Patent Injunctions After eBay: The Bidding Is Open on Who Really Benefits

When faced with the threat of a crippling injunction, many businesses would rather pay for a patent license than spend millions litigating an uncertain result. This simple principle lies at the heart of what has been called the 'licensing-by-litigation' model, and has led to numerous battles over patent rights.

The battle lines have become particularly acute in cases involving companies that do not make or sell products, but claim patent rights to core technologies used throughout an industry. Such companies often threaten permanent injunctive relief against accused infringers as a tactic for negotiating higher fees for patent licenses. To the extent their chances of actually obtaining an injunction are diminished, so are their chances of securing a license through threats of litigation.

In an eagerly awaited decision, the U.S. Supreme Court recently addressed these issues in eBay, Inc. v. MercExchange, L.L.C., __ U.S. __, 126 S.Ct. 1837 (2006). In a unanimous opinion, the Court held that permanent injunctive relief in patent cases is not nearly automatic (as the Federal Circuit had held), but is discretionary, determined by using the same four-factor test applied in any other case.

While significant for any company defending against threatened injunctive relief, the Court's eBay decision did not drastically alter the landscape in patent cases, much less sound the death knell for the licensing-by-litigation model. Indeed, the ruling's lasting implications do not overwhelmingly favor either side in such patent battles. Rather, the lead and concurring opinions provide plenty of fodder to both sides in the bidding war over victory rights.

Background

The eBay plaintiff, MercExchange, is a type of patent holding company referred to as a 'non-practicing entity' (NPE) ' a company that owns patents but does not engage in commercial activity practicing the patents. Along with a huge increase in the number of patent applications filed in the last 20 years, the number of NPEs has risen rapidly.

Companies such as eBay complain that NPEs are damaging the economy and stifling legitimate competition by threatening to enforce patents of dubious validity ' often extracting high licensing fees from companies that would rather pay such fees than defend against an even more expensive lawsuit. In turn, NPEs counter that they are merely enforcing legitimate patent rights, having often acquired patents from individual inventors who lack the financial wherewithal to take their products to market, much less take on an industry behemoth such as eBay.

In the eBay case, MercExchange owned patents including a business method patent for an electronic market designed to facilitate the sale of goods. Although MercExchange merely licensed its patents and did not make or sell any goods, it had acquired the patents from the sole inventor, who allegedly tried unsuccessfully to commercialize the inventions before founding MercExchange. MercExchange asserted that its patents covered the fixed-price purchasing feature of eBay's Web site and demanded a license accordingly. After eBay refused, MercExchange sued for patent infringement.

Following a jury verdict for Merc-Exchange of validity and infringement, the U.S. District Court for the Eastern District of Virginia denied MercExchange's motion for permanent injunctive relief. See, 275 F. Supp. 2d 695 (2000). In doing so, the court applied the traditional four-factor test for injunctive relief, whereby a plaintiff must show: 1) irreparable injury; 2) the inadequacy of available remedies at law (such as monetary damages); 3) a balance of hardships between the parties that tips in its favor; and 4) that the public interest would not be disserved.

Most notably, the court concluded that MercExchange's 'willingness to license its patents' and its 'lack of commercial activity in practicing the patents' were sufficient to establish that it would not suffer irreparable harm if an injunction did not issue. Id. at 712.

On appeal, the Federal Circuit reversed. See, 401 F.3d 1323 (2005). Specifically, it articulated a 'general rule' ' unique to patent cases ' 'that a permanent injunction will issue once infringement and validity have been adjudged.' Id. at 1338. Conversely, the court indicated that injunctions should be denied only in 'unusual' cases, under 'exceptional circumstances' and 'in rare instances ' to protect the public interest.' Id. The Supreme Court granted certiorari to determine the appropriateness of that general rule.

The Supreme Court's Unanimous Opinion

In a unanimous opinion delivered by Justice Clarence Thomas on May 15, 2006, the Supreme Court expressly rejected the Federal Circuit's ruling that permanent injunctions in patent cases are granted as a general rule absent exceptional circumstances. See, 126 S.Ct. at 1841. Instead, it held that a patentee must satisfy the same four-factor test for injunctive relief applied in other cases. The Court further held that a district court's issuance of such relief is entirely discretionary.

The Court made two main arguments to support its ruling. First, it explained that the Patent Act itself indicates that injunctive relief is discretionary, and may issue only in accordance with principles of equity. Second, the Court analogized to the Copyright Act, which likewise provides that injunctive relief is discretionary with the district court.

Notably, the Court rejected the position (urged by eBay and adopted by the district court) that a company's 'willingness to license its patents' and 'lack of commercial activity' constitute sufficient grounds to deny permanent injunctive relief. In other words, the Court was unwilling categorically to deny permanent injunctive relief to NPEs such as MercExchange. Indeed, it reaffirmed that such relief may issue even where an NPE has unreasonably declined to use a patent.

The Concurring Opinions:
A Look Backward or Forward?

Some of the most interesting language in eBay exists in its concurring opinions, which alternately look to the past and future as guides to determining the appropriateness of injunctive relief.

Justice John Roberts' concurring opinion (joined by Justices Antonin Scalia and Ruth Bader Ginsberg) agreed that the discretionary four-factor test controls, but looked to history for guidance in its application, emphasizing that for roughly 200 years, courts have granted injunctive relief upon a finding of infringement in 'the vast majority of patent cases.' Id. at 1841. Justice Roberts explained that this long tradition reflects the difficulty of protecting a patentee's right to exclude through monetary remedies. In essence, he argued that while this historical practice does not justify a general rule that permanent injunctions should issue, it should be a guide for the future, noting that 'a page of history is worth a volume of logic.' Id.

While agreeing that the discretionary test governs and that history is instructive, Justice Anthony Kennedy's concurrence (joined by Justices John Stevens, David Souter and Stephen Breyer) looked to present realities and future likelihoods for guidance. Justice Kennedy disagreed that the historical practice of granting injunctive relief shows the difficulty of protecting the right to exclude through monetary remedies. Instead, he explained, the pattern simply illustrates the results of the four-factor test in the contexts prevalent at that time, but not necessarily now.

Implicitly adopting many of eBay's arguments, Justice Kennedy identified several new considerations that were not present in earlier cases. He explained that the courts' equitable discretion over injunctions is well suited to allow courts to adapt to such technological and legal developments, emphasizing that courts must determine whether past practice fits the circumstances of the cases now before them. In short, he suggested that new developments may well cut against the appropriateness of granting injunctive relief in patent cases.

Future Implications

Importantly, eBay does not represent a sea change in patent law jurisprudence. Although the Court reaffirmed use of the traditional four-factor test, prudent parties and their counsel have always addressed such factors when seeking injunctive relief in patent cases.

While it is clearly significant that there is no 'general rule' concerning permanent injunctions in patent cases, the true impact of eBay will be most strongly felt by a narrow class of litigants: NPEs and those they accuse of infringement. Whether they invoke the past, present or future, both types of businesses will be able to find support in at least some aspect of the eBay decision.

For example, NPEs likely will urge conformance with the historical practice of granting permanent injunctive relief in the majority of patent cases, as counseled by Justice Roberts' concurrence. This history, they will argue, shows that permanent injunctive relief ' and not monetary damages ' is usually the only way to avoid irreparable harm and protect a patentee's right to exclude.

Moreover, NPEs may find much to celebrate in the Court's unanimous opinion. Most notably, the Court refused to deny permanent injunctive relief categorically to NPEs, rejecting the position that a company's willingness to license its patents and lack of commercial activity defeated a claim of irreparable harm. This alone at least partially vindicates NPEs, particularly given the Court's reaffirmation that such companies may obtain injunctive relief even where they unreasonably refuse to practice their patents.

NPEs also will likely seize upon language in the Court's unanimous opinion validating patent holders 'such as university researchers or self-made inventors,' whose licensing activity and failure to commercialize was essentially deemed legitimate by the Court's observation that such patentees could satisfy the traditional four-factor test for injunctive relief. Id. at 1840. One can reasonably expect that many NPEs will seek to cast themselves as championing the rights of such patent holders, just as MercExchange did in eBay. NPEs may also argue that the Court implicitly recognized that such innovators' activities serve the public interest and thereby weigh in favor of injunctive relief.

For their part, accused infringers may argue that the Court's unanimous opinion singled out those innovators precisely to distinguish them from the vast majority of NPEs. Implicit in the Court's statements, they may contend, is the notion that other types of NPEs lack such legitimacy and should have difficulty satisfying the four-factor test.

In addition, accused infringers likely will focus on language in Justice Kennedy's concurrence. For example, Justice Kennedy noted that the rise of NPEs has led to an industry where firms use patents not to make or sell goods, but instead to threaten injunctive relief as a bargaining tool for obtaining licensing fees (sometimes exorbitant ones). Accused infringers likely will argue that those statements recognize that such conduct is disfavored as a matter of public policy and thus weighs against the entry of an injunction. Whether an NPE has a history of charging excessive license fees may therefore become more relevant in determining injunctive relief than in the past.

Likewise, accused infringers probably will seize upon Justice Kennedy's contention that where the patented invention is only a small component of the infringing product and the threat of injunctive relief is used simply for undue negotiating leverage, monetary damages could be adequate and an injunction may not serve the public interest. Indeed, even in cases that do not involve NPEs, one can expect that defendants will cite this language to argue that injunctive relief is inappropriate both because there is no irreparable harm and because it would disserve the public interest.

Finally, companies accused of infringing business method patents will undoubtedly find solace in Justice Kennedy's concurrence. Specifically, he notes the rapid proliferation of such patents, and suggests that their potential vagueness and suspect validity may affect whether injunctive relief is appropriate. These are arguments one can expect to hear in virtually any patent case involving business method patents in the future, although NPEs undoubtedly will counter that such considerations have no application to patents that have been adjudicated valid.

On balance, the eBay opinion raises the bar for obtaining permanent injunctive relief simply because there is no 'general rule' that such relief is granted. As such, it somewhat lessens the negotiating leverage of NPEs and other patent holders. Some accused infringers will thereby be emboldened to refuse a license and risk their chances at trial.

That being said, the threat of injunctive relief will remain viable in most cases, and one can expect that the licensing-by-litigation model will continue into the foreseeable future. Given the high costs of patent litigation, many businesses will still opt to license or settle rather than incur such costs.

In the meantime, while falling short of drastically altering the landscape in patent cases, the eBay decision will allow both sides in patent battles to claim partial victory.

When faced with the threat of a crippling injunction, many businesses would rather pay for a patent license than spend millions litigating an uncertain result. This simple principle lies at the heart of what has been called the 'licensing-by-litigation' model, and has led to numerous battles over patent rights.

The battle lines have become particularly acute in cases involving companies that do not make or sell products, but claim patent rights to core technologies used throughout an industry. Such companies often threaten permanent injunctive relief against accused infringers as a tactic for negotiating higher fees for patent licenses. To the extent their chances of actually obtaining an injunction are diminished, so are their chances of securing a license through threats of litigation.

In an eagerly awaited decision, the U.S. Supreme Court recently addressed these issues in eBay, Inc. v. MercExchange, L.L.C. , __ U.S. __, 126 S.Ct. 1837 (2006). In a unanimous opinion, the Court held that permanent injunctive relief in patent cases is not nearly automatic (as the Federal Circuit had held), but is discretionary, determined by using the same four-factor test applied in any other case.

While significant for any company defending against threatened injunctive relief, the Court's eBay decision did not drastically alter the landscape in patent cases, much less sound the death knell for the licensing-by-litigation model. Indeed, the ruling's lasting implications do not overwhelmingly favor either side in such patent battles. Rather, the lead and concurring opinions provide plenty of fodder to both sides in the bidding war over victory rights.

Background

The eBay plaintiff, MercExchange, is a type of patent holding company referred to as a 'non-practicing entity' (NPE) ' a company that owns patents but does not engage in commercial activity practicing the patents. Along with a huge increase in the number of patent applications filed in the last 20 years, the number of NPEs has risen rapidly.

Companies such as eBay complain that NPEs are damaging the economy and stifling legitimate competition by threatening to enforce patents of dubious validity ' often extracting high licensing fees from companies that would rather pay such fees than defend against an even more expensive lawsuit. In turn, NPEs counter that they are merely enforcing legitimate patent rights, having often acquired patents from individual inventors who lack the financial wherewithal to take their products to market, much less take on an industry behemoth such as eBay.

In the eBay case, MercExchange owned patents including a business method patent for an electronic market designed to facilitate the sale of goods. Although MercExchange merely licensed its patents and did not make or sell any goods, it had acquired the patents from the sole inventor, who allegedly tried unsuccessfully to commercialize the inventions before founding MercExchange. MercExchange asserted that its patents covered the fixed-price purchasing feature of eBay's Web site and demanded a license accordingly. After eBay refused, MercExchange sued for patent infringement.

Following a jury verdict for Merc-Exchange of validity and infringement, the U.S. District Court for the Eastern District of Virginia denied MercExchange's motion for permanent injunctive relief. See, 275 F. Supp. 2d 695 (2000). In doing so, the court applied the traditional four-factor test for injunctive relief, whereby a plaintiff must show: 1) irreparable injury; 2) the inadequacy of available remedies at law (such as monetary damages); 3) a balance of hardships between the parties that tips in its favor; and 4) that the public interest would not be disserved.

Most notably, the court concluded that MercExchange's 'willingness to license its patents' and its 'lack of commercial activity in practicing the patents' were sufficient to establish that it would not suffer irreparable harm if an injunction did not issue. Id. at 712.

On appeal, the Federal Circuit reversed. See, 401 F.3d 1323 (2005). Specifically, it articulated a 'general rule' ' unique to patent cases ' 'that a permanent injunction will issue once infringement and validity have been adjudged.' Id. at 1338. Conversely, the court indicated that injunctions should be denied only in 'unusual' cases, under 'exceptional circumstances' and 'in rare instances ' to protect the public interest.' Id. The Supreme Court granted certiorari to determine the appropriateness of that general rule.

The Supreme Court's Unanimous Opinion

In a unanimous opinion delivered by Justice Clarence Thomas on May 15, 2006, the Supreme Court expressly rejected the Federal Circuit's ruling that permanent injunctions in patent cases are granted as a general rule absent exceptional circumstances. See, 126 S.Ct. at 1841. Instead, it held that a patentee must satisfy the same four-factor test for injunctive relief applied in other cases. The Court further held that a district court's issuance of such relief is entirely discretionary.

The Court made two main arguments to support its ruling. First, it explained that the Patent Act itself indicates that injunctive relief is discretionary, and may issue only in accordance with principles of equity. Second, the Court analogized to the Copyright Act, which likewise provides that injunctive relief is discretionary with the district court.

Notably, the Court rejected the position (urged by eBay and adopted by the district court) that a company's 'willingness to license its patents' and 'lack of commercial activity' constitute sufficient grounds to deny permanent injunctive relief. In other words, the Court was unwilling categorically to deny permanent injunctive relief to NPEs such as MercExchange. Indeed, it reaffirmed that such relief may issue even where an NPE has unreasonably declined to use a patent.

The Concurring Opinions:
A Look Backward or Forward?

Some of the most interesting language in eBay exists in its concurring opinions, which alternately look to the past and future as guides to determining the appropriateness of injunctive relief.

Justice John Roberts' concurring opinion (joined by Justices Antonin Scalia and Ruth Bader Ginsberg) agreed that the discretionary four-factor test controls, but looked to history for guidance in its application, emphasizing that for roughly 200 years, courts have granted injunctive relief upon a finding of infringement in 'the vast majority of patent cases.' Id. at 1841. Justice Roberts explained that this long tradition reflects the difficulty of protecting a patentee's right to exclude through monetary remedies. In essence, he argued that while this historical practice does not justify a general rule that permanent injunctions should issue, it should be a guide for the future, noting that 'a page of history is worth a volume of logic.' Id.

While agreeing that the discretionary test governs and that history is instructive, Justice Anthony Kennedy's concurrence (joined by Justices John Stevens, David Souter and Stephen Breyer) looked to present realities and future likelihoods for guidance. Justice Kennedy disagreed that the historical practice of granting injunctive relief shows the difficulty of protecting the right to exclude through monetary remedies. Instead, he explained, the pattern simply illustrates the results of the four-factor test in the contexts prevalent at that time, but not necessarily now.

Implicitly adopting many of eBay's arguments, Justice Kennedy identified several new considerations that were not present in earlier cases. He explained that the courts' equitable discretion over injunctions is well suited to allow courts to adapt to such technological and legal developments, emphasizing that courts must determine whether past practice fits the circumstances of the cases now before them. In short, he suggested that new developments may well cut against the appropriateness of granting injunctive relief in patent cases.

Future Implications

Importantly, eBay does not represent a sea change in patent law jurisprudence. Although the Court reaffirmed use of the traditional four-factor test, prudent parties and their counsel have always addressed such factors when seeking injunctive relief in patent cases.

While it is clearly significant that there is no 'general rule' concerning permanent injunctions in patent cases, the true impact of eBay will be most strongly felt by a narrow class of litigants: NPEs and those they accuse of infringement. Whether they invoke the past, present or future, both types of businesses will be able to find support in at least some aspect of the eBay decision.

For example, NPEs likely will urge conformance with the historical practice of granting permanent injunctive relief in the majority of patent cases, as counseled by Justice Roberts' concurrence. This history, they will argue, shows that permanent injunctive relief ' and not monetary damages ' is usually the only way to avoid irreparable harm and protect a patentee's right to exclude.

Moreover, NPEs may find much to celebrate in the Court's unanimous opinion. Most notably, the Court refused to deny permanent injunctive relief categorically to NPEs, rejecting the position that a company's willingness to license its patents and lack of commercial activity defeated a claim of irreparable harm. This alone at least partially vindicates NPEs, particularly given the Court's reaffirmation that such companies may obtain injunctive relief even where they unreasonably refuse to practice their patents.

NPEs also will likely seize upon language in the Court's unanimous opinion validating patent holders 'such as university researchers or self-made inventors,' whose licensing activity and failure to commercialize was essentially deemed legitimate by the Court's observation that such patentees could satisfy the traditional four-factor test for injunctive relief. Id. at 1840. One can reasonably expect that many NPEs will seek to cast themselves as championing the rights of such patent holders, just as MercExchange did in eBay. NPEs may also argue that the Court implicitly recognized that such innovators' activities serve the public interest and thereby weigh in favor of injunctive relief.

For their part, accused infringers may argue that the Court's unanimous opinion singled out those innovators precisely to distinguish them from the vast majority of NPEs. Implicit in the Court's statements, they may contend, is the notion that other types of NPEs lack such legitimacy and should have difficulty satisfying the four-factor test.

In addition, accused infringers likely will focus on language in Justice Kennedy's concurrence. For example, Justice Kennedy noted that the rise of NPEs has led to an industry where firms use patents not to make or sell goods, but instead to threaten injunctive relief as a bargaining tool for obtaining licensing fees (sometimes exorbitant ones). Accused infringers likely will argue that those statements recognize that such conduct is disfavored as a matter of public policy and thus weighs against the entry of an injunction. Whether an NPE has a history of charging excessive license fees may therefore become more relevant in determining injunctive relief than in the past.

Likewise, accused infringers probably will seize upon Justice Kennedy's contention that where the patented invention is only a small component of the infringing product and the threat of injunctive relief is used simply for undue negotiating leverage, monetary damages could be adequate and an injunction may not serve the public interest. Indeed, even in cases that do not involve NPEs, one can expect that defendants will cite this language to argue that injunctive relief is inappropriate both because there is no irreparable harm and because it would disserve the public interest.

Finally, companies accused of infringing business method patents will undoubtedly find solace in Justice Kennedy's concurrence. Specifically, he notes the rapid proliferation of such patents, and suggests that their potential vagueness and suspect validity may affect whether injunctive relief is appropriate. These are arguments one can expect to hear in virtually any patent case involving business method patents in the future, although NPEs undoubtedly will counter that such considerations have no application to patents that have been adjudicated valid.

On balance, the eBay opinion raises the bar for obtaining permanent injunctive relief simply because there is no 'general rule' that such relief is granted. As such, it somewhat lessens the negotiating leverage of NPEs and other patent holders. Some accused infringers will thereby be emboldened to refuse a license and risk their chances at trial.

That being said, the threat of injunctive relief will remain viable in most cases, and one can expect that the licensing-by-litigation model will continue into the foreseeable future. Given the high costs of patent litigation, many businesses will still opt to license or settle rather than incur such costs.

In the meantime, while falling short of drastically altering the landscape in patent cases, the eBay decision will allow both sides in patent battles to claim partial victory.