eBay decision changes balance of power in patent disputes

25 Jan eBay decision changes balance of power in patent disputes

Editor’s note: This is the final installment of a series on patent law written by attorneys from the Madison office of Whyte Hirschboeck Dudek. The first two parts, written by attorney Gina Carter, pertained to preventing intellectual property infringement within organizations. The following commentary, written by attorneys Joe Goode and Jonathan Fritz, addresses the ramifications of a recent Supreme Court ruling involving the online retailer eBay.

Permanent injunctions are often sought in patent infringement suits as an equitable remedy to patent infringement. The recent United States Supreme Court decision, eBay Inc. vs.
MercExchange, LLC, 126 S.Ct. 1837 (2006), has changed the permanent injunction landscape. Why should companies be aware of this decision? Simply put, eBay overturned a long-standing presumption in favor of granting permanent injunctions against patent infringers.

Though the terse, five-page decision was unanimous, the two concurring opinions reveal that the justices agreed upon very little beyond requiring district courts faced with a request for injunctive relief to apply the traditional four-factor test. The net result appears to be that, while a permanent injunction should not automatically be issued upon a finding of infringement, the injunction should not be denied solely because the patent holder does not practice the patented invention.
The decision has unleashed nothing less than a firestorm of debate and controversy because permanent injunctions have been virtually guaranteed in most patent cases since the beginning of the 19th Century. While the precise impact of the Supreme Court’s decision remains to be seen, it is sure to increase the complexity of patent infringement litigation. Would-be plaintiffs and defendants must be prepared for the uncertainty that stems from eBay. Whatever the fallout, one thing is for certain: without a presumption favoring permanent injunctions, the bargaining table balance has shifted.
Patent Act
Tracing its roots back to the U.S. Constitution, the Patent Act provides an uncommon exclusionary right. Patent holders are not granted a right to practice their invention, but are granted “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States.”
The Patent Act further provides that patents have the attributes of personal property; as such, courts may grant injunctions “in accordance with the principles of equity” to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.
Why is the exclusion vs. practice distinction important? Patent holders may believe they have an affirmative right to practice their invention, when they may in fact be infringing upon another’s patent rights. Enforcement of exclusionary patent rights have generally been through permanent injunctions, but eBay has reduced the likelihood that a permanent injunction will be granted in every case where infringement is found.
The four-factor test
By itself, the Supreme Court’s decision simply affirmed the obligation of a party seeking the permanent injunction to establish a right for the injunction under the historic four-factor test:
• That the patent holder has suffered an irreparable injury.
• That remedies available at law, such as monetary damages, are inadequate to compensate for that injury.
• That, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted.
• That the public interest would not be disserved by a permanent injunction.
In his concurring opinion from eBay, Chief Justice John Roberts spoke to the importance of granting permanent injunctions. He concluded that the first two factors of the test are the ones most often implicated in patent suits, considering the exclusionary nature of the patent right.
Case closed
The case involved a dispute between Internet-retailer eBay and MercExchange over three patents owned by MercExchange.
MercExchange alleged that a fixed price purchasing feature of eBay’s website infringed its patents, which protect a method relating to the purchasing and selling of goods over a secure Internet environment. Having obtained a jury verdict of infringement against eBay, MercExchange asked the district court to grant a permanent injunction against eBay enjoining future infringement. The district court denied MercExchange’s motion for permanent injunction and held that it would not suffer irreparable harm if an injunction was not issued. [MercExchange L.L.C. v. eBay Inc., 275 F. Supp. 2d 695, 712 (E.D. Va. 2003)]
The court reasoned that monetary damages were adequate in light of MercExchange’s ability to license the patents and the fact it had not commercialized the patents-in-suit. The district court further reasoned that MercExchange’s failure to seek a preliminary injunction at the outset of the case indicated that a permanent injunction was unnecessary to protect MercExchange on a going-forward basis.
The United States Court of Appeals for the Federal Circuit reversed the district court’s decision, applying the general rule that courts will issue permanent injunctions against patent infringement “absent exceptional circumstances.” [401 F.3d 1323, 1339 (Fed. Cir. 2005)]. In so doing, the Federal Circuit focused on the “right to exclude recognized in a patent” as being the essence of the property right. While the Federal Circuit claimed that “exceptional circumstances” (such as a public health need for the infringing product) could serve to defeat a request for a permanent injunction, it specifically found that a general concern over the validity of business method patents – eBay’s assertion – was not the important public need that justified the “unusual step” of denying injunctive relief.
The Supreme Court’s decision focused on both the historic right to exclude and the issue of whether a patent holder was, in fact, practicing the invention. The only clear guidance is that permanent injunctions can no longer be issued as a right inasmuch as district courts must engage in fact-finding before concluding that the patentee has a right to the injunction.
What this means
The seemingly short and benign decision by the Supreme Court has significant repercussions for patent holders and infringers alike. Fewer settlements may be reached in patent infringement suits as a result of eBay. Alleged infringers may be emboldened to see cases through to trial, especially where they can economically withstand an award of monetary damages but not a permanent injunction.
For example, the $612.5 million settlement in the Research in Motion case occurred on the eve of the district court’s decision on whether to grant a permanent injunction. The threat of shutting down connectivity for all Blackberries in the United States was one of the foremost reasons why RIM came to the bargaining table in the first place.
Can a patent’s value vary depending upon the type of patent holder? In the event that a particular patent holder is more likely to succeed at a permanent injunction, the patent may be more valuable to a licensee, given the increased threat of a permanent injunction. Patent enforcement entities, often referred to as “patent trolls,” are now in a precarious position where monetary damages may in fact be adequate considering the lack of commercialization and licensing business model.
On the other hand, direct competitors may in fact be more likely to pay a greater premium for patent licenses, considering the stronger likelihood that the application of the four-factor test is more likely to result in an injunction than in cases where the holder of the patent is not practicing the invention.
Permanent injunctions have legitimately brought infringers to their knees, effectively halting future infringement. With the Supreme Court having shrunk the quiver, the patent holder’s ability to use the permanent injunction arrow has been significantly reduced. This creates problems relating to post-verdict infringement and the bargaining position of the patentee for licensing. Presumably any post-verdict infringement is willful and subject to enhanced damages.
However, filing a new lawsuit to account for ongoing infringement certainly does not promote judicial economy. Alternatively, the patent holder, having just emerged victorious, may now be forced into a compulsory license or covenant-not-to-sue, but the value of a patent is often considerably greater after it has traversed the litigation gauntlet.
New strategic paradigm
The bottom line? The Supreme Court’s rejection of the long-standing presumption for permanent injunctions in patent suits materially affects the business decisions of would-be plaintiffs and defendants. Two district court decisions have already denied requests for permanent injunctions based on eBay, one of which is currently on appeal to the Federal Circuit.
Patent holders and potential infringers must consider the effect of eBay as they plan their litigation strategies in the future.
Related articles
• Gina Carter: Intellectual Property: Are you an “infringer?”
• Gina Carter: IP infringement – avoiding liability for officers & directors