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Manatt, Phelps & Phillips, LLP

U.S. Supreme Court Rejects General Rule In Favor Of Injunctions For Patent Holders That Have Proven Actionable Infringement
In a decision that theoretically decreases the power of patent holders, the U.S. Supreme Court recently ruled that there is no general rule that a patent holder, having proven that it has a valid, enforceable patent which another party has infringed, is entitled to a permanent injunction against the infringement. eBay, Inc. v. MercExchange, L.L.C. At the same time, undercutting attacks on “patent trolls,” the Supreme Court held that the fact that the patent holder does not practice its patent, and either withholds the invention from public use or selectively licenses the patents to third parties, does not automatically preclude the patent holder from obtaining an injunction against an infringing third party to which the patent holder does not want to issue a license. In sum, instead of having bright-line rules to follow in considering whether to enter an injunction in a patent infringement case, each federal trial court must apply the traditional four-factor test for injunctions, which test is not specific to patent cases, and reach a conclusion suited to the particular facts of the case.

I. Factual Background of the Case

Plaintiff MercExchange, the instigator of this important case, holds several “business-method” patents, dating to the mid 1990s, and relating to Internet-based auctions. (Precise descriptions of the patents are not necessary to understand the legal and business issues in the eBay judicial opinion.) Business-method patents, covering novel business operations, usually implemented by computers, have been accepted as a category of patents for less than 10 years. Many companies and commentators, not necessarily addressing MercExchange’s patents, have complained that often these patents cover simple and obvious methods or processes and thus do not merit legal protection.

MercExchange does not practice its patents, but just licenses them for others to use. Consequently, MercExchange has been branded an opportunistic patent troll in some quarters. Patent trolls have frustrated many legitimate companies that manufacture products or provide services to customers and find themselves threatened by seemingly inert trolls on the sidelines of their industries. Defenders of patent trolls (who, obviously, do not usually use that derogatory term) point out that these firms provide a market for small-time inventors to sell and thus receive compensation for their patents, without having to invest in developing marketable products or services based on the patents, and thereby stimulate innovation for the overall benefit of society. Other voices, particularly coming from the pharmaceutical industry, emphasize the importance of strong patent protection in encouraging companies and individuals to invest in research and development that can yield similar social benefits.

eBay, the main defendant in the case, is the popular online auction house and the dominant player in this market. Half.com, another defendant in the case, and a wholly owned eBay subsidiary, owns and operates an Internet website allowing customers to search for and purchase goods posted on other websites. ReturnBuy was a third defendant that dropped out of the ensuing litigation midway through it.

MercExchange tried but failed to get eBay, Half.com and ReturnBuy to take licenses to the patents in question out of court. Therefore, MercExchange felt compelled to sue the three companies for patent infringement.

II. Legal Background of the Case

Nearly 100 years ago, in the case of Continental Paper Bag Co. v. Eastern Paper Bag Co., the Supreme Court held that the quintessential power of a patent holder is the power to exclude others from practicing the patent. Therefore, a federal trial court should not refuse to enter an injunction protecting a patent holder from infringement just because the patent holder is withholding its invention from public use.

More than 50 years ago, the U.S. Congress wrote the patent statute still in effect today, providing that federal trial courts may grant injunctions against infringement in patent cases. The U.S. Court of Appeals for the Federal Circuit, which hears appeals in patent infringement cases from all over the country and hence often establishes patent law for the country, has repeatedly held – in conformity with the clear meaning of the patent statute – that trial courts have discretion as to how to resolve the injunction decision in patent cases. See, e.g., Windsurfing Int’l, Inc. v. AMF, Inc.; Kearns v. Chrysler Corp.; Rite-Hite Corp. v. Kelley Co., Inc.; Odetics Inc. v. Storage Tech. Corp.

In practice, however, when a federal trial court finds that a patent holder has a valid, enforceable patent that has been infringed, the court very often will enter a permanent injunction against the infringer. The Federal Circuit has thus also often stated that, although trial courts do have discretion to reject a patent holder’s request for such an injunction, there is a general rule in such cases that an injunction should issue. See, e.g., W.L. Gore & Assocs., Inc. v. Garlock, Inc.; Richardson v. Suzuki Motor Co., Ltd. The rule is grounded in the notion that a patent is property, and any property owner has the right to exclude others from using the property.

With the simultaneous rise of business-method patents and patent-holding companies in the last decade, the patent holder’s virtual entitlement to an injunction against infringement has become a critical business issue for high-tech and other companies. Meanwhile, the pharmaceutical industry has depended on this power of patents for many years. These issues were at the center of the eBay decision.

III. The Trial Court’s Decision

In 2001, MercExchange filed a patent infringement case against eBay and the other defendants in federal court in Norfolk, VA. In 2003, the case went to trial, where the jury found that eBay and Half.com (hereinafter, collectively, “eBay”) infringed several of MercExchange’s valid, enforceable patents, and awarded MercExchange $35 million in damages.

Although the jury verdict vindicated MercExchange, the trial court declined the victor’s request for a permanent injunction against eBay. The trial court invoked the traditional four-part test for an injunction, evaluating (1) whether MercExchange would suffer irreparable harm in the absence of an injunction; (2) whether MercExchange had an adequate remedy at law; (3) the balance of hardships as between MercExchange and eBay; and (4) the public interest. The trial court applied the test as follows:

* The court reasoned that MercExchange would not suffer irreparable harm in the absence of an injunction for at least four reasons. MercExchange (1) does not practice its patents, (2) was willing to license eBay to use the patents, (3) made comments to the media to the effect that it sought only damages, not an injunction, from eBay and (4) never sought a preliminary injunction against eBay (to be in place during the litigation).

* The trial court further found that MercExchange’s monetary damages award constituted an adequate remedy, such that no additional equitable relief was required, again because the company had been willing to license eBay to use the patents in exchange for monetary payments.

* The trial court further found that the balance of hardships weighed against an injunction. Again the trial court noted that MercExchange could be compensated for the infringement in money damages. And the court saw clear practical benefits – for not only the parties but also itself – in not having to monitor eBay’s compliance with an injunction. The obviously exasperated court observed:

This case has been one of the more, if not the most, contentious cases that this court has ever presided over. From day one the parties have been unable to agree on anything… The court predicts that if it granted the plaintiff’s request for a permanent injunction, the battle would continue to be as contentious as ever. For example, the defendants have argued that they can design around the patents with relative ease. The plaintiff, on the other hand, continues to strenuously assert that such a design around is impossible. …The court envisions contempt hearing after contempt hearing requiring the court to essentially conduct separate infringement trials to determine if the changes to the defendants’ systems violates [sic] the injunction. This will result in extraordinary costs to the parties, as well as considerable judicial resources.

* Considering whether an injunction served the public interest, the trial court acknowledged that usually the enforcement of patent rights serves the public interest. But in this case, the court heeded eBay's assertion of “a growing concern over the issuance of business-method patents, which forced the [U.S. Patent and Trademark Office; the 'PTO'] to implement a second level review policy and caused legislation to be introduced in Congress to eliminate the presumption of validity for such patents.” The court found that the denial of an injunction served the public interest in this case.

Summing up the multiple factors in the equation, the trial court ruled that an injunction should not issue.

IV. The Federal Circuit’s Decision

The U.S. Court of Appeals for the Federal Circuit considered many issues on appeal in this case in 2005. The Federal Circuit reversed the trial court’s decision against issuing an injunction.

First, the Federal Circuit stated “the general rule that a permanent injunction will issue once infringement and validity have been adjudged.” According to the appellate court, only in rare instances should trial courts depart from the general rule. For example, a trial court may decline to issue an injunction against patent infringement if the patent holder does not practice the patent, and it is needed for an important public benefit such as “to protect public health.”

Next, the Federal Circuit critiqued each of the trial court’s reasons for denying the injunction:

* The appellate court asserted that a generalized concern that the PTO issues too many unmeritorious business-method patents cannot “justify the unusual step of denying injunctive relief” in the present case.

* The Federal Circuit rebutted the logic in the trial court’s reluctance to monitor an injunction through multiple contempt proceedings. The higher court reasoned that absent an injunction MercExchange would be likely to file multiple patent infringement lawsuits against eBay, at roughly the same cost in time and resources to the litigants and the lower court.

* The appellate court would not castigate MercExchange for not practicing its patents, and showing a willingness to license them to eBay. “Injunctions are not reserved for patentees who intend to practice their patents, as opposed to those who license.” That MercExchange might have leverage over eBay to extract a large licensing payment “is a natural consequence of the right to exclude and not an inappropriate reward to a” patent holder, even one that does not practice its invention.

* Finally, the Federal Circuit discounted the relevance of MercExchange’s failure to seek a preliminary injunction against eBay, because preliminary injunctions “serve entirely different purposes” than permanent injunctions.

V. The Supreme Court’s Decision

The Supreme Court unanimously reversed the Federal Circuit, sending the case back to the trial court to reconsider the injunction question. However, the nation’s highest court produced three opinions in the case.

A. The Unanimous Opinion

The unanimous (8-0) opinion, authored by Justice Thomas, emphasized that trial courts determining whether to issue injunctions in patent infringement cases must apply the general four-part test applicable in any case: “Nothing in the Patent Act indicates that Congress intended…a departure” in patent cases from the usual analysis. (The ninth justice, Justice Alito, did not participate in the case.)

Justice Thomas criticized the trial court for appearing “to adopt certain expansive principles suggesting that injunctive relief could not issue in a broad swath of cases.” The Supreme Court rejected the notion that all patent holders that do not practice their patents, but perhaps only license them, forfeit their ability to obtain injunctions against infringers. “For example, 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.” A categorical rule disfavoring injunctions for patent holders that do not practice their inventions cannot be squared with Continental Bag, the century-old but still controlling precedent.

At the same time, Justice Thomas overturned the Federal Circuit’s general rule favoring injunctions in patent cases. Rather than being bound by such a general rule, each trial court handling a patent case has to exercise its equitable discretion on the injunction question, by conducting the long-standing multi-factor analysis that takes into account the particular facts and circumstances of the case.

Therefore, barring a settlement, the eBay trial court has a second chance to apply the injunction test and decide the injunction question in this case.

B. Chief Justice Roberts’s Concurrence

In a concurring opinion that sounded themes of stability and uniformity in the law, Chief Justice Roberts, Justice Scalia and Justice Ginsburg observed that “[f]rom at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases.” This pattern “is not surprising,” because patent holders often face irreparable injury from infringement, and money damages alone often cannot remedy the injury, two factors that weigh in favor of injunctions. Future trial courts considering issuing injunctions in patent cases should consult and take guidance from the decisions of older courts, in order to “promote the basic principle of justice that like cases should be decided alike.”

C. Justice Kennedy’s Concurrence

Justice Kennedy also wrote a concurring opinion, which Justices Stevens, Souter and Breyer joined. (The opinion was just one justice short of being a majority opinion.) This opinion also acknowledged the history of many courts issuing injunctions in patent infringement cases, and declared “that history may be instructive in applying the [injunction] test.” However, Justice Kennedy would have future trial courts give weight to this history only “when the circumstances of a case bear substantial parallels to litigation the courts have confronted before” (emphasis added), i.e., guiding trial courts to place less emphasis, compared with Justice Roberts’s views, on the historical pattern of patent injunction decisions.

Furthermore, echoing the complaints of many successful Silicon Valley companies, Justice Kennedy lamented two recent phenomena that make the landscape of the patent world different from before – and may rightfully lead future trial courts to deny injunctions in infringement cases more frequently. First is the new breed of firms (a/k/a patent trolls, although Justice Kennedy did not use that term) that holds patents without practicing them and tries to charge “exorbitant fees” to alleged infringers under threats of injunctions. Second is the burgeoning number of business-method patents, some characterized by “vagueness and suspect validity.” The presence of either of these circumstances in a patent infringement case may weigh against the issuance of an injunction against the infringement, according to four justices.

Because a trial court considers an injunction in a patent infringement case only if the patent has been upheld as valid, Justice Kennedy’s remark about suspect business-method patents is somewhat cryptic. Perhaps he was signaling that if a patent in dispute in litigation has been selected for re-examination by the PTO (in a separate administrative process) that fact may weigh against the issuance of an injunction in the litigation.

VI. Analysis of the Supreme Court Decision

It is unclear to what degree the eBay decision will alter the longstanding pattern of patent holders usually obtaining injunctions against infringers. Seven of the eight justices hearing the matter (i.e., all but Thomas) acknowledged either that, essentially, the pattern emerged for good reasons and should continue or that, at least, the pattern “may be instructive” and “helpful” to future courts considering similar questions.

Certainly, trial courts should feel freer to deny patent infringement injunctions now compared to the recent past, when the Federal Circuit insisted that injunctions should issue almost as a matter of course if patent holders have shown infringement and validity. At least, we can expect future patent infringement plaintiffs seeking injunctions to emphasize the significance of the historical pattern, while the defendant in each such case quotes Justice Kennedy and argues that his comments about patent trolls and weak business-method patents apply in this particular case.

Moreover, a change in patent licensing negotiations seems like a logical outcome of the decision. A patent holder can no longer credibly threaten an accused infringer with an automatic injunction, which weakens the patent holder’s bargaining position in license negotiations. This power shift likely means, in the short run at least, that patent holders will have to file infringement lawsuits more often than before, because accused infringers will not succumb to out-of-court injunction threats as readily as before. Another alternative is that more patent holders will accept less remunerative licensing arrangements.

When litigation commences, litigants likely will devote more resources to uncovering and presenting evidence relevant to the injunction decision, because it is now within the discretion of the trial judge, not subject to a rigid rule for or against injunctions. Alas, this change will likely make patent litigation somewhat more expensive and time-consuming.

07-01-2006

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King & Spalding

FERC Proposes to Overhaul Natural Gas Industry Regulations
During its blockbuster open meeting on June 15, 2006, the Federal Energy Regulatory Commission ("FERC" or "Commission") showcased its commitment to addressing volatility (in the form of price and supply imbalances) in the natural gas industry.

07-01-2006

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Greenberg Traurig, LLP

U.S. Supreme Court Restricts First Amendment Rights of Public Employees
The United States Supreme Court recently ruled that a deputy district attorney could be disciplined for criticizing police conduct in obtaining a search warrant, rejecting the employee's claim of First Amendment protection.

07-01-2006

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Greenberg Traurig, LLP

The United States and Germany Amend Reciprocal Tax Treaty
This GT Alert provides an outline of the how certain business and capital market provisions of the 2006 Protocol affect the Treaty and cross-border U.S.-German transactions.

07-01-2006

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Greenberg Traurig, LLP

Tax Increase Prevention and Reconciliation Act: Controlled Foreign Corporations to Benefit
On May 17, 2006, President Bush signed a $70 billion tax reconciliation bill titled the "Tax Increase Prevention and Reconciliation Act of 2005" (the "Act"). The new Act modifies and provides for extensions to a wide variety of tax provisions of the Internal Revenue Code (the "Code"). Among others, the Act provides for two different breaks for Controlled Foreign Corporations.

07-01-2006

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Goodwin Procter, LLP

U.S. Court of Appeals Vacates Hedge Fund Adviser Registration Rule
On Friday, June 23, the U.S. Court of Appeals for the District of Columbia Circuit (the "Circuit Court") vacated and remanded Rule 203(b)(3)-2 and certain related rule amendments under the Investment Advisers Act of 1940, which required registration of certain advisers to hedge funds and were sometimes collectively referred to as the "Hedge Fund Registration Rule.

07-01-2006

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Goodwin Procter, LLP

Hedge Fund Adviser Registration Rule Remains in Effect . . . For Now
The U.S. Court of Appeals for the District of Columbia Circuit has withheld issuance of the mandate vacating the
Hedge Fund Adviser Registration Rule, meaning advisers will continue to be subject to the Rule until at least August 7, 2006, unless the SEC determines it will not seek a rehearing of the court's decision.

07-01-2006

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