eBay, Inc. v. MercExchange, L.L.C.: Permanent Injunctions For Patent Infringement Are No Longer Automatic

Friday, December 1, 2006 - 01:00
Gregory M. Hasley
Manoj Gandhi

Gregory M. Hasley

Manoj Gandhi

In May 2006 a unanimous U.S. Supreme Court issued its opinion in eBay, Inc. v. MercExchange, L.L.C., saying that patentees must satisfy the traditional four-factor test before a court can grant permanent injunctive relief for patent infringement. eBay, Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837, 1838 (2006). On its face, the ruling seems logical, but the discussion, particularly in a concurrence by Justice Kennedy, casts a shadow over certain patent owners and certain patents. Permanent injunctions will no longer be automatic in patent cases. Instead, courts will look at factors such as the patent owner's business and the type of patents it holds before granting a permanent injunction.

The eBay Decision

Prior to eBay , prevailing in a patent litigation generally entitled the patentee to a permanent injunction. The U.S. Court of Appeals for the Federal Circuit (the court for all patent appeals) long ago concluded that once a patent holder prevailed on infringement and validity in a patent case, a court should enforce the right to exclude given by the Patent Act and issue a permanent injunction. The Federal Circuit recognized that there might be circumstances in which a permanent injunction should not issue (such as the need to use an invention to protect the public health), but such a case would be exceptional.

The district court in eBay found this case to be exceptional. See MercExchange, L.L.C. v. eBay, Inc. , 275 F. Supp. 2d 695, 711-15 (E.D. Va. 2003), rev'd , 401 F.3d 1323 (Fed. Cir. 2005), vacated , 126 S. Ct. 1837 (2006). After a five-week trial, a jury found that eBay and its co-defendant had willfully infringed MercExchange's valid patents. Id. at 698. MercExchange sought a permanent injunction against eBay, but the district court (quite understandably) was unwilling to shut down the popular Internet site. Id. at 715. The district court found that MercExchange's willingness to license the patents, its lack of commercial activity in practicing the patents, and its comments to the media (stating that MercExchange sought royalties, not injunctions) rebutted the presumption of irreparable harm that came with the jury's verdict. Id. at 712. The district court also gave weight to the argument that business method patents were the subject of some controversy and were under review by the Patent Office and Congress. Id. at 713-14.

The Federal Circuit, in rejecting the "willingness to license" position of the district court, laid out an owner-neutral injunction criteria:

Injunctions are not reserved for patentees who intend to practice their patents, as opposed to those who choose to license. The statutory right to exclude is equally available to both groups, and the right to an adequate remedy to enforce that right should be equally available to both as well.

MercExchange, L.L.C. v. eBay, Inc. , 401 F.3d 1323, 1339 (Fed. Cir. 2005), vacated, 126 S. Ct. 1837 (2006). The Federal Circuit saw "no reason to depart from the general rule that courts will issue permanent injunctions against patent infringement except in exceptional circumstances." Id.

The Supreme Court rejected both the district court's and the Federal Circuit's positions. eBay, Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837, 1840-41 (2006). The Court declared that just because a patentee licenses its patents and lacks commercial activity in practicing its patents, such does not establish that a permanent injunction should be categorically denied. Id. at 1840. The Court likewise stated that a showing of validity and infringement does not establish that a permanent injunction should be categorically granted. Id. at 1841. Instead, the Court held that discretion must be exercised consistent with traditional principles of equity in patent disputes no less than in other cases governed by such standards. Id. at 1841. The Court vacated the Federal Circuit judgment and remanded for further consideration using the traditional four-factor test:

1. that patentee has suffered an irreparable injury;

2. that remedies available at law 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.

Id. at 1838.

Perhaps more interesting than the Supreme Court's opinion itself were two concurring opinions issued in support of the Court's ruling. Chief Justice Roberts issued a concurrence indicating that permanent injunctions have been granted historically to successful patentees because it is difficult to protect a patentee's right to exclude with monetary remedies. Id. at 1841. Roberts found that this difficulty often satisfies the first two factors of the traditional four-factor test. Id. at 1841.

In a second concurrence Justice Kennedy argued that more-recent trends in patent law could be distinguished from the historical cases granting injunctions. Id. at 1842. He opined that companies using patents primarily to obtain licensing fees as opposed to producing and selling goods were given an unfair negotiating advantage by a permanent injunction - particularly when the patented invention was but a small component of a product. Id. Kennedy also noted that the suspect validity of some business method patents may affect the calculus under the test.

Permanent Injunctions After eBay

The Supreme Court's comments in eBay and the subsequent district court opinions suggest that all patent owners and all patents are not to be treated equally. The following are some criteria that one can use to evaluate the likelihood of obtaining a permanent injunction in a patent case:

1. Patentees generally get injunctions against their competitors. The district courts have recognized that eBay does not change the analysis for suits against competitors. A typical example of post- eBay analysis involving competitors is Smith & Nephew, Inc. v. Synthes (U.S.A.), No. 02-2873, slip op. at 5-11 (W.D. Tenn. Sept. 28, 2006). Smith & Nephew was a competitor of Synthes, and despite having licensed the patents-in-suit to others, Smith & Nephew refused to license the patents to Synthes. Id. at 7. After finding infringement in a bench trial, the court found that "the loss of market share and the resulting lost profit, and loss of brand name recognition which Smith & Nephew suffered because of Synthes' continued sale of the infringing products constitutes injuries that are both incalculable and irreparable." Id. at 7.

2. Licensing companies generally will not get injunctions. Justice Kennedy warned to "bear in mind ... the economic function of the patent holder" and specifically identified those using patents to obtain licensing fees. eBay, Inc., 126 S. Ct. at 1842. One example of a licensing company denied a permanent injunction is found in Paice LLC v. Toyota Motor Corp. , where Toyota was found to infringe patents related to transmissions in hybrid automobiles. No. 2:04-CV-211-DF, 2006 WL 2385139, at *1 (E.D. Tex. Aug. 16, 2006). Paice was in the business of licensing its technology, not manufacturing, and the court found that Paice did not prove that the absence of an injunction impacted its licensing abilities. Id. at *5.

3. Universities and "self-made" inventors may be treated differently from other licensing entities. eBay points out that patent holders such as "university researchers or self-made inventors" may prefer to license their inventions yet still satisfy the traditional four-factor test. eBay, Inc., 126 S. Ct. at 1840. At this point, there does not appear to be a published case that recognizes this distinction in licensors. In Voda v. Cordis Corp., an inventor was denied a permanent injunction despite willful infringement of his patents because he could not show irreparable harm. No. CIV-03-1512-L, 2006 WL 2570614, at *5-6 (W.D. Okla. Sept. 5, 2006). No apparent credit was given for being a self-made inventor.

4. Component inventions may not justify injunction of a whole unit. Justice Kennedy also warned that "the nature of the patent being enforced" should be considered. eBay, Inc., 126 S. Ct. at 1842. He pointed out that inventions which serve as a component of a larger product may not justify an injunction. Id. One of the first cases to apply the eBay decision was z4 Techs., Inc. v. Microsoft Corp., 434 F. Supp. 2d 437 (E.D. Tex. 2006). A jury found that Microsoft willfully infringed z4 Tech's patents for "product activation" software, but the district court, pointing to Justice Kennedy's concurrence, denied z4 Tech's motion for an injunction in part because z4 Tech's invention was a small component of the Microsoft software. Id. at 441. This analysis suggests that a change may need to be made in the way some patent claims are drafted. While "component" claims may be the most accurate reflection of the invention, end product claims might increase the potential for injunction - e.g., a claim for an automobile with an improved wheel as opposed to a claim for a wheel.

5. Business method patents may receive special scrutiny for permanent injunctions. One of the most difficult issues to resolve from the eBay decision is Justice Kennedy's comments on business method patents. See eBay, Inc., 126 S. Ct. at 1842. Justice Kennedy said that "the potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test." Id. Although there has been much public discussion of business method patents having questionable validity, the injunction evaluation occurs only after invalidity arguments are rejected. It is hard to see how general criticisms of business method patents should impact the injunction analysis of patents subject to litigation scrutiny. To date, no published opinions have denied injunction based upon this factor.

Moving Forward

In the six months since eBay , there have been a few patent cases that have denied permanent injunctions when injunctions would likely have issued under pre- eBay law. The vast majority of cases continue to result in permanent injunctions. Early evaluation should be made by parties involved in patent disputes. If a patent holder or his patent falls into categories unlikely to be enjoined, negotiating positions are drastically changed. An accused infringer may choose to litigate rather than accept a high-royalty license, knowing the worst case is money damages - not business interruption. Similarly, a patent holder may see little upside in expending the cost of litigation, only to end up with a compulsory license.

Other fallout from the eBay decision may occur. eBay almost certainly impacts preliminary injunction law. Although it has always been difficult to obtain a preliminary injunction, those groups disfavored by eBay will have even greater difficulty. The Federal Circuit has presumed irreparable harm upon strong or clear showing of infringement and validity, and this presumption now appears to be inconsistent with eBay . Another issue yet to be determined is whether Justice Kennedy's doubtful words regarding business method patents will result in increasing invalidity findings on those patents.

Gregory Hasley is a Partner and Manoj Gandhi is an Associate in the Intellectual Property Practice Group of Akin Gump Strauss Hauer & Feld LLP in Houston, Texas.

Please e-mail the authors at ghasley@akingump.com or mgandhi@akingump.com with questions about this article.