Erik Hovenkamp and I have posted a paper on ssrn titled Anticompetitive Injunctions, Unprotected Market Entry, and Diagonal Integration in Patent Disputes. Here is the paper, and here is the abstract:
The current approach for determining when courts should award injunctions in patent disputes involves a myopic focus on the hardships an injunction might impose on the litigants and the public. This article demonstrates, however, that courts sometimes could rely instead on a consideration far more relevant to the patent system's goal of promoting dynamic welfare: the extent to which the right to exclude was actually a necessary quid pro quo for the plaintiff's decision to bring its products to market. We begin with a discussion of a recent Federal Circuit decision, Trebro Mfg. Inc. v. FireFly Equipment, LLC, in which the court held that injunctive relief may be appropriate when a defendant infringes a patent that the plaintiff-competitor does not practice, and against which it lacked any legal protection when it entered the market in which the parties now compete. We then present a simple economic model demonstrating that under these circumstances—which are increasingly common in industries with rich markets for secondhand patents, resulting in the formation of what we refer to as “diagonally integrated” nonpracticing entities—injunctive relief poses a threat to consumer welfare that is not offset by any plausible benefit to innovation. The model’s implications extend to a range of topics at the core of contemporary patent policy debates, including patent privateering, FRAND-encumbered standard essential patents, and preemptive patenting. In addition, we show that diagonally integrated NPEs are more likely to seek high licensing fees and aggressively seek injunctive relief than are conventional, “unintegrated” NPEs.