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On Wednesday, March 29, 2006, the Supreme Court heard oral argument in eBay, Inc. and Half.com, Inc. v. MercExchange, L.L.C., which will decide whether, absent exceptional circumstances, a patent owner is entitled to a permanent injunction against a party found infringing its patent, regardless of whether the patent owner uses the patent. 

MercExchange, a patent-holding company, sued eBay, alleging infringement of business method patents.  A jury found MercExchange’s patents were valid and willfully infringed by eBay’s "Buy It Now" feature for one-click purchases.  Despite this finding, the district court denied MercExchange’s motion for a permanent injunction, because of a "growing concern over the issuance of business-methods patents" and their validity, and because of MercExchange’s stated willingness to license its patents. 

The Federal Circuit reversed the denial, holding that "the general rule is that a permanent injunction will issue once infringement and validity have been adjudged" absent exceptional circumstances. 

eBay Stresses the Protections Provided by the Injunction Four-Part Test

At oral argument, counsel for e-Bay, Carter Phillips, argued that if the Court did not reverse the Federal Circuit, then trial courts would automatically grant permanent injunctions in most cases after juries find a patent violation.  eBay contends that this result ignores the plain language of the Patent Act, which requires a permanent injunction is to be granted under "principles of equity," 35 U.S.C. § 283.  eBay argues that the Federal Circuit’s presumption that an injunction must issue ignores those principles by failing to allow district courts to weigh the equities of the situation by applying the traditional four-part test for permanent injunctive relief.  That test requires finding that (i) irreparable injury would occur if an injunction did not issue, (ii) there is no adequate remedy at law, (iii) an injunction is in the public interest, and (iv) the balance of the hardships tips in the plaintiff’s favor. 

Analyzing the four-part test, eBay argues that because of MercExchange’s willingness to license the patent and its failure to seek a preliminary injunction, it was not entitled to a presumption of "irreparable harm" or "inadequate remedy at law."  Moreover, a patentee is not necessarily entitled to the settlement leverage afforded by the threat of an injunction; "[t]he Patent Act’s remedies are not intended to [bestow] a windfall gain."  eBay argues that the public’s interest is served neither by a patentee who declines to allow the public to benefit from the patented inventions, nor by a court’s enjoining commercial conduct covered by a business method patent that may later be found invalid.  Automatic injunctions impose "harms not only on productive companies, but also their innocent employees and consumers, and even vital parts of the economy, such as the capital markets and the banking system."  Because of this, Mr. Phillips urged the Court to "say ‘no, enough is enough.’" 

Finally, eBay argues that the hardships of an inevitable contempt proceeding and uncertainty over potential for future infringement tip the scales against issuing an injunction. 

MercExchange Embraces the Status Quo

MercExchange argues that the Federal Circuit does not apply an irrebuttable presumption:  the trial court can, in certain circumstances, still deny an injunction.  MercExchange emphasizes that the Federal Circuit applied Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908), in which the Supreme Court ruled that a patentee who did not practice a patent was nonetheless entitled to a permanent injunction on a showing of infringement.  "[The patent] right can only retain its attribute of exclusiveness by a prevention of its violation."  210 U.S. at 430.  (In granting certiorari in eBay, the Supreme Court asked the parties whether it should reconsider Continental Paper Bag; however, the case was not a focus of the oral argument.) 

Under the four-part test, MercExchange reasons that it is appropriate to presume irreparable harm and inadequate remedy at law upon a showing of infringement.  "It is no answer … to say that ‘money damages’ are available under Section 284.  Damages do not permit MercExchange to exercise the right granted by statute [the right to exclude]; only an injunction can achieve that goal."  Justice Ginsburg commented during argument that compulsive licensing programs have been consistently rejected by Congress.

In response to eBay’s contention that willingness to license the patent counsels against an injunction, MercExchange analogizes a patent holder’s right to exclude to a land-owner’s right to prevent enemies from entering his property though he permits friends.  At oral argument, Justice Scalia seemed sympathetic to this argument: "We’re talking about a property right here, and a property right is the exclusive right to exclude others."  Chief Justice Roberts expressed a similar concern: "Are you devaluing the value of a particular patent by denying an injunction?"

MercExchange also argues that it would be contrary to public policy, and would stifle innovation, to take actions deterring inventors from licensing their inventions.

Pro-eBay Amici Explain the Dangers of Injunctions

The pro-petitioner amici fall largely into two camps:  (1) those concerned that "patent assertion firms" (also called "non-practicing entities" ("NPEs") or "patent trolls") are given unwarranted market power by the Federal Circuit’s "automatic" injunction rule, and (2) those with more general concerns about the scope of patentable subject matter, who believe the patent system can be reined in by giving trial courts greater discretion to deny permanent injunctive relief. 

The NPE concern is raised by an amici group of 52 intellectual property professors.  They argue that the Federal Circuit’s holding gives unwarranted power to "patent owners who do not manufacture the patented or any other competing good."  According to amici

inappropriate "holdups" occur on a regular basis under the Federal Circuit’s mandatory-injunction standard.  Patentees can obtain revenue in excess of the value of their technology by threatening to enjoin products that are predominantly noninfringing and in which the defendant has already made significant irreversible investments. 

Their solution is that "[p]atent owners … who seek only to license their invention at a reasonable royalty, should be entitled to injunctive relief only if they would be irreparably injured by the infringement."

This "anti-troll" theme is sounded in the amici brief of Business Software Alliance, et al., and in the amicus brief by Blackberry manufacturer, Research in Motion, Ltd.  Amici argue that the deleterious effects of the license agreements extracted by NPEs "are not limited to the companies that enter into them," but also "extend to consumers and our entire economy." 

The amicus brief of the Computer & Communications Industry Association is a more broadside attack on the current patent regime, arguing that the Federal Circuit’s "expansionist jurisprudence" — primarily the "extension of patents to pure software and then to business methods" — "has unbalanced and distorted the U.S. patent system, especially as it affects information technology, software and business services."  Amicus argues that the Federal Circuit’s automatic injunction rule "magnifies [producers’] exposure, making those producers that contribute the most value to the marketplace the most vulnerable to catastrophe."

Justice Breyer appeared somewhat sympathetic to this theme, noting that the trial judge had refused to grant a permanent injunction in part because MercExchange’s patent was for a broad "business method."  Breyer quipped that "maybe A&P could patent its process for a supermarket."  In a similar vein, the Electronic Frontier Foundation argues in its amicus brief that "[m]any new and pending patents ‘appropriate methods of communication,’" such as "patents on methods for downloading video programs, publishing web pages, sending email messages, making internet telephone calls, and even online fundraising methods."  According to amicus, "[i]njunctions against uses of these technologies … will inevitably affect, and may even chill, free expression on the internet." 

Mr. Phillips picked up on this theme of a patent system run amok in oral argument, complaining that patent holders bring suit in certain judicial districts where they believe juries are likely to award large verdicts, such as Marshall, Texas.  Justice Scalia appeared unpersuaded by this argument, commenting that the Court should not change the law "because we have renegade jurisdictions."

Pro-MercExchange Amici Argue That a Strong Injunction Rule Encourages Innovation

On the other side of the issue, nine professors of Law & Economics (L&E) support a general rule that infringers should be subject to injunctions and advocate the creation of categorical exceptions:

The preferred approach is to require a defendant to articulate some discrete category of cases into which the infringer’s case falls and within which a grant of injunctive relief would be inappropriate, rather than undertaking a costly and uncertain fact-specific inquiry….

The nine L&E professors conclude it would be unwise to permit courts the discretion to deny an injunction because a patentee has not "practiced the invention with sufficient vigor, because of some alleged holdup, or holdout, problem, or because a judge thinks that the patent is of the wrong type."  Such a framework, according to the L&E professors, would make "the courts arbiters not of the patents but of industrial policy, on which they have little competence."

The U.S. Government, as amicus, argues a more measured approach, nonetheless favoring injunction: "in accordance with the familiar four-factor test," there will be a high tendency (although not a "general rule") that an injunction will grant — especially where infringement is willful. 

Amici Qualcomm, Inc., and Tessera, Inc., argue that the Supreme Court should not intercede since patent reform legislation, H.R. 2795, is currently under consideration by Congress.  This theme is amplified in an amicus brief filed by the Bar Association of the District of Columbia – Patent, Trademark & Copyright Section, in support of neither party.  The DC Bar Section notes the lack of political consensus on proposed changes in the law, citing the fact that "software and electronic companies … contend that the grant of a permanent injunction should be linked to whether a patentee actually works his patent….  The pharmaceutical and biotechnology industries generally oppose the proposition that a working requirement be linked to the availability of injunctive relief."  The Section attributes this difference to the fact that: 

Although "patent trolls" may surface from under a pharmaceutical bridge, they have not gained the prominence seen in the computer and electronics industries….

Generally, there are limited numbers of overlapping patents for the same chemical or biologic entity, as opposed to the thousands of patents that may clutter the fields of software inventions.  Robust intellectual property protection is key to attracting capital investment in the biotechnology sector, but may be less important to software companies…. 

Thus, protection strategies divide members of the patent bar along technological lines when it comes to weighing criteria for injunctive relief.

The divide between the electronics and software industry, on the one hand, and the pharmaceutical and biotech industries, on the other, is highlighted by the amicus briefs of the Pharmaceutical Researchers and Manufacturers of America (PhRMA), and the Biotechnology Industry Organization (BIO).  Their briefs emphasize that these industries rely heavily on patent rights to protect innovations that cost millions of dollars to develop, sums predicated on assurances that others can be excluded from the market. 

Other briefs argue that NPEs are important to technological innovation.  First, the amici brief of a consortium of universities notes that 54% of basic research is conducted by the academic sector.  The universities credit the rule in Continental Paper Bag for making it possible for them "to grow and flourish through the licensing of [their] inventions and through investing in start-up companies that develop the inventions with the aid of private investors."

A similar theme is sounded by Rembrandt IP Management, an NPE, in its amicus brief: 

NPEs allow inventors to concentrate on inventing while the NPE realizes the value of the patent through licensing and enforcement.  Similarly, when they purchase patents outright from inventors, NPEs function as market-makers—the inventor is immediately compensated and motivated to continue inventing, while the NPE undertakes to ensure that the invention is appropriately valued in the market.

According to Rembrandt, removing NPEs’ rights to permanent injunctions penalizes the independent inventors and university researchers who are directed to developing new ideas and technologies, but lack the capital or structure to successfully commercialize inventions.  This theme was picked up by Chief Justice Roberts, who expressed a concern for protecting "the guy in his garage" who lacks the financial ability — or the inclination — to commercialize his invention.  In a similar vein, Justice Scalia asked, "Why should we draw a distinction between the solo inventor who needs a patent speculation firm to market his invention and somebody else?"

Final Thoughts

The Supreme Court’s questions during oral argument made clear the Court does not approach making changes to the United States patent system lightly.  The decision in this important case will be rendered later this year and is expected to have a significant impact on licensing and litigation.  If the Supreme Court affirms the Federal Circuit’s decision, patent owners and NPEs will be emboldened to continue their threats of permanent injunction to extract tribute for the use of the inventions claimed in their patents.  Software and computer companies will have to carry their fight against "patent trolls" to Congress and battle the pharmaceutical and biotech industries and, perhaps, large universities.  On the other hand, a ruling in favor of eBay would be a boon for the software and electronics industries, making it easier to prevent an NPE from stopping a company’s operations with a patent it does not use.