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Wealth of Ideas, December 2005
The "world's largest yard sale" is about to
go to the Supreme Court, which decided on November 28
to hear the patent infringement case between eBay and
the small patent holding company MercExchange. The case
as it stands concerns eBay's "Buy It Now"
feature and fixed-price auctions, which MercExchange
claims infringes its patents on using networked computers
to create an online market or auction. The Supreme Court
is to decide whether or not to uphold the permanent
injunction issued against eBay in March by the U.S.
Court of Appeals for the Federal Circuit (CAFC).
Besides the fact that this is a sensational case because
of the household name involved - eBay, where millions
of people buy anything and everything from auto parts
to antiques - the case stunned the patent world as it
has the potential to upend the precedent of a district
court issuing a permanent injunction whenever there
is a finding of infringement in a patent lawsuit. Basically,
eBay wants the decision of whether to issue injunctive
relief to be decided on a case-by-case basis. eBay's
petition to the Supreme Court asked that the four-part
"injunctive relief test"1 be applied
to patent cases instead of simply automatically applying
such relief.
No one expected the Supreme Court to grant eBay a Writ
of Certiorari (a decision by the Supreme Court to hear
an appeal from a lower court). Although the law as it
currently stands states that the courts "may"
grant a permanent injunction, such injunction was almost
automatic save for the cases where public health or
safety was concerned, or when national security or other
extraordinary circumstances were an issue.
The whole dispute goes back to a court case in 2003,
when eBay was sued in a Norfolk, VA court by Thomas
G. Woolston, a lone inventor, former soldier and ex-CIA
employee, who had patented a method of making online
bids using credit cards (and who founded MercExchange).
The jury sided with Woolston and ordered eBay to pay
$29.5 million in past damages (later reduced to $25
million by the CAFC).
The District court in Virginia is still slated to rule
on an important issue of the MercExchange patent case:
the auction patent, which may cover eBay's core auction
business in its entirety. (That patent was thrown out
on summary judgment in the original case, but that decision
was overturned by the appeals court and remanded for
trial.)
And the $25 million already awarded to MercExchange
might look like a drop in the bucket if the permanent
injunction order is reinstated and halts 35% of eBay's
business model, forcing eBay to take a license on MercExchange's
terms (although eBay may have already found a work-around
that allows it to continue business as usual without
infringing MercExchange's patents). No matter what happens,
it looks like eBay is in for an expensive fight.
Add to the mix the fact that MercExchange's patents
are in reexamination in the Patent Office, and you have
the makings of a very interesting year ahead for both
eBay and MercExchange - and the patent landscape as
a whole.
Editorial Comment:
An attempt to deny permanent injunction to patent holders
who do not practice their own inventions is the subject
of a massive lobbying campaign spearheaded by Microsoft
and eBay and supported by a few other companies who
perceive themselves as targets of patent infringement
lawsuits. This campaign resulted in the introduction
of the Patent Reform Act of 2005, which initially attempted
to strike down permanent injunctive relief for holders
of "paper" patents. It was widely perceived
as unconstitutional, because the US Constitution guarantees
the patentees an "exclusive right to their inventions,"
i.e. an injunctive relief. Consequently, the latest
draft of the patent reform bill dropped this proposed
change.
An attempt to resurrect this issue at the Supreme Court
threatens to, in effect, create a compulsory license,
which does not exist in the US and has been abandoned
in most industrial countries. This is nothing short
of an assault at the very heart of the US patent system.
If the Supreme Court takes away the injunctive relief
from patent holders, not only it will significantly
diminish their property rights (already diminished due
to the Supreme Court's decision in the Festo case, all
but eliminating the doctrine of equivalents) but it
will also promote patent litigation as the defendants
will be in no worse position if they litigate and lose
than if they settle out of court.
Footnotes:
1. The four factors of this test are:
1. Will the plaintiff suffer irreparable harm from
the court's failure to grant an injunction? MercExchange's
failure to move for a preliminary injunction suggested
to the CAFC that the plaintiff would not suffer such
irreparable harm from the lack of a permanent injunction.
2. Does an adequate remedy exist in the form of damages?
The CAFC cited MercExchange's willingness to settle
for monetary damages as proof that this requirement
was satisfied.
3. Would the injunction be in the public interest? The
court found that public interest weighed equally in
favor of both parties - MercExchange because of the
need to preserve the integrity of the patent system,
and eBay because the patentee does not practice its
inventions, so a permanent injunction would not benefit
the public.
4. In whose favor does the balance of hardships tip?
The CAFC found that the balance weighed slightly in
eBay's favor, given that "[w]hile it is important
to respect the rights of the patent holder, in this
case, the plaintiff exists solely to license its patents
or to sue to enforce them, and not to develop or commercialize
them".
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