Ebay v. MercExchange: The Law of Patent Injunctions

eBay v. MercExchange (on writ of Certiorari 2006).

Later this month, the Supreme Court will hear this case to determine when a patentee should have a right to stop an infringer from making or selling unlicensed products once the patent has been found valid and infringed.  Because this issue is so fundamentally important to patent law, eBay v. MercExchange will likely be the most important patent case for the past decade.

As it stands, the Federal Circuit has a “usual rule” that once a plaintiff shows that a defendant infringes a valid patent, an injunction should issue.  According to the appellate court, the usual rule should be followed “absent special circumstances.”

In this case, a jury found that eBay infringed MercExchange’s patent, but the court refused to issue an injunction. Stating the “usual rule,” the Federal Circuit reversed, finding that an injunction should issue.  Now, Supreme Court has agreed to hear the case and determine the proper standards for issuing an injunction.

In January, eBay and its supports filed their briefs asking the court to overturn the Federal Circuit’s usual rule.  Respondent’s brief was due Friday, March 10, 2006. The following is a short review of the briefs in-hand.

Respondent MercExchange’s Brief: MercExchange’s brief is one of the best that I have ever read. In a twelve-page fact section, MercExchange tells its story and leaves little doubt that it will likely win its case, regardless of the rule eventually created by the high court. 

On the legal issues, MercExchange argues that the CAFC’s “usual rule” has been mischaracterized by eBay as an “automatic injunction” provision. Rather, the patent holder argues that courts have discretion to deny injunctions. The “usual rule,” they argue, flows naturally because it is only in “rare cases” that “any balance of hardships or the public interest favor the adjudged infringer.”  Rather, “in most cases those factors will strongly favor the patent holder.”

MercExchange also discusses the fundamental nature of a patent. 

The patent right’s fundamental aspect—its sum total—is “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States.”

It is this right to exclude and not a ‘right to damages’ that defines the essence of a patentee’s rights.

MercExchange then walked through each of the district court’s stated factors that it used to originally deny the permanent injunction:

• Willingness to license — According to MercExchange, it is “extraordinarily strange” to think that a patent holder’s willingness to license would be an indication that money damages may be adequate. (Land-owner example: you may allow your friends on your property, but may still want to exclude your enemies.)
• Business method patents — According to MercExchange, Congress should address this issue.
• Pending reexamination of MercExchange patents — According to MercExchange, this issue “is not properly before this court.”
• Non-practice — MercExchange tried for years to practice the invention, and it does license its invention, which is as good as practicing the invention.  
• Contempt proceedings — The threat of contempt proceedings against eBay for violating an injunction should not stop the court from issuing an injunction.
• Failure to seek a preliminary injunction — MercExchange argues that this litigation strategy should not be held against it, and that requiring PI requests before granting permanent injunctions would further complicate the patent litigation procedure.

MercExchange’s only vacuous argument comes at the end where it essentially argues that all patentees are trolls to some extent because every patent includes at least some claim-scope that is not being practiced.

Government Brief: In the BlackBerry case, the Government sided with RIM, asking the district court to not issue an injunction.  Here, however, the DOJ has apparently flipped and now supports MercExchange. 

The Government argues that this case really involves a minor slip-up by the CAFC.  That court simply did not “adequately articulate” the principles regarding equitable relief. However, the Government argues that the court of appeals did reach the correct decision.

This position goes along with my own thoughts that the Supreme Court will hold that a court should weigh the pros and cons of an injunction before shutting down an infringer, but that there will still be a strong presumption that an injunction will grant — especially when the infringement is willful. 

* Query whether this brief provides any general indication of the Republican party stance regarding patent injunctions? [WSJ Blog][AuctionBytes][Patent Hawk]

Academics take sides: Two major groups of law professors have taken-sides in the debate.  First, a group of fifty-two patent-law professors, led by Mark Lemley of Stanford, filed a brief in support of eBay.  They argue that court’s should be given discretion to deny injunctive relief – even if such discretion is not used regularly or often.  The patent-law professors also make a distinction between a district court’s refusal to grant an injunction and a compulsory licensing scheme. (Patent-Law Professors Brief).

On March 10, a new brief, filed by nine professors of Law and Economics (L&E) takes the other side.  Professors Richard Epstein, Scott Kieff and Polk Wagner filed the brief in support of respondent, MercExchange.  They argue that the patent-law prof. brief “confuses the issues and muddies the waters in ways that weaken the structure of exclusive patent rights on which today’s elaborate system of licenses and other voluntary agreements rest.”

The L&E Professors take the position that the Federal Circuit’s jurisprudence is correct, and that “injunctions should generally issue except in those unusual cases in which good cause is shown for denying that form of relief.”  Where the L&E brief differs from the patent-law prof. brief is in the proposed route for determining when to refuse an injunction.  Specifically, the L&E brief argues that any exceptions to the general rule must fall within a specific category of exception, while the patent-law professors focus on more discretionary or ad hoc determinations.

PhRMA: PhRMA is an industry group that includes the major U.S. pharmaceutical research companies. The business models of those companies rely heavily on patent rights to protect innovations that may cost hundreds of millions to develop. PhRMA argues that the billions spent on R&D is predicated on assurances that the resulting IP rights will be strongly protectable.  This case threatens that long-held belief.

The industry group also notes that, if a hardship balance is considered, that the infringer’s hardship should not be considered when the hardship results from its obligation to stop infringing.

BIO: Like PhRMA, the members of the Biotechnology Industry Organization (BIO) argue that the right to injunctive relief is “vital in ensuring innovation” in their industry.  BIO quoted the 1824 case of Ex parte Wood for the proposition that our common law history unquestionably supports a strong right to injunctions against infringers.

The securing to inventors of an exclusive right to their inventions, was deemed of so much importance, as a means of promoting the progress of science and the useful arts, that the constitution has expressly delegated to Congress the power to secure such rights to them for a limited period. The inventor has, during this period, a property in his inventions; a property which is often of very great value, and of which the law intended to give him the absolute enjoyment and possession.

Ex parte Wood, 22 U.S. (9 Wheat.) 603, 608 (1824) (Story, J.) (emphasis added). Bio also favorably cites Hal Wegner’s article for the proposition that a compulsory license may well “run afoul” of the U.S. obligations under TRIPS.

GE, 3M, P&G Du Pont, and J&J: The group of industry giants support the presumptive right to an injunction that is “deeply rooted in the Constitution, the Patent Act, and 200 years of judicial precedent.”  This brief directly addresses eBay’s statutory hook of 35 U.S.C. 283, which only allows that courts “may grant injunctions in accordance with principles of equity.”  To quote Justice Marshall: “discretion is a motion, not to its inclination, but to its judgment; and its judgment is to be guided by sound legal principles.” I.e., a lower court’s discretion does not indicate that there should not be a strong presumption.

Rembrandt IP Management: Rembrandt is a “non-practicing entity” or NPE — meaning that it is a company that invests in patents but does not practice them. Rembrandt’s brief outlines the beneficial role that NPE’s can perform in the marketplace and in furtherance of the goals of the patent system. For instance:

• Patent rights, like other property rights, benefit the community most when they are freely transferable.  Limiting the rights of certain patent holders practically limits the right to transfer.
• Independent inventors and university researchers often have a niche in developing new ideas and new technology, but do not have the capital or the necessary tools to successfully bring products to market — inventors should not be penalized for not having a marketing wing.

Rembrandt also makes the point that without the threat of injunctions, “a well-funded infringer either would not take a license from an independent inventor at all, or would do so on a playing field that vastly favored the infringer.”

Intellectual Ventures: Intellectual Ventures has not been publicly termed a troll — perhaps because they have thus far been able to obtain licenses without litigation — but the secretive Washington State company does have a very high PPR (patent to product ratio).  Two dozen well known inventors signed-on to Intellectual Venture’s brief to send their message patent exclusivity promotes the progress of science and technology and promotes investment in research.  Perhaps more than any other groups, small entities and individual inventors rely on the potential for exclusivity to protect their work and to provide the incentive to research and develop new products.

Qualcomm: QualComm is an interesting story.  They used-to manufacture products, but now they primarily invent, design, and license.  They have proven that a big company can be competitive even when their only product is intellectual property.

Qualcomm and its co-amicus Tessera argue that eBay’s brief wrongly characterizes the patent marketplace. eBay and its supporters contentions of a “broken patent system” is not supported by the evidence.

This case itself shows that willful infringers are not cowed by the prospect of an injunction after an unsuccessful litigation defense and are not coerced into any settlement. To the contrary, large corporate infringement defendants often pursue a scorched earth defense strategy, particularly when they are sued by smaller entities.

Qualcomm also makes the important point that if eBay’s proposed changes were effectuated, they would result in a patent’s value depending upon the category of the owner — rather than on any intrinsic value of the claimed invention. “That world would be a distortion of the marketplace. The value of property should not depend on legal rules that are different for different owners.” 

ABA: The American Bar Association has sided with the patent holder MercExchange, arguing that the longstanding role of injunctions in patent cases should continue.  Interestingly, the ABA makes the novel argument that if we were to apply any new equitable considerations, those are “properly addressed” by Congress, not by the federal courts.

COPIES OF THE BRIEFS:

• Party Briefs on the Merits
• EBay Brief 

• MercExchange Brief

• Amici Briefs on the Merits

• Supporting MercExchange (Strong Injunctions)
• U.S. Government Brief
• Intellectual Ventures and Inventors Brief
• L&E Professor's Brief
• BIO Brief
• PhRMA Brief
• Brief of GE, 3M, P&G Du Pont, and J&J
• Qualcomm Brief
• Brief of Rembrandt IP Management
• Brief of the University of California and other Research Universities
• AAU Brief
• United Inventors Brief
• ABA Brief
• Franklin Pierce Law Professors Brief
• Hoffberg Brief
• Supporting Ebay (Weaker Injunctions)
• Yahoo!’s Brief
• Electronic Frontier Foundation Brief 
• Brief of Professors Pollack & Reynolds
• Computer & Communications Industry Association (CCIA) Brief
• Brief of Intel, Microsoft, Oracle, and Micron
• Brief of the Securities Industry
• Brief of Research-In-Motion
• Nokia’s Brief
• Brief of the Bar of the City of New York
• Business Software Alliance (BSA) Brief
• Brief of Time Warner, et al.
• Supporting Neither Party
• AIPLA & FCBA Joint Brief (Supporting a “general rule” of granting injunctions)
• Fifty-Two Law Professors Brief (asking for weaker injunction provision)
• Teva’s Brief (asking for weaker injunctions)
• Bar Assn. of the District of Columbia’s Brief (cautioning about meddling in a political issue)
• IBM’s Brief (equitable principles must be examined)

• Briefs for/against Certiorari:

• Professor Brief.pdf (50 KB)
• eBay Brief.pdf (4452 KB)
• MercExchange Brief.pdf (3480 KB)
• CCIA Brief
• EFF brief 
• Qualcomm
• Other

• Supreme Court Docket.

 * cite as Dennis Crouch, Review: EBay v. MercExchange Amici Briefs, Patently-O, March 13, 2006, available at http://www.patentlyo.com.

 

Comments

[fred]

What do you mean Qualcomm "used-to manufacture products, but now they primarily invent, design, and license."?? Qualcomm sells about 50 million chips every single quarter. These are the CDMA chips that a CDMA cell phone uses to communicate on the CDMA cell network. They also sell base station chips as well.

[Zan L]

The Supreme Court has specifically referred to Continental Paper Bag v. Eastern Paper Bag case. What the Court wants to decide is probably under what circumstances should there be equitable relief from injunctive rights. The Court quoted the eloquent words of Judge Aldrich, but artfully dodged that question in 1908.

It's the right time to answer that question. For startups in industries that requires complex integration, e.g., computer, communication, financial, it's becoming almost impossible to survive in US under repressive patent licensing schemes. When a large IP licensing shop comes knocking, what can a startup do, other than paying up? Which patent do you want to fight against – among the 5000?!

There need to be an equitable relief against abusers of the system. At least make them "practice" their "inventions" before they can shake others down. If nothing else, that would drive up their cost and slow them down a bit.

P.S. I'm a founder of a software startup, in case you are wondering about my bias.

[Laurent GUERBY]

Is the Supreme Court able to say something about the patent in this case, eg: finding it invalid because it's a business / software patent? (State Street did not reach the Supreme Court IIRC)

[Joe Smith]

MercExchange may win this case on their particular facts. If MercExchange loses it is likely to be because the Court of Appeal went too far in overturning a trial judge's exercise of discretion and not because the Supreme Court agrees that the trial decision was correct.

In terms of the bigger issues which the Supreme Court apparently wants to address the Intel/Microsoft submission should be given a lot of weight. The problem of hold-ups is real and growing and the "rubber stamp" granting of injunctions is the cornerstone foundation for hold-ups.

The protective measures which large corporations have to take to protect themselves from hold-ups is making the problems worse. We have seen an explosive growth in patent applications as Micorsoft and other large corporations try to patent every idea any employee has to prevent them from being shaken down in the future by patent licencing firms.

[Ryan McLeod]

The notion that there can exist a “usual rule” in equity is antithetical to the notion of equity itself. First, the history of equity instructs that it exists to provide unique remedies where the law failed to adequately do so. Legal remedies provide usual rules; equitable remedies are special. Second, the positive law that bestows courts with the power to issue injunctions demands that they are issued according to the traditional principles of equity, which have always included the standard four-factor test. Finally, the history of the word “equity” itself destabilizes MercExhange’s position. The word derives from the Latin aequitas, which, in it most basic form, means universality, or, as Professors Lewis and Short write, “the uniform relation of one thing to others.” It’s absurd, therefore, to issue an equitable remedy without actually considering the balance of harms and the public interest. I agree that the nature of patent law will undoubtedly (as it always has) result in frequent injunctions, but that provides all the more reason to actually consider the traditional factors; the presumptions are unnecessary and can only conceivably do harm.

[Wayne]

Dennis,

There are two issues here - one is a rule of law, which you have covered quite well. The other is the defects in the US Patent system, and you have filed to address those.

This Patent should not have been issued, it fails the "obvious" test. The issueance of patents like this will destroy innovation in my opinion. And of course they are damaging to the repute of the Patent Office.

[small inventor]

Hey, Ryan McLeod, did you actually read what you just wrote ?

You can talk some obscure language all you want, but the truth is this:
if somebody *willfully* violates a *valid* patent the actual owner of that patent should have the right to stop violation. Period.

[Ryan McLeod]

Well, "small inventor," if there is in fact a willful violation of a patent, there will likely be irreparable harm, and in the VAST majority of cases the balance of the equities and the public interest will favor the patent holder. I'm not suggesting we do away with injunctions in patent law (nor is that the issue in the case); I'm simply pointing out what the “principles of equity” are. And, I remind you, that those are the guidelines Congress instructed courts to use when issuing injunctions in patent law. Patent Act, 35 U.S.C. § 283 (2000). I apologize if you thought the Latin was obscure, but the Supreme Court has many times looked at the derivation of words to aid its analysis. See, e.g., Coy v. Iowa, 487 U.S. 1012, 1016 (1988) (“Simply as a matter of Latin as well, since the word “confront” ultimately derives from the prefix “con-” (from “contra” meaning “against” or “opposed”) and the noun “frons” (forehead).”).
Thus, while you may normatively believe that injunctions should issue as a matter of course, that belief contradicts the law. Write to your local representative if you don’t like it.

[Guioseppe]

Any news about this case?

when will the supreme court give its conclusion?
it's been more than a year since the hearing... does it usually take that long between hearing and conclusion? does that point o "behind the scene" negotations between the parties and the Justices???
the problem being for us VC's are that now we are more aware than ever that the value of patents might be lower than appearing in due-dilligence, but how much credit can we place on them if injunction are not longer an option to stop a bigger and wealthier competitor...
this decision will definitely have very large impact on start-up valuation at both side of our game (investing in and reselling them) if patents now become only a mean to negotiate without any much clout than the goodwill of large infringer