Supreme Court Chooses the Middle Ground in the eBay Case

Wealth of Ideas Newsletter, 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 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.