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Wealth of Ideas, May 2006
A landmark decision of the Supreme Court in the
eBay case has left many inventors and patent owners
disappointed, as the Supreme Court sided with eBay and
set aside the Appellate Court's prior decision. A closer
reading of the decision, however, seems to indicate
a balanced approach that gave both sides something to
brag about.
By way of background, petitioner eBay is a popular
online auction site. Respondent MercExchange LLC owns
patents for an electronic exchange. eBay sought to license
the patent from MercExchange, but negotiations failed.
MercExchange sued eBay and its affiliate, Half.com,
for infringement, alleging that eBay's fixed-price "Buy-it-Now"
feature infringed its patent.
A jury in the Eastern District of Virginia found that
the patent was valid, and that eBay and Half.com had
willfully infringed it. They awarded MercExchange damages
in the amount of $35 million. Following the jury verdict,
the judge denied MercExchange's motion for a permanent
injunction. The Court of Appeals for the Federal Circuit
(CAFC) reversed that ruling, applying its "general
rule that courts will issue permanent injunctions against
patent infringement absent exceptional circumstances."
The Supreme Court said that the District Court and the
Federal Circuit both erred by departing from the four-factor
test in opposite directions. The Supreme Court set aside
the CAFC's ruling and remanded the case to the District
Court.
Four-Factor Equitable Test Applies to Patent Cases
An injunction is equitable relief. It is granted by
the courts when monetary damages and other remedies
available at law are not sufficient to compensate for
the injury. The courts have long applied a four-factor
test to the question of equitable injunctive relief:
1. irreparable injury;
2. whether remedies such as monetary damages are adequate;
3. the balance of hardships between the patent owner
and infringer; and
4. whether a permanent injunction would disserve the
public interest.
District courts have discretion in granting or denying
injunctive relief. Any abuse of such equitable discretion
may be appealed to and reviewed by the CAFC. The Supreme
Court held that these well-established principles apply
equally to patent cases. The Supreme Court cited its
earlier decision in Weinberger v. Romero-Barcelo, in
which it held that, "a major departure from the
long tradition of equity practice should not be lightly
implied." The Justices found nothing in the Patent
Act that warranted such a departure. To the contrary,
the published unanimous opinion written by Justice Thomas
cites the Patent Act that "expressly provides that
injunctions 'may' issue 'in accordance with the principles
of equity.' 35 U. S. C. §283."
Property Rights of Patents are "subject to"
the Rest of the Statute
The Supreme Court's decision addressed the question
of property rights of a patent. The Court recognized
that "the Patent Act declares that 'patents shall
have the attributes of personal property,' §261,
including 'the right to exclude others from making,
using, offering for sale, or selling the invention,'
§154(a)(1)." The Supreme Court disagreed with
the Court of Appeals, however, in that "this statutory
right to exclude alone justifies its general rule in
favor of permanent injunctive relief." The Supreme
Court observed that "the creation of a right is
distinct from the provision of remedies for violations
of that right." Justices Thomas observed that,
'The Patent Act itself indicates that patents shall
have the attributes of personal property '[s]ubject
to the provisions of this title,' 35 U. S. C. §261,
including, presumably, the provision that injunctive
relief 'may' issue only 'in accordance with the principles
of equity,' §283." Thus, relying on the language
of the Patent Act, the Supreme Court made a distinction
between the right to exclude (the property right) and
permanent injunction as the remedy for its violation.
Although patents do have the attributes of personal
property, that does not trump the four-factor test.
The Decision
In its decision, the Supreme Court scolded both the
District Court and the Court of Appeals for taking extreme
positions and erring in opposite directions.
Although the District applied the four-factor test,
its holding would have excluded from the injunctive
relief remedy "a broad swath of cases." In
a victory for independent inventors, universities and
patent holding companies, the Supreme Court rejected
the notion that either not practicing the patented invention
or granting a license under the patent would automatically
disqualify a patent owner from seeking a permanent injunction.
The Supreme Court rejected the District Court's conclusion
that "a 'plaintiff's willingness to license its
patents' and 'its lack of commercial activity in practicing
the patents' would be sufficient to establish that the
patent holder would not suff er irreparable harm if
an injunction did not issue." Justice Thomas wrote
for the unanimous Court: "some patent holders,
such as university researchers or self-made inventors,
might reasonably prefer to license their patents, rather
than undertake efforts to secure the financing necessary
to bring their works to market themselves. Such patent
holders may be able to satisfy the traditional four-factor
test, and we see no basis for categorically denying
them the opportunity to do so." The Court cited
its earlier opinion in Continental Paper Bag Co. v.
Eastern Paper Bag Co., (1908), "which rejected
the contention that a court of equity has no jurisdiction
to grant injunctive relief to a patent holder who has
unreasonably declined to use the patent."
In the opinion of the Supreme Court, the Court of Appeals
went to the other extreme when it enunciated a general
rule "that a permanent injunction will issue once
infringement and validity have been adjudged."
According to the Supreme Court, the CAFC did not properly
apply the four-factor equity test in this case and,
therefore, it vacated the CAFC's decision and remanded
the case to the District Court for fact-finding to determine
if the four-factor test was satisfied by the plaintiff.
The Supreme Court did not take a position on whether
or not permanent injunction is warranted in the eBay
case or any other specific patent case. It only concluded
that "the decision whether to grant or deny injunctive
relief rests within the equitable discretion of the
district courts, and that such discretion must be exercised
consistent with traditional principles of equity, in
patent disputes no less than in other cases governed
by such standards."
What this means for the patent owners
This long-anticipated decision - that many inventors
and patent owners had been awaiting with bated breath
- will likely have a limited effect on the outcome of
patent cases. Firstly, only a very small percentage
of patent cases ever reaches trial. Historically, only
three to four percent of filed cases are tried - most
are settled or resolved on motion.
Based on the analogy with the copyright law drawn by
the Supreme Court, one can anticipate that, like copyright
cases, most patent cases will result in a permanent
injunction, once infringement is established.
Moreover, even if an injunction is not granted, in
the absence of a compulsory license, the prevailing
patent owner can file a subsequent case in which the
issues of validity and infringement will be likely res
judicata. Such a case will likely proceed quickly to
a hearing in damages and a likely finding of willful
infringement.
On the other hand, the law may develop in a different
direction if some judges take to heart the dicta in
the concurring opinion of Justice Kennedy and deny injunction
to non-practicing entities, to owners of business method
patents, and in those cases where the patented invention
is but a small component of a larger system.
Although most non-practicing patent owners, such as
patent holding companies, independent inventors and
universities, do not wish to enjoin the infringer from
practicing their invention, which would deny them income
from royalty payments if these infringers were to license
their patents, the threat of injunction is what often
brought the infringers to the negotiating table. Two
things could be said with certainty to follow from this
Supreme Court decision: it will promote litigiousness
as the alleged infringers, emboldened by now less likely
prospect of injunction, will become more recalcitrant;
and, secondly, it will drive down settlement amounts
since the risk factors in the equation have now changed.
Conclusion
In its decision, the Supreme Court took the middle
ground and, to some extent, gave something to both sides.
eBay and its supporters can brag that they won, and
win they did - there will be no automatic injunction
in patent cases. The universities and independent inventors
can also celebrate that the threat of eliminating a
remedy of injunctive relief for non-practicing entities
has passed. All inventors are now equal… although
some may still be more equal than the others.
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