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In an eagerly awaited decision, the United States Supreme Court has rejected the notion that there is a "general rule" that a patent owner is entitled, as a matter of course, to a permanent injunction following a finding that its patent is infringed.  In eBay v. MercExchange, issued Monday, May 15, 2006, the Court unanimously held that, rather than applying an "automatic" injunction rule, courts must apply the traditional four-factor test when considering whether to award permanent injunctive relief to a prevailing plaintiff.  That test requires a plaintiff to demonstrate that: (1) it has suffered an irreparable injury; (2) remedies available at law are inadequate to compensate for that injury; (3) a remedy in equity is warranted in light of the balance of hardships between the plaintiff and the defendant; and (4) the public interest would not be disserved by a permanent injunction.  Divergent views expressed in concurring opinions, however, suggest that it may be some time before it is clear whether this decision will represent a real change in the ability of prevailing patentee-plaintiffs to obtain permanent injunctions. 

The Court’s short and narrowly-tailored opinion contained critical words for both lower courts:  "Neither the District Court nor the Court of Appeals below fairly applied . . . traditional equitable principles in deciding respondent’s motion for a permanent injunction."  The District Court had refused to issue a permanent injunction, though eBay was found willfully to infringe MercExchange’s valid patent.  The District Court did not believe a permanent injunction was appropriate because MercExchange did not practice its patent, MercExchange was willing to license the patent, the patent was for a business method (which the court viewed as suspect patent subject matter), and there would be difficulties in enforcing an injunction.  The Court of Appeals for the Federal Circuit rejected the District Court’s analysis, concluding that as a "general rule . . . courts will issue permanent injunctions against patent infringement absent exceptional circumstances." 

The Supreme Court reversed the Federal Circuit, finding that it erred by "articulat[ing] a ‘general rule,’ unique to patent disputes, ‘that a permanent injunction will issue once infringement and validity have been adjudged.’"  The Supreme Court grounded its decision in the express wording of the Patent Act, which provides that injunctions "may" issue "in accordance with the principles of equity."  35 U.S.C. § 283.  Justice Thomas, writing for the Court, found nothing in the Patent Act to suggest that Congress intended a departure from the traditional four-factor test, and steered the treatment of patents into line with that of copyrights, where the Court has consistently refused to adopt the view that an injunction automatically follows from a finding of copyright infringement.  The Court emphasized that while the Patent Act conveys to a patent owner the "right to exclude" others from making, using, offering for sale, or selling the invention, this fact does not justify a general rule in favor of permanent injunctive relief because the "creation of a right is distinct from the provision of remedies for violations of that right."

The Court likewise dismissed the District Court’s approach, which it characterized as "appear[ing] to adopt certain expansive principles suggesting that injunctive relief could not issue in a broad swath of cases."  The Court noted that the District Court had relied upon the plaintiff’s willingness to license its patents and failure to practice the patent as sufficient to establish that the patent holder would not suffer irreparable harm if an injunction did not issue.  The Supreme Court held that "traditional equitable principles do not permit such broad classifications." 

[S]ome 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 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."

The Supreme Court’s decision had been widely awaited in the electronic and software industries, which had complained that the Federal Circuit’s automatic injunction rule gave unfair and unnecessary leverage to companies that were solely in the business of enforcing patents (so called "patent trolls" or "non-practicing entities").  Similarly, those entities with concerns about the scope of patentable subject matter were hopeful for a ruling rejecting the automatic injunction rule and explicitly permitting the lower courts to consider the nature of the patent in determining whether to issue an injunction.  Conversely, the pharmaceutical and biotechnology industries were supportive of an automatic injunction as these groups rely heavily on the patent right to exclude others to protect costly innovations.  Universities had feared that any decision aimed at limiting the rights of non-practicing patentees might have a negative impact on the value of their portfolios. 

The Court’s narrow opinion failed to provide a clear victory to any group; however, the concurring opinions provide a glimpse into the Court’s view on the issues of interest to industry and reveal uncertainty over the extent to which injunctions will be granted in the future. 

Chief Justice Roberts’s concurring opinion, joined by Justices Scalia and Ginsburg, suggests that he believes little will change as a result of the ruling.  He noted that courts have historically found permanent injunctions appropriate in patent law because of "the difficulty of protecting a right to exclude through monetary remedies that allow an infringer to use an invention against the patentee’s wishes—a difficulty that often implicates the first two factors of the traditional four­factor test."  When district courts apply the four-factor test, he concluded, they should not ignore this history and act as if they were "writing on an entirely clean slate." 

Justice Kennedy, joined by Justices Stevens, Souter, and Breyer, appears to take a different view.  Justice Kennedy noted that "[t]he lesson of the historical practice" of granting permanent injunction against most patent infringers "is most helpful and instructive when the circumstances of a case bear substantial parallels to litigation the courts have confronted before."  However, both the "nature of the patent" and the "economic function of the patent holder" now before the courts "in many instances" are "quite unlike earlier cases."  Justice Kennedy observed that for non-practicing entities that use patents primarily for obtaining licensing fees and seek injunctions as a bargaining tool, "legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest."  Furthermore, he observed that district courts may consider, in applying the four-factor test, the "potential vagueness and suspect validity" of some "patents over business methods, which were not of much economic and legal significance in earlier times."  Parting with the Chief Justice, Justice Kennedy concluded that "it should be recognized that district courts must determine whether past practice fits the circumstances of the cases before them."

The long-term impact of the Court’s decision is difficult to predict.  If Chief Justice Roberts’s admonition that "a page of history is worth a volume of logic" is followed, then it is likely that courts will adhere to their past practice of granting permanent injunctions "in the vast majority of patent cases."  On the other hand, if the reasoning of Justice Kennedy’s concurrence is adopted by lower courts, then non-practicing entities may face a higher hurdle in getting a permanent injunction, which could also push down the cost of pre-trial settlements.