A Law and Economics Perspective on Injunctive Relief

The Law and Economics perspective on injunctive relief has been developed primarily from the Calabresi and Melamed (1972) distinction between property rules and liability rules, two different judicial means of enforcing legal rights. Their analysis is predicated on the assumption that, if the prevention of the unlawful activity by an injunction does not reach an efficient solution between the relevant parties, then the latter can modify the terms of the injunction by means of bilateral negotiation, drawing on Coase's basic analysis. The approach is particularly important once it is appreciated that legal entitlements are imperfectly formulated and that, in appropriate circumstances, legal wrongdoing can increase social welfare. For example, in areas where intellectual property rights are particularly difficult to formulate because of the high technology involved, too rigid an enforcement of those imperfectly targeted rights generates welfare losses. The task for economic analysis is then to determine whether injunctive relief or damages is preferable in the particular circumstances governing the parties' activities. This largely involves comparing on the one hand the welfare losses which arise from imperfect damages awards which arise predominantly where the court has high information costs in assessing the plaintiff's losses (particularly where those losses are subjective and therefore cannot be determined by reference to market evaluation) or include irrecoverable third-party losses with, on the other hand, the transaction costs of negotiating a compromise solution or the welfare losses arising from a holdout (both conditions are likely where more than two parties are involved). One branch of the literature has added a new dimension to this analysis. It is concerned to explore how the choice of remedy ex post affects behaviour ex ante, in particular the propensity to invest. In addition, literature on optimal enforcement provides insights regarding the optimal timing of sanctions, which is relevant for the choice between injunctions (the first possible stage of legal intervention) and damages (the last possible stage).