If you’re an individual who shoplifts a $100 item from a store, you might spend the night in jail — and you certainly won’t be allowed to keep the product.
But if you’re a company and you steal a rival’s $100 million technology, you’ll almost certainly be allowed to keep selling it as your own and will only suffer financial consequences if your rival has the time and resources to duke it out with you in court.
That’s because of a 2006 Supreme Court ruling, in eBay Inc. v. MercExchange, L.L.C., that has had profound and damaging ripple effects across our innovation ecosystem. The Court ruled that judges should no longer automatically issue “injunctions” — court orders that force infringers to stop using patented technology that they’ve stolen. Instead, they instituted a four-factor test that has made injunctions far harder to obtain.
This may sound arcane, but the real-world impacts have been staggering. My recent empirical research found that permanent injunctions for non-practicing entities (NPEs) — a category that includes small inventors, startups, universities, and research institutions that don’t manufacture products themselves — dropped by 91.2% after the eBay decision. Even for manufacturers, or “operating” companies, injunctions fell by 66.7%. The impact extends beyond just permanent injunctions. Preliminary injunctions, temporary orders issued early in a case, also saw significant declines: requests dropped by 48.4% for NPEs and 53.2% for operating companies.
Moreover, these figures likely understate the full impact of the eBay decision. Due to the diminished likelihood of obtaining an injunction, many patent holders may now be self-selecting out of seeking this remedy altogether, unwilling to bear the costs of a likely futile effort. This means the true effect on patent enforcement is likely even more significant than the numbers suggest.
This shift has created a de facto “compulsory licensing” regime, fundamentally altering the bargaining dynamics between patent holders and potential licensees. Without the credible threat of an injunction, patent holders lose significant leverage in negotiations, often leading to under-compensation for their innovations. It may even encourage litigation where licensing discussions would once have sufficed, distorting the market for patents and effectively devaluing them as an asset class.
This new dynamic disproportionately harms a wide range of innovators, from small inventors and startups to universities and research institutions. Venture capitalists become hesitant to invest in companies whose innovations can be easily copied by larger competitors. Institutions focused on pure research lose critical bargaining power. In essence, the very entities often driving cutting-edge innovation find themselves at a severe disadvantage in both litigation and licensing negotiations.
The data suggests that this shift is already impacting innovation patterns. A recent study by the AUTM reveals a telling trend: since the eBay decision, non-exclusive licensing has significantly increased, while exclusive licensing has remained flat. This shift indicates that academic institutions are changing how they commercialize their innovations. Without strong injunctive relief, universities may find it harder to offer exclusive rights, potentially dampening companies’ incentives to invest in bringing these technologies to market.
The long-term effects on American innovation would be disastrous. While the eBay decision may have been well-intentioned, its unintended consequences demand a thorough reexamination of how we balance innovation protection with fair competition in the 21st century.
Kristina M. L. Acri née Lybecker, PhD, is a professor of economics at Colorado College and a Senior Fellow at the Fraser Institute. This piece originally ran in the Denver Post.
