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Indigestion from the eBay Ruling: How Do You Spell Relief?

Wealth of Ideas Newsletter, September 2009

Did the landmark Supreme Court decision in the eBay v. MercExchange case make it more difficult for patent owners to get injunctive relief in patent infringement cases? Without a doubt! And it mostly depends on who you are – and more specifically, what you do with the patent you own.

A Brief History of the eBay Case

The legal saga began when MercExchange, LLC sued eBay Inc. for infringement of its patent related to eBay’s “Buy it Now” feature. In 2003, a Virginia jury in the US District Court for the Eastern District of Virginia found eBay guilty of willful patent infringement, but the court did not grant a permanent injunction to MercExchange – a move which would have forced eBay to stop offering the popular “Buy it Now” service to its sellers, unless it took a license under the patents-in-suit. The District Court ruled that since MercExchange did not practice its invention it was not entitled to injunctive relief.

MercExchange appealed the verdict to the Court of Appeals for the Federal Circuit (CAFC), which hears appeals on patent cases, and the CAFC reversed the District Court – granting MercExchange an injunction and citing the “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” The practice of granting permanent injunction upon finding of infringement has been consistently applied by courts for well over 100 years.

eBay appealed to the Supreme Court, which granted certiorari. The Supreme Court reversed the CAFC’s ruling – taking away MercExchange’s permanent injunction.
Moreover, the Supreme Court stated in dicta that just as the District Court erred in creating a general rule that an entity not practicing its invention cannot be entitled to injunctive relief, so too the CAFC erred in enunciating another general rule that a permanent injunction is automatic upon finding of infringement (see A. Poltorak, “Supreme Court Chooses the Middle Ground in the eBay Case”).

The Supreme Court ruled that any plaintiff seeking injunctive relief must satisfy the “four-factor test” and prove that:

  1. the patent owner has suffered an irreparable injury;
  2. the remedies available at law, such as monetary damages, are inadequate to compensate for its injury;
  3. a remedy in equity is warranted after considering the balance of hardships between the patent owner and the alleged infringer; and
  4. the public interest would not be disserved by an injunction. eBay, 126 S. Ct. at 1839.

The Aftermath of eBay

Originally, the status of the plaintiff as a practicing entity or non-practicing entity (NPE) was not supposed to be a factor in the patent owner’s rights. (NPE, or “non-practicing entity,” is the term used by the courts to describe patent owners that do not practice their patents. A “market participant” is a patent owner that does practice its patent.)

Indeed, prior to eBay, the Federal Circuit often cited the Supreme Court’s ruling in Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908) as the basis for a patent owner's right to exclusive use of his invention – and thus an injunction: "It is his absolute property ...'his title is exclusive ... he is neither bound to use his discovery himself or permit others to use it.'" (The opinion quotes Heaton Peninsular Co. v. Eureka Specialty Co., 77 F. 288, 294 (1896).)

In his concurring opinion Chief Justice Roberts, joined by Justices Scalia and Ginsburg, 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.” Urging judges to apply the four-factor test in this historical context, he further quoted Justice J. Holmes who wrote, “a page of history is worth a volume of logic.”

Unfortunately, this admonition fell on deaf ears. Since the eBay case and the emphasis on the four-factor test, it has in fact become almost impossible for NPEs to obtain injunctive relief – even after their patents have been found valid and infringed. A study published by attorneys with the Morrison & Foerster law firm in April 2008 found that in almost 90% of the post-eBay cases they documented, practicing entities were still able to obtain a permanent injunction.

And NPEs? According to Morrison and Foerster’s findings, the only NPE that was granted an injunction was a research institution whose ability to raise funds for further research through licensing patents would be compromised without injunctive relief. It seems as if judges have forgotten that a patent is a quid-pro-quo for an invention’s disclosure, not for the practice of the invention. They also seem to have forgotten that by its very definition, a patent is the right to exclude others from practicing the patented invention. How can one exclude others without an injunction? Don’t hold your breath waiting for an answer.

Compulsory Licensing for NPEs?

Although injunctive relief is likely not in the stars for an NPE these days, NPEs are still winning patent cases and licensing their patents. But now, in many cases, the court is the one setting the terms of the license – whether the parties agree or not, and whether or not the patent owner even wanted to license the patent. This practice is called “compulsory licensing.”

Is compulsory licensing such a bad thing for the patent holder? Definitely, for at least these reasons:

  1. Finding of patent infringement without an injunction means that the infringement will continue with the court’s blessing – whether the patent owner likes it or not.
  2. Knowing that a permanent injunction is no longer a credible threat, the infringer has little incentive to settle with the patent owner because at the end of the litigation, the infringer is in no worse of a situation than at the beginning – win, lose or draw. If the worst outcome is having to pay the same royalty rate as what the patent owner is asking for, why settle? Why not roll the dice? A threat of permanent injunction is no longer a valuable bargaining chip in the hands of the patent owner.
  3. Royalty rates set by courts in compulsory licenses are often significantly lower than those that could have been negotiated by a patent owner after obtaining a permanent injunction. Because a permanent injunction could mean having to totally redesign the infringing product or stop sales altogether, the infringer often agrees to a much higher royalty rate than the court would impose.

However, in some cases, permanent injunctions have been replaced with higher royalties imposed by the court on the infringer. And patent owners are usually happy about that.

The courts have got it all wrong. (See A. Poltorak, “On Patent Trolls and Injunctive Relief.”) Intellectual property is property, after all, and ownership comes with certain property rights that should not be dependent on whether the patent is practiced by its owner. And the legacy of eBay is a loss of those rights for IP.