconsistent.

The analysis must be much deeper and more sophisticated.  After all, there are numerous elements that inform the extent to which future market activity may be reasonably predicted and forward-looking infringement damages reliably quantified:

• the nature of the technology at issue,
• the industrial organization of the relevant markets in which covered products compete,
• the relative positioning of the infringer and patentee in the immediate markets and adjacent markets,
• the rates of scientific change affecting the technology at issue, and
• the degree to which ongoing infringement could alter the dynamics of competition in the relevant markets…

There are numerous other factors, and the issues interact, so they must be evaluated in a comprehensive way to determine how predictable the relevant economic activity will be.  Given the stakes involved in a permanent injunction decision, a complete analysis of the market (i.e., one that provides a true indication of the reliability of any damage forecasts rendered over the period of ongoing infringement) is warranted.

In this regard, it is also necessary to be clear about what valuation standard must be achieved in any forward-looking damage quantification.  The valuation standard reflects the level of accuracy and reliability any forward-looking damage calculation must meet in order for irreparable harm to not be found.  In some instances, the future may be predictable – but simply not predictable enough for purposes of a permanent injunction inquiry.

As a broad statement, forecasts rendered for different purposes are held to different standards.  For certain purposes, a relatively general forecast may be sufficient, while for other purposes, a much higher level of reliability is necessary.  It is not so important that the weather forecaster predict tomorrow’s mid-day high to the tenth of a degree if one’s purpose in using the information is to choose clothing for the next day.  If one is using the information to run a scientific experiment outdoors, though, the forecast may need to be reliable to the hundredth of a degree.

The valuation standard appropriate for permanent injunction inquiries is unique.  It is not the same as that for other forward-looking damages contexts, nor is it the same as that for past patent damages calculations.  Without getting into the details, the relevant standard for future damage valuation in irreparable harm inquiries must be at least as stringent as that required for future damages valuations in other contexts, and no more stringent than that required for past damages valuations in patent infringement proceedings.

The reasons for this are somewhat complex, but if you’ve made it this far, you might be interested to read about them and about the details of my other findings in the paper this article summarizes: Porter Jr., Stevan D., Post-eBay Economic Standards for Assessing Irreparable Harm, Journal of the Patent and Trademark Office Society, Vol. 94, No. 3, pp. 250-273.

 

About the Author

Stevan Porter is a Managing Director of AdValum Consulting, which is a premier provider of expert economic consulting services.  AdValum specializes in valuation and damages analysis in relation to intellectual property, competition, contract, and class action matters.