eBay Decision Levels Patent Litigation Playing Field

On May 15, 2006, the United States Supreme Court addressed the circumstances under which patent holders may obtain permanent injunctions against infringers. eBay Inc. v. MercExchange LLC, 126 S. Ct. 1837 (2006).  Specifically, the Court was asked to determine whether there should be a presumption in favor of issuing a permanent injunction against a patent infringer. In a unanimous opinion, the Court held that district court judges have discretion in deciding whether a party claiming infringement should win a permanent injunction against continued use of the product. The Court held that district court judges should apply the traditional four factor test for issuance of a permanent injunction.

eBay spells the end to the long-standing presumption in patent cases that an injunction should issue almost automatically against a patent infringer. The eBay dispute began in 2001, when MercExchange sued eBay for infringing on its patent that enabled the “Buy it Now” feature on eBay’s online auction site.  A jury in the Eastern District of Virginia found that eBay had infringed on MercExchange’s patent and it awarded MercExchange $35 million in damages. Relying upon Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908), which established the presumption in favor of an injunction against the infringer, MercExchange petitioned the trial court for a permanent injunction. The trial court denied MercExchange’s motion, finding that the company, which licenses but does not practice its patents, would not suffer irreparable harm without an injunction.  Rejecting the trial court’s reasoning, the U.S. Court of Appeals for the Federal Circuit declined to deviate from the rule in favor of an injunction.

Justice Thomas, writing for the Supreme Court, rejected the presumption in favor of automatic injunctions.  The Court also rejected eBay’s request for a bright line rule in patent law that would prevent a patent holder from obtaining injunctive relief if it merely licensed its patents and failed to commercialize its products.  Justice Kennedy provided guidance to the lower courts in his concurring opinion by suggesting that trial courts should now consider (1) whether a patent plaintiff is simply a "troll" asserting a questionable business patent to extort licensing fees and (2) whether there is “potential vagueness and suspect validity of some of these patents” which might affect the courts’ analysis of the traditional four requirements for an injunction.

In recent years, the presumption in favor of injunctions has been used by patent trolls to exact enormous settlements from manufacturers and service providers who want to avoid the risk of having their product or service removed from the market by permanent injunction.  A patent troll is a patent holder who, instead of developing and commercializing useful products, merely obtains its patents for the sole purpose of generating licensing revenue from actual market participants. Earlier this year, the threat of a permanent injunction which would have shut down Research in Motion’s (“RIM”) blackberry network lead to a $600 million settlement between NTP, Inc (“NTP”) and RIM.  Although NTP is the holder of several patents which RIM’s blackberry device infringes upon, NTP itself does not produce a product which utilizes these patents.

The eBay decision removes the fear of the automatic issuance of an injunction upon a finding of infringement.  Upon a finding of infringement, companies now have options other than immediately negotiating a settlement.  Companies may now be more willing to fight patent trolls because, for example, they may have additional time to exhaust avenues such as appellate review and patent re-examinations that are potentially unavailable when a company is faced with an imminent permanent injunction.

Although it is unclear whether the eBay decision will result in issuance of fewer permanent injunctions against patent infringers, the playing field has been leveled somewhat in the patent litigation process.  If trial courts follow the guidance provided in Justice Kennedy’s concurrence, or take it upon themselves to expand the four factor test to include consideration of the reasonable royalty a patent holder is entitled to upon a finding of infringement, then the eBay decision will be a significant step in reducing settlement amounts and reducing the number of patent trolls that are currently taking undue advantage of the patent litigation process.