From "Wealth of Ideas" e-newsletter, 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".