Legal analysis: The impact of the eBay case on patent infringement

The sometimes-reflexive grant of permanent injunctions in patent cases has probably come to an end as the result of last year's US Supreme Court decision in a case involving eBay.

By Lisa A. Ferrari, Cohen Pontani Lieberman & Pavane LLP -- Electronic Business, 8/15/2007

Since the early 19th century, the plaintiff in a successful patent-infringement litigation could generally expect to obtain at least two types of relief after a trial:

• Monetary damages from the infringer for the past infringement
• An order enjoining the defendant from infringing the patent in the future, such as by manufacturing, selling, using, or distributing the infringing device.

This second type of relief, known as a "permanent injunction," is considered equitable relief for those instances in which monetary damages are deemed inadequate to compensate for the plaintiff's injury. It is available in cases other than those involving patent infringement but has found perhaps its most frequent application in the area of patent law.

The sometimes-reflexive grant of permanent injunctions in patent cases has probably come to an end, however, as the result of last year's Supreme Court decision in eBay Inc. v. MercExchange, L.L.C. (126 S.Ct. 1837 [2006]).

The dispute in eBay concerned the online auction company's popular "buy it now" feature, which allows buyers to circumvent the auction process and buy a product immediately at a set price. The plaintiff, MercExchange, was the company of an inventor and patent attorney who, it was reported in the press, had filed for its patent shortly before eBay's founder created a working model of eBay. MercExchange had unsuccessfully sought to license its technology to eBay before commencing suit.

Following a jury verdict in favor of MercExchange for willful patent infringement and a multimillion-dollar jury award against eBay, the district court considered MercExchange's request for the entry of a permanent injunction. To determine whether to grant injunctive relief, the district court applied the traditional four-part test, which requires that:

1. The plaintiff has suffered irreparable injury
2. Remedies available at law, such as monetary damages, are inadequate to compensate for the injury
3. Considering the balance of hardships between the parties, an injunction is warranted
4. The public interest would not be disserved by the granting of an injunction.

(MercExchange L.L.C. v. eBay, Inc., 275 F.Supp. 695, 711 [E.D.Va. 2003])

Pointing to, among other considerations, evidence that MercExchange did not practice its patent but existed simply for the purpose of licensing its technology to others, that MercExchange had made comments to the press during trial to the effect that it only sought damages for the infringement, and that the patent at issue was one of the newer and perhaps questionable "business method patents," the district court denied injunctive relief (Id. at 712–15).

The Federal Circuit, the appellate court for patent cases, reversed. Without applying the traditional four-part test for injunctive relief, the Federal Circuit held that "absent exceptional circumstances," a patent owner was entitled to an injunction against those found to have infringed the patent (MercExchange L.L.C. v. eBay, Inc., 401 F.3d 1323, 1339 [Fed.Cir. 2005]). 

On appeal to the Supreme Court, the court unanimously reversed the Federal Circuit (eBay, Inc. v. MercExchange, L.L.C., 126 S.Ct. 1837, 1838–39). In an opinion by Justice Thomas, the court held that the four-part test for injunctive relief applies to patent-infringement cases as in other cases. The court concluded that although the district court had applied the four-part test, it had adopted "certain expansive principles suggesting that equitable relief could not apply in a broad swath of cases" (Id.at 1840). As for the Federal Circuit, it had gone too far in the other direction and assumed that there was a general rule entitling patentees to injunctive relief upon a showing of infringement and patent validity (Id.at 1841).

In one way, the Supreme Court's holding is not surprising, in that it simply clarified that the four-part test historically used to determine whether a permanent injunction should be entered applies in patent cases as in every other area of the law. The decision is perhaps more noteworthy for the comments of the concurring justices, who while agreeing that the four-part test for injunctive relief should be applied, revealed some of their views about the new economics and their impact on patent-infringement litigation.

Chief Justice Roberts, in a concurrence joined by two other justices, suggested that the courts take a lesson from history books (Id. at 1841–42; Roberts, J., concurring). Although the four-part test should be applied, wrote the chief justice, there was a reason that injunctions were generally granted in patent-infringement cases: It made sense. The patent laws grant patentees the right to exclude others from practicing the invention during the life of the patent—that is, through infringement suits—and it was difficult to protect that right through an award of money (Id.at 1841).

Justice Kennedy, joined by three other justices, argued that the prevalence of permanent injunctions in patent-infringement cases did not have to do so much with the patent owner's right to exclude as it did with the types of infringement cases previously before the courts (Id. at 1842; Kennedy, J., concurring). Without ever using the words patent troll, Justice Kennedy noted that "an industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees" (Id.). "For these firms," Justice Kennedy stated, "an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent" (Id).

Justice Kennedy and his concurring colleagues clearly questioned whether money damages might not be sufficient for these types of companies: "When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest" (Id). Justice Kennedy also noted the new economic reality of business-method patents, with their "potential vagueness and suspect validity," as possibly affecting the outcome of the four-part test in such cases—that is,that perhaps injunctive relief should not be granted when the underlying patents were on shaky ground (Id).

What will be the effect of eBay? Only time will tell, as district courts begin to apply the four-factor test in patent cases now working their way through the federal courts and the Federal Circuit begins to review those cases on appeal. Certainly, parties on both sides of patent-infringement cases will have to reevaluate strategy in light of eBay. Patentees asserting business-method patents, in particular, will need to assess the strength of their patents prior to bringing suit. The decision about where to file may be affected as patterns start to emerge among district courts in the granting or denying of injunctive relief. Settlement discussions may change, too, because neither party will be able to walk into negotiations assuming that an injunction is a guarantee if the patentee should prevail.

Lisa A. Ferrari is a partner at Cohen Pontani Lieberman & Pavane LLP, New York, an intellectual-property firm serving companies in a wide range of industries, including electronics. She litigates patent-, trademark-, and copyright-infringement actions in the federal courts and prosecutes and defends trademark cancellation and opposition petitions before the Trademark Trial and Appeal Board of the US Patent and Trademark Office.