Permanent Injunctions as Punitive Damages in Patent Infringement Cases

Although much ink has been spilled over the decision of the Supreme Court in eBay v. Mercexchange to modify the test for equitable relief in patent cases and to nullify the long-standing presumption that victims of infringement are always entitled to permanent injunctions, an obvious point is never pursued: Injunctions in patent cases can function like punitive damages at common law. In cases where the infringer’s costs of switching to an alternative non-infringing technology are sufficiently high, patent "hold up" will occur, whereby the patentee will be able to negotiate a post-injunction license that exceeds the amount that would have been determined by an ex ante arms-length bargain (i.e., a reasonable royalty). Permanent injunctions that result in the recovery of an extra-compensatory bounty function like punitive damages and can be analyzed as such. This article examines the economic literature on punitive damages and identifies the limited set of circumstances where permanent injunctions are warranted