The Value of Injunctions – Douglas Dynamics v. Buyers Products Co. (Fed. Cir. May 21, 2013)

The Federal Circuit’s recent decision in Douglas Dynamics, LLC, v. Buyers Products Co. (Fed. Cir. May 21, 2013) is very important given the widespread, albeit mistaken, belief today that the Supreme Court’s decision in eBay v. MercExchange (2005) established that damages and not injunctions are the presumptive remedy for patent infringement.  For those in the know, the four-factor “eBay test” for awarding an injunction now governs whether a plaintiff who has proven patent infringement will receive as a remedy either an injunction or a court-determined “reasonable royalty.”

In Douglas Dynamics, the Federal Circuit reversed a district court’s denial of an injunction under the eBay test and thus reaffirmed the basic legal principle that violations of property rights are generally best remedied with injunctions (which then permits the parties to negotiate for licenses, as the infringer should have done in the first place).  The district court had rejected Douglas Dynamics’ request for an injunction, and instead awarded it a compulsory license via Judge William Conley’s determination of an “ongoing reasonable royalty rate.”

On appeal, Chief Judge Randall Rader resoundingly disagreed with Judge Conley’s belief that the “public interest” is always better served by the introduction of a new competitor who is selling cheaper products.  This is what happened in this case, as Douglas Dynamics and Buyers Products Company are competitors in the sale of snowplow blades.  Instead, Chief Judge Rader recognized that its act of infringement as such is what gave Buyers Products Company its market advantage in undercutting Douglas Dynamics’ prices.  Because it did not have to incur Douglas Dynamics’ ex ante expenses in engaging in innovative research and development, Buyers Products Company’s infringement permitted it the economic advantage of being able to undercut Douglas Dynamics prices’ and thus enter the allegedly “untapped market segment” of cheaper snowplow blades. It was precisely this expansion of a consumer market that the district court relied on in its denial of Douglas Dynamics’ requested injunction. In sum, the district court used an infringement-created expansion of the market to justify denying an injunction and awarding a compulsory license to the patent-owner, which effectively rewarded Buyer Products Company for its act of infringement.

In reversing the district court’s award of a reasonable royalty, Chief Judge Rader explained the basic economic principle of dynamic efficiency that animates the Patent Act in securing property rights to inventors in their patented innovation:

While the general public certainly enjoys lower prices, cheap copies of patented inventions have the effect of inhibiting innovation and incentive. This detrimental effect, coupled with the public’s general interest in the judicial protection of property rights in inventive technology, outweighs any interest the public has in purchasing cheaper infringing products.   In sum, the public has a greater interest in acquiring new technology through the protection provided by the Patent Act than it has in buying “cheaper knock-offs.”

Even more important, Chief Judge Rader explicitly rebuffed Judge Conley’s conclusion that the Douglas Dynamics failed to make a threshold showing of “irreparable harm” simply because it continued to profit from its own sales during the period of Buyer Products Company’s infringement.  Chief Judge Rader rightly pointed out that “irreparable injury” comprises many different types of losses that are often difficult to quantify, such as the patent-owner’s lost sales, erosion in its reputation, and loss of its brand distinction.  Due to Buyer Products Company’s infringement, Douglas Dynamics faced the very real risk of losing its distinctiveness and market lure because consumers would not know that Buyer Products Company’s knock-offs were entirely a result of patent infringement.

Further identifying the non-quantitative forms of “irreparable injury,” Chief Judge Rader also pointed out that Buyer Products Company’s infringement would erode Douglas Dynamics’ reputation as an innovator.  This reputational loss may occur even absent consumer confusion, as there may still be harm to a company’s reputation among other market actors, such as business customers, dealers, and distributors.  Chief Judge Rader noted that a company’s reputation would be damaged if its dealers and distributors — commercial entities with whom a patent-owner licenses and engages in other necessary commercial transaction costs in converting inventions into real-world innovation used by consumers — come to believe that the patent-owner does not enforce its intellectual property rights.

In summing up the essential purpose of patent rights, Chief Judge Rader succinctly stated that “exclusivity is closely related to the fundamental nature of patents as property rights.  It is an intangible asset that is part of the company’s reputation” (emphasis added).

Chief Judge Rader’s opinion is an important reminder of the dangers inherent in a court’s all-too-eager embrace of an expansive interpretation of the “public interest” factor of the eBay test. Such expansive interpretations of the “public interest” threaten to eviscerate the very nature and justification for why patents have been secured as property rights since the early years of the American Republic. In fact, this danger was warned against by no less than Chief Justice John Roberts in his concurring opinion in eBay itself.  As Chief Justice Roberts explained (joined by Justices Ginsburg and Scalia):

From at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases. This “long tradition of equity practice” is not surprising, given the difficulty of protecting a right to exclude through monetary remedies that allow an infringer to use an invention against the patentee’s wishes — a difficulty that often implicates the first two factors of the traditional four-factor test.

Luckily, since eBay was decided in 2005, most courts have followed the Supreme Court’s injunction not to eviscerate the nature and function of property rights in patented innovation.  In applying the eBay test from 2006 to 2011, courts awarded injunctions in an overwhelming majority of patent infringement cases: they issued injunctions in 75% of patent cases that reached the remedy stage following a finding of infringement (injunctions issued in 131 cases and damages were awarded in 43 cases).

Of course, injunctions are not automatic — they are no more automatic for property rights in innovation as they are for property rights in other assets.  But it should not be forgotten, as it was by the district court in Douglas Dynamics, that injunctions are an essential mechanism serving “the public’s general interest in the judicial protection of property rights in inventive technology” (to quote Chief Judge Rader).