Most companies have heard of patent trolls but some have yet to encounter one of their key tactics - the threat of an injunction. The U.S. Supreme Court, however, recently greatly weakened patent trolls' ability to use that threat as a tool and, thus, has given the power to negotiate back to companies and other alleged infringers. In eBay Inc. v. MercExchange, LLC , decided last May, the Supreme Court struck down the "general rule" that a permanent injunction will issue once patent infringement and validity have been adjudged. 126 S. Ct. 1837, 1841 (2006). Instead, a patent owner must proceed, as in all other cases when requesting injunctive relief, to satisfy a four factor test. Id. at 1839. The majority ruling leaves much to the discretion of the district courts but the two concurrences do offer some guidance for patent owners and alleged infringers.
Statutory Authority For Injunctive Relief In Patent Cases
The U.S. Patent Statutes grant patent owners the ability to obtain relief in courts for infringement of patents. A patent confers on a patent owner the exclusive right to prevent others from making, using, selling, offering for sale or importing an invention claimed in patent. 35 U.S.C. 271. If another party performs any of those actions without the patent owner's permission, i.e. , infringes the patent, the patent owner may file a civil action against the infringer. 35 U.S.C. 281. Upon a finding of infringement, a court can award damages. 35 U.S.C. 284. In addition, a court " may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable." 35 U.S.C. 283 (emphasis added). The "principles of equity" include irreparable injury, inadequacy of legal remedies, balancing of hardships, and whether an injunction would adversely affect the public interest. Weinberger v. Romero-Barcelo , 456 U.S. 305, 312-13 (1982). The Supreme Court noted, "[a]n injunction should issue only where the intervention of a court of equity 'is essential in order effectually to protect property rights against injuries otherwise irremediable.'" Id. ( quoting Cavanaugh v . Looney , 248 U.S. 453, 456 (1919)).
The Pre- eBay "Automatic" Injunction Rule
Before eBay , an almost "automatic" injunction rule existed in patent law. The practice of the Court of Appeals for the Federal Circuit, which hears all patent appeals, was to enter a permanent injunction once a court determined a patent's validity and a defendant's infringement of the patent, because the "right to exclude recognized in a patent is but the essence of the concept of property." Richardson v. Suzuki Motor Co. , 868 F.2d 1226, 1246-47 (Fed. Cir. 1989). The Federal Circuit explained, "[W]ithout this injunctive power of the courts, the right to exclude granted by the patent would be diminished, and the express purpose of the Constitution and Congress, to promote the progress of the useful arts, would be seriously undermined." Smith Int'l, Inc. v. Hughes Tool Co ., 718 F.2d 1573, 1577-78 (Fed. Cir. 1983).
One of the oft-cited historical cases relied upon by the Federal Circuit to support its practice is Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908). In that case, the U.S. Supreme Court recognized a patent owner's right to exclusive use of his invention: "It is his absolute property ...'his title is exclusive ... he is neither bound to use his discovery himself or permit others to use it.'" Id. at 424, 425 (1908) ( quoting Heaton Peninsular Co. v. Eureka Specialty Co. , 77 F. 288, 294 (1896)). The Court also noted the right given to a patent owner "can only retain its attribute of exclusiveness by a prevention of its violation," i.e. an injunction. Id. at 430.
The Supreme Court Asserts Its Authority
The U.S. Supreme Court's review of the Federal Circuit's rule was prompted by MercExchange's suit against eBay for infringing its patent on an internet selling tool. After a jury found the patent was valid and eBay infringed the patent, the jury awarded MercExchange damages. eBay , 126 S. Ct. at 1837. The district court, however, denied MercExchange's motion for a permanent injunction. On appeal, the Federal Circuit reversed the injunction ruling of the district court citing the "general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances." MercExchange, LLC v. eBay , 401 F.3d 1323, 1339 (Fed. Cir. 2005). The Supreme Court, when granting certiorari to the issue of automatic injunctions in patent cases, faced the task of reconciling the Federal Circuit's "automatic" rule with the long established equitable principles regarding injunctions.
The Supreme Court's majority opinion in eBay is brief. The Court held the Federal Circuit's general rule for awarding injunctions in patent cases was incorrect. Instead, the court ruled a patent owner must prove, as in all other types of cases requesting injunctive relief, the following: (1) it has suffered an irreparable injury; (2) the remedies available at law, such as monetary damages, are inadequate to compensate for its injury; (3) a remedy in equity is warranted after considering the balance of hardships between the patent owner and the alleged infringer; and (4) the public interest would not be disserved by an injunction. eBay , 126 S. Ct. at 1839.
The majority opinion explained its ruling by comparing the patent and copyright statutes. Both the patent statute and the copyright statute provide a court "may" grant injunctive relief. See 35 U.S.C. 283; 17 U.S.C. 502(a). When deciding whether to grant injunctions in copyright cases, the Court noted it does not follow a hard-line or general rule but considers only "traditional equitable considerations." eBay , 126 S. Ct. at 1840. Moreover, the Court responded to the contention a patent owner's right to exclude automatically warrants an injunction by stating, "the creation of a right is distinct from the provision of remedies for violations of that right." Id.
While the majority did not provide any guidance for examining the four factors and left the analysis of the factors to the district court's discretion, two concurrences did provide some guidance. One of the concurrences, authored by Chief Justice Roberts, gave some insight into the Court's decision. He discussed the long history and tradition of equity practice and noted how "a major departure ... should not be lightly implied." Id. at 1841 (Roberts, C. J., concurring). He also recognized, "[L]ike cases should be decided alike." Id. at 1841-42 ( quoting Martin v. Franklin Captial Corp. , 126 S. Ct. 704, 710 (2005)) (Roberts, C. J., concurring).
The other concurrence, authored by Justice Kennedy, focused on "the nature of the patent being enforced and the economic function of the patent holder" and how they "present considerations quite unlike earlier cases." eBay , 126 S. Ct. at 1842. He pointed to an increasing practice "in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees." Id. at 1842 (Kennedy, J., concurring). He noted, under the Federal Circuit's rule, injunctions became a "bargaining tool to charge exorbitant fees" to potential licensees and remained a threat during litigation, even when legal damages may have sufficed. Id. Justice Kennedy also cautioned courts to consider not only the actions of these so called "patent trolls" but also the "potential vagueness and suspect validity of [business method] patents," which, in earlier times, "were not of much economic and legal significance." Id. Another warning Justice Kennedy gave was, "When the patented invention is but a small component of the product the companies seek to produce 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." Id.
Trends In District Court Opinions Subsequent to eBay
Though it is impossible to predict how district courts will weigh and decide each of the four factors in patent cases, a survey of the cases decided since eBay proves useful in identifying one trend in the decisions. What has become apparent thus far is the district courts' attention to the considerations expressed in Justice Kennedy's concurrence and whether the parties are in direct competition. For example, in the Eastern District of Texas, the court denied permanent injunctions in two patent infringement cases involving large corporate defendants that did not directly compete with the respective patent owners. z4 Technologies, Inc. v. Microsoft Corp ., 434 F. Supp. 2d 437 (E.D. Tex. 2006); Paice LLC v. Toyota Motor Corp. , 2006 U.S. Dist. LEXIS 61600 (E.D. Tex. Aug. 16, 2006). Both cases also turned on the fact the infringing technology was a small part of the infringers' products. z4 , 434 F. Supp. 2d at 440; Paice , 2006 U.S. Dist. LEXIS 61600 at *15. The courts felt an injunction would impose a significant hardship on the infringers since they would be forced to totally redesign their products. z4 , 434 F. Supp. 2d at 442-43; Paice , 2006 U.S. Dist. LEXIS 61600 at *16. In contrast, the patent owners would not lose any brand name recognition, good will or market share based on the infringers' conduct since the parties did not directly compete. z4 , 434 F. Supp. 2d at 441; Paice , 2006 U.S. Dist. LEXIS 61600 at *14. Thus, the courts did not award injunctions.
Other more recent cases in Texas and Tennessee have followed the z4 and Paice courts' reasoning, but the courts issued injunctions because of different facts. Visto Corp. v. Seven Networks, Inc ., 2006 U.S. Dist. LEXIS 91453 (E.D. Tex. Dec. 19, 2006); Transocean v. GlobalSantafe Corp ., 2006 U.S. Dist. LEXIS 93408 (S.D. Tex. Dec. 27, 2006); Smith & Nephew, Inc. v. Synthes , 2006 U.S. Dist. LEXIS 91851 (W.D. Tenn. Sept. 28, 2006). Direct competition between the parties existed in all three cases, which "weigh[ed] heavily in the court's analysis" in Visto . 2006 U.S. Dist. LEXIS 91453 at *12. The court in Smith & Nephew acknowledged the intangible value of "good will and brand name recognition," while in Transocean the court focused on the infringing product's "relat[ion] to the. . . core functionality" of the infringed invention. 2006 U.S. Dist. LEXIS 91851 at *10-11; 2006 U.S. Dist. LEXIS 93408 at *17.
Those district court cases provide some guidance to patent owners who seek injunctions against infringers. A patent owner appears to have a better chance of obtaining injunctive relief when its patent is infringed by a direct competitor and the patented invention is an integral part of the infringer's product. When the parties are not in direct competition, the courts, however, appear to focus on the hardships an injunction would impose on the infringer, such as total product redesign and expense in doing so. In those cases, the courts would likely find monetary damages are adequate, as good will is likely to remain intact as the patent owner is not losing business directly to the infringer. Thus, patent trolls may have a seemingly difficult time obtaining injunctions since they are not in direct competition with their infringers. To date, district courts appear to have thus far heeded Justice Kennedy's warnings in his eBay concurrence and not issued injunctions to such parties.
John L. Dauer, Jr. is Counsel in Day Pitney LLP's Patent Group and has extensive experience with patent litigations, transactions and strategic counseling. Sarah Elizabeth Cleffi is an Associate in Day Pitney LLP's Litigation Department and has worked on a number of intellectual property litigations.