From "Wealth of Ideas" e-newsletter, June 2006

When the Supreme Court earlier this year ruled in favor of eBay, there was still some hope left. After all, Justice Thomas wrote for the unanimous court: "some patent holders, such as university researchers or self-made inventors… may be able to satisfy the traditional four-factor test, and we see no basis for categorically denying them the opportunity to do so" (See A. Poltorak, "Supreme Court Chooses the Middle Ground in the eBay Case").

Moreover, Chief Justice Roberts in his concurring opinion appealed to judges to respect the long tradition of granting injunctive relief upon a finding of infringement. He wrote, "From at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases." Alas, all hope was dashed in the first post-eBay decision out of the Eastern District of Texas in z4 Technologies, Inc. v. Microsoft.

The Jury in this case ruled in favor of z4, finding Microsoft to have willfully infringed z4's patents. The Court, however, declined to grant a permanent injunction to z4. In its decision, Judge Davis relied on the traditional four-factor equity test:

1. Irreparable injury. z4 is a patent holding company. As such, it does not make or sell any products, instead relying on patent licensing as its business model. Because the patent holder does not practice its invention, the Court decided that the Irreparable Injury factor weighed in favor of the infringer, Microsoft:

"In the absence of a permanent injunction against Microsoft, z4 will not suffer lost profits, the loss of brand name recognition or the loss of market share because of Microsoft's continued sale of the infringing products. These are the type of injuries that are often incalculable and irreparable… z4 can be compensated for any harm it suffers in the way of future infringement at the hands of Microsoft by calculating a reasonable royalty for Microsoft's continued use of the product activation technology."

2. Remedies Available at Law. This equity test seeks to determine if money is a sufficient remedy. In weighing this factor, the Court relied on the dicta (concurring opinion) of Justice Kennedy:

Justice Kennedy specifically mentioned the situation where a "patented invention is but a small component of the product the companies seek to produce" and states that in such a situation, "legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest."…

Although dicta, even when expressed by a Supreme Court justice, has no precedential power, the words of Justice Kennedy struck a chord with the Texas Court, which chose to adopt this rationale.

3. Balance of Hardships. The Court decided this factor also in favor of Microsoft, which, if enjoined from selling MS Office, would have to rewrite parts of the code, which, it successfully argued, would not be easy.

4. Public Interest. The Court decided that the interest of the public would be best served by allowing Microsoft to continue to sell its very popular Office software:
"It is likely that any minor disruption to the distribution of the products in question could occur and would have an effect on the public due to the public's undisputed and enormous reliance on these products."

The infringing product's commercial success used to inure to the benefit of the patent owner, at least as a secondary indicia of patent validity. Now, it seems, the commercial success of the infringing product helps the infringer avoid a permanent injunction. The moral: if you want to infringe with impunity, infringe big!

It is interesting to note that, as we have predicted in the previous article (see ibid.), the Court advised z4 to immediately refile the case, which would proceed straight to hearing in damages to address continuing infringement by Microsoft.

As the first post-eBay case, this decision will undoubtedly influence future decisions in the direction of denying permanent injunction to small inventors and other non-practicing entities. Welcome to the brave new world of infringements galore.