A decision today by the United States Supreme Court is likely
to impact the dynamic in many patent litigation lawsuits
brought by companies that purchase patents in order
to sue other companies for infringing them. The eBay v.
MercExchange case was closely watched by defendants in
infringement cases brought by patent holding companies
(sometimes referred to by the disparaging term "patent
trolls"), which typically acquire patents not to practice
the inventions they claim, but to assert them against the
products of other companies. Traditionally, plaintiffs in
such cases could rely on the prospect of a near-automatic
permanent injunction in the event of a finding of liability, and
such a prospect provided enormous leverage to the plaintiffs
in post-verdict settlement discussions. An example of this is
the $612 million settlement in the recent NTP v. Research in
Motion case that the parties reached while the district court
was considering whether to permanently enjoin Research in
Motion's BlackBerry wireless email service. The Supreme
Court's ruling today may undermine the availability of this
potent weapon to a significant category of patent plaintiffs,
although the precise impact will not be known until lower
courts have had the chance to interpret and apply the
Supreme Court's precedent.
In ruling for defendant eBay, the Supreme Court clarified
that plaintiffs seeking permanent injunctions in patent
cases must always satisfy a four-factor equitable test in
order to obtain a permanent injunction. Specifically, the
patent owner must prove that (i) the plaintiff has suffered an
irreparable injury, (ii) that remedies available at law, such as
monetary damages, are inadequate to compensate for that
injury, (iii) that an equitable remedy such as an injunction is
warranted in light of the balance of the hardships between
the plaintiff and defendant, and (iv) that the public interest
would not be disserved by the granting of an injunction.
This approach effectively overrules the prior "general rule"
applied to patent disputes by the Federal Circuit (which hears
most patent appeals) that injunctions should be issued
upon a determination of liability for infringement, except
in "exceptional circumstances" and in "rare instances" to
protect the public interest.
In the eBay case, after a jury found that eBay's "Buy it Now"
feature infringed a business method patent belonging to
MercExchange, the district court rejected MercExchange's
request to enjoin eBay's use of the patented invention.
The district court decided that MercExchange would not
suffer irreparable harm that would warrant a permanent
injunction, because MercExchange did not conduct any
commercial activity involving the patented technology
other than licensing and because MercExchange apparently
saw no need to seek a preliminary injunction earlier in the
case. Reversing, the Federal Circuit interpreted its own
precedent as calling for permanent injunctions against patent
infringement "absent exceptional circumstances."
The Supreme Court reversed the Federal Circuit, holding that
injunctions in patent cases fall within a court's equitable
discretion just like injunctions in all other types of cases, and
that ownership of a patent that has been infringed does not
create a "right" to an injunction. The Court thus weakened
the Federal Circuit's presumption that a prevailing patentee
would obtain a permanent injunction against the defendant.
The Supreme Court did not, however, go as far as the district
court had gone. Specifically, the Supreme Court rejected the
district court's determination that the plaintiff's willingness
to license its patents and lack of commercial activity in
practicing its patents were necessarily sufficient to show
a lack of irreparable harm. For example, according to the
Supreme Court, "some patent holders such as university
researchers or self-made inventors" might be able to satisfy
the four-factor test even though they "might reasonably
prefer to license their patents, rather than undertake efforts
to secure the financing necessary to bring their works to
market themselves," and they should not be categorically
denied the opportunity to seek an injunction.
It may be significant, though, that the Court's list of examples
of patent owners who might be able to satisfy the four-factor
test without practicing the patented invention (university
researchers or self-made inventors) did not explicitly extend
to patent holding companies. Some may see this exclusion as a between-the-lines message from the Supreme Court that
such patent plaintiffs may face greater difficulty in obtaining
a permanent injunction.
A concurring opinion written by Justice Anthony Kennedy
and joined by three other Justices leans more sharply in
favor of defendants in cases brought by patent holding
companies. That concurrence urges trial courts to bear in
mind in applying the four-factor test that "[a]n industry has
developed in which firms use patents not as a basis for
producing and selling goods" but "primarily for obtaining
license fees," and that for such firms an injunction can
be used as "a bargaining tool to charge exorbitant fees to
companies that seek to buy licenses to practice the patent."
In such circumstances, where the patented invention is a
small part of the product sold 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." In addition, according to Justice Kennedy, the
"potential vagueness and suspect validity" of some business
method patents may affect the calculus under the four-factor
test as well.
Conversely, a concurrence by Chief Justice John Roberts,
joined by two other Justices, takes a less severe approach
toward injunctions. The Chief Justice agreed that the fourfactor
approach should be applied, but noted that historical
practice suggests that injunctive relief is often warranted.
The Chief Justice also placed great importance on the right of
a patentee to exclude others from using an invention against
the patentee's wishes.
In summary, the eBay decision means that injunctions in
patent cases are no longer "near-automatic" and that district
courts must always consider the four equitable factors. It
is not entirely clear, however, how district courts will apply
those factors. If district courts take note of Justice Kennedy's
concurrence, some patent holding companies may find it
difficult to obtain injunctions. If the district courts take
note of the approach outlined by Chief Justice Roberts,
the end results may change little from the pre-eBay days.
Regardless, these considerations are likely to ripple through
the negotiating positions taken by litigants in such patent
cases, and some plaintiffs may be less confident that they
will ultimately have the enormous power of an injunction with
which to coerce the defendant into settling for what Justice
Kennedy called an "exorbitant" license fee.
For further information, please contact:
Michael J. Sacksteder, Litigation Partner
Darryl M. Woo, Chair, Patent Litigation Group
Charlene M. Morrow, Litigation Partner
This alert is intended by Fenwick & West LLP to
summarize recent developments in the law. It is not
intended, and should not be regarded, as legal advice.
Readers who have particular questions about these
issues should seek advice of counsel.
© 2006 Fenwick & West LLP. All Rights Reserved.