In eBay Inc. v. MercExchange, L.L.C.,1 the Supreme Court has rebalanced the calculus to be applied in determining whether to grant permanent injunctions in patent cases. The Court unanimously struck down the Federal Circuit's general rule that, once a patent is found to be valid and infringed, an injunction should issue "absent exceptional circumstances." District courts now have equitable discretion in applying the four-factor test used in other civil actions, including consideration of whether monetary damages are adequate to compensate the injury and the balance of hardships between patentee and infringer.
eBay is the operator of a Web site that enables individuals and small businesses to sell goods and services through live auctions or at pre-determined prices. At issue in this case was the Web site's "Buy It Now" feature, which allows buyers to purchase at a fixed price. MercExchange provides digital technology to businesses and owns several patents, including a business method patent for an electronic market. MercExchange offered a patent license to eBay, but the parties could not reach an agreement. MercExchange then sued eBay, its subsidiary, Half.com, Inc., and ReturnBuy, Inc., which ran a site hosted on eBay, for infringing U.S. Patent Nos. 5,845,265 (the "'265 patent"), 6,085,176 (the "'176 patent"), and 6,202,051 (the "'051 patent").
In 2001 MercExchange filed suit in the Eastern District of Virginia. The district court held, on summary judgment, that the asserted claims of the '051 patent were invalid due to an inadequate written description. The rest of the case was heard by a jury, which found eBay and Half.com liable for infringing the '265 patent and the '176 patent and awarded $35 million in damages.2 All parties filed post-trial motions, including MercExchange's motion for a permanent injunction.
The court stated that it had the authority to grant a permanent injunction after the patents were deemed valid and infringed, and that it had discretion in deciding whether to issue such an injunction. Applying the traditional four-factor test for issuing a permanent injunction in any civil action, the court asked whether: (i) the plaintiff would face irreparable injury if the injunction did not issue; (ii) the plaintiff had an adequate remedy at law; (iii) granting the injunction was in the public interest; and (iv) the balance of the hardships tipped in the plaintiff's favor.3 The court denied MercExchange a permanent injunction in part because it did not practice and was willing to license or sell its patents and thus would not suffer irreparable harm absent an injunction.4
Both parties appealed to the Federal Circuit, which reversed the district court's denial of MercExchange's motion for a permanent injunction. The appeals court relied on the general rule that "courts will issue permanent injunctions against patent infringement absent exceptional circumstances."5 The Federal Circuit noted that courts had denied injunctive relief in patent cases only in rare circumstances to protect the public interest, and held that this case involved no exceptional circumstances. The Federal Circuit thus rejected the district court's reasoning that MercExchange's willingness to license or sell its patents meant that it could be adequately compensated by damages and did not need injunctive relief. The Federal Circuit reiterated the principle that injunctions are as available to patent holders who practice their patents as to those who merely acquire and then license patents.
The Supreme Court vacated the judgment of the Federal Circuit and remanded to the district court, holding that the traditional four-factor test6 for granting a permanent injunction in civil actions applies to patent cases as well.
Writing for the unanimous Court, Justice Thomas explained that "this Court has long recognized 'a major departure from the long tradition of equity practice should not be lightly implied'"7 and that Congress did not intend such a departure under the Patent Act, which provides "that injunctions 'may' issue 'in accordance with the principles of equity.'"8 Justice Thomas wrote that the right of a patentee to exclude others from using the invention did not justify a general rule that a permanent injunction shall automatically issue when a valid patent is found to be infringed.9
Justice Thomas wrote that neither the Eastern District of Virginia nor the Federal Circuit had appropriately applied traditional equitable principles. Justice Thomas rejected the district court's suggestion that injunctions should not be granted where a patent holder is not practicing and is willing to license the patent. Justice Thomas noted that "some 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."10 Such patent holders who could satisfy the four-factor test should not be categorically excluded from trying to satisfy the test. However, Justice Thomas also rejected the appeal court's rule that a permanent injunction should issue whenever a patent is determined to be valid and infringed, except in exceptional circumstances. Justice Thomas stated that this categorical grant, like the categorical denial by the district court, is not in line with traditional equitable principles.
The Court held that the determination whether to grant 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."11
Chief Justice Roberts, joined by Justices Scalia and Ginsburg, wrote a concurring opinion stating that, since the nineteenth century, courts have issued injunctive relief in many patent cases and that these decisions should be taken into account when applying the four-factor test to determine whether to grant an injunction. Chief Justice Roberts quoted another Supreme Court case, stating that "[d]iscretion is not whim, and limiting discretion according to legal standards helps promote the basic principle of justice that like cases should be decided alike."12
Justice Kennedy, joined by Justices Stevens, Souter and Breyer, wrote a separate concurring opinion. Justice Kennedy wrote that, while prior case law might be helpful in applying the four-factor test, recent patent cases differed from earlier cases due to the rise in the number of firms that hold patents primarily to license them and do not themselves produce products or provide services under these patents. Justice Kennedy noted that these firms use the threat of an injunction as a bargaining tool in negotiating high license fees. Therefore, Justice Kennedy wrote, if the patented invention at issue is a small portion of a product being developed 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."13
The Supreme Court's decision has abolished the rule that, absent exceptional circumstances, an injunction will issue when a patent is found to be valid and infringed. The decision takes away one threat of "patent trolls," which threaten litigation to force parties to take licenses to patents the trolls have acquired but do not themselves practice.14 In fact, Justice Kennedy's concurring opinion seems to target these licensors. It is also notable that the Supreme Court has taken this step to limit patent remedies on the heels of the resolution of NTP, Inc. v. Research in Motion, Inc.,15 which received widespread publicity due to the threat that nationwide Blackberry service could be shut down pursuant to an injunction against patent infringement.
Under MercExchange, patent owners still will have the opportunity to prove entitlement to permanent injunctions, but will no longer enjoy the presumption that this remedy will follow any finding that their valid patents have been infringed. In other words, patent owners now stand in the same position as all other claimants in seeking equitable relief under longstanding principles of equity. This decision thus reduces the "hostage value" of patent licensing demands that are disproportionate to the value of asserted patent rights.1 eBay, Inc., v. MercExchange, L.L.C., No. 05-130, 2006 WL 1310670, at *2 (U.S. May 15, 2006).
2 ReturnBuy filed for bankruptcy and settled with MercExchange.
3 MercExchange, L.L.C. v. eBay, Inc., 275 F.Supp. 2nd 695, 711 (E.D. Vir. 2003) (quoting Odetics, Inc. v. Storage Tech. Corp., 14 F.Supp. 2nd 785, 794 (E.D. Va. 1998), aff'd, 185 F.3d 1259 (Fed. Cir. 1999)).
4 The court denied most of the other post-trial motions, but did strike the jury's award of $5.5 million for eBay's inducing ReturnBuy to infringe the '265 patent. Thus, the judgment totaled $29.5 million.
5 MercExchange. L.L.C. v. eBay, Inc., 401 F.3d 1323, 1339 (Fed. Cir. 2005).
6 A plaintiff must demonstrate: "(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction." eBay, Inc. v. MercExchange, L.L.C., No. 05-130, 2006 WL 1310670, at *2 (U.S. May 15, 2006) (citing Weinberger v. Romero-Barcelo, 456 U.S. 305, 311-313 (1982); Amoco Prod. Co. v Gambell, 480 U.S. 531, 542 (1987)).
7 Id. (quoting Romero-Barcelo, 456 U.S. at 320).
8 Id. (quoting 35 U.S.C. 283).
9 Justice Thomas likened the Court's approach to patents and copyrights and wrote that the Court "has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a copyright has been infringed." Id. at *3.
11 Id . at *4.
12 Id . (quoting Martin v. Franklin Capital Corp., 126 S. Ct. 704, 710 (2005)).
13 Id. at *5.
14 Jessica Holzer, Supreme Court Buries Patent Trolls, FORBES.COM, May 16, 2006, at www.forbes.com/home/businessinthebeltway/2006/05/15/ebay-scotus-patent-ruling-cx_jh_0516scotus.html.
15 418 F.3d 1282 (Fed. Cir. 2005), on remand to 397 F. Supp. 2d 785 (E.D. Va. 2005), cert. denied, 126 S. Ct. 1174 (2006). This suit was subsequently settled.
William M. Ried is Of Counsel and Miwako Hosaka is an Associate with Willkie Farr & Gallagher LLP in its New York office. Copyright 2006 by Willkie Farr & Gallagher LLP. All rights reserved.