eBay, Inc. v. MercExchange, L.L.C.

Issues

Whether a patentee has an automatic right to a permanent injunction once infringement is found.

Oral argument:

March 29, 2006

Court below:

United States Court of Appeals for the Federal Circuit

In 2003, a jury found that eBay, an online auction website, was violating various patents owned by MercExchange. The district court nevertheless refused to issue a permanent injunction that would have barred eBay from continuing to use the patented methods. The Federal Circuit of Appeals granted the injunction against eBay and held that permanent injunctions were the “general rule” in patent infringement cases. The Supreme Court granted certiorari to decide whether a patentee has an automatic right to a permanent injunction after a finding of infringement. If the Court upholds the “near-automatic injunction rule,” then patent holders will have a powerful remedy that can give them tremendous leverage in litigation. However, upholding the rule may also make it easier for “patent trolls” to continue benefiting from genuine innovators. If the Court instead finds that patent holders do not automatically have the right to an injunction, infringers will be able to continue using the patented product, thereby subverting the purposes of patent law. Not granting automatic injunctions may also encourage more patent infringement. How the Supreme Court decides the case will depend on its interpretation of important precedents and how it weighs these important social implications.

Questions as Framed for the Court by the Parties

Whether the Federal Circuit erred in setting forth a general rule in patent cases that a district court must, absent exceptional circumstances, issue a permanent injunction after a finding of infringement.

Facts

eBay, Inc. (“eBay”) owns and operates a website that allows buyers to purchase goods either through an auction-style format or at a fixed price via the “Buy it Now” feature. See , 401 F.3d 1323, 1325 (Fed. Cir. 2005). Launched in 1995, eBay has since become one of the largest online marketplaces, with more than a hundred million registered users from all over the world. See Brief of Petitioners at 3. MercExchange, a company that licenses patented technologies, sued eBay, alleging willful infringement of a number of its patents. See , 401 F.3d 1323, 1325. A jury found that eBay’s “Buy it Now” feature infringed on “patent ‘265,” a method that enables individuals to sell goods at a fixed price over the Internet. See Id. at 1326; Brief in Opposition at 5. The district court, using its equitable discretion under 35 U.S.C. § 283, denied MercExchange’s motion for a permanent injunction that would have barred eBay from continuing to use the patented methods in its Internet operations. See , 401 F.3d at 1325.

The United States Court of Appeals for the Federal Circuit, a specialized court that hears all appeals in patent cases, overturned the district court’s decision, ruling that MercExchange was entitled to a permanent injunction. See Id. The appeals court held that injunctions are the “general rule” in patent infringement cases, and should be withheld only when the patentee’s failure to practice the patented invention frustrates an important public need for the invention, such as protecting public health. See , 401 F.3d at 1323, 1338.

The Supreme Court granted certiorari to decide whether the Federal Circuit’s rule correctly interprets patent law.

Analysis

When the Supreme Court granted certiorari, it agreed to revisit the rules by which courts grant permanent injunctions against a company found to have infringed on another’s patent. The appeals court held that injunctions are the “general rule” in patent infringement cases, and should be withheld only in rare circumstances. See , 401 F.3d 1323, 1338. eBay criticizes this interpretation of federal patent law. See Brief of Petitioners at 14.

eBay’s Analysis

eBay argues that the Federal Circuit’s near-automatic injunction rule cannot be reconciled with the plain language of 35 U.S.C. § 283. See Id. The statute provides that courts “may grant injunctions,” thereby, eBay argues, granting courts the discretion to grant injunctions. See Id.

Further, eBay attacks the Federal Circuit’s two justifications for its “wooden approach” to granting injunctions. The court first points to 35 U.S.C. § 154(a)(1), which provides a patentee with a “right to exclude others from marking, using, offering for sale, or selling the invention.” See Id. eBay points out, however, that 35 U.S.C. § 283 also provides that a court must balance this right “in accordance with the principles of equity,” or with other competing interests, such as promoting competition and the economy. See Id. at 15. A wooden approach, eBay concludes, would prevent courts from exercising their discretion in accordance with the plain meaning of the statute. See Id. at 20.

Second, the Federal Circuit justifies the near-automatic injunction rule by invoking the notion that a patent is equivalent to personal property. See Id. at 26. eBay, in turn, argues that “personal property has never been treated as a demand note for an injunction,” and that, in fact, the Court has held that injunctions should be issued only “to protect property rights against injuries otherwise irremediable.” See Id. at 26 (quoting Cavanaugh v. Looney, 248 U.S. 453, 456 (1919)).

eBay also argues that the case relied on by the Federal Circuit and MercExchange, Continental Paper Bag, Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908) (“Continental Bag”), does not preclude reading § 283 as giving courts the discretion to grant injunctions due to the following reasons: first, the case’s holding is limited to its ruling that a patentee’s unreasonable nonuse of its invention does not deprive a district court of jurisdiction to grant an injunction; second, if Continental Bag nevertheless requires a near-automatic injunction rule in patent cases, its holding should be overruled because the holding is irreconcilable with (1) the plain language of § 283, and (2) the “changed circumstances” and “lessons of accumulated experience” of seventy-six years of practice in the federal courts. See Id. at 16.

MercExchange’s Analysis

MercExchange argues that the Court should affirm the near-automatic injunction rule for three reasons. First, it argues that the Federal Circuit did not adopt a “per se” rule denying a district court’s discretion to grant injunctions in patent cases; rather, the Federal Circuit addressed, but ruled against, the district court’s reasoning that the balance of hardships weighed against granting an injunction. See Brief in Opposition at 10–12.

Second, MercExchange argues that Continental Bag’s rationale has been affirmed many times, and thus should not be overruled. See Id. at 18–20. MercExchange points to Dawson Chemical Co. v. Rohm & Haas as an example, where the court held that “the traditional remedy against infringement is the injunction” and that “the long-settled view [is] that the essence of a patent grant is the right to exclude others from profiting by the patented invention.” 448 U.S. 175, 197 (1980).

Finally, MercExchange gives three reasons why the Court should grant an injunction even though MercExchange licenses rather than practices its patents and may therefore be viewed as a patent troll. First, an injunction creates a property right and leads to negotiations between theparties, and a private outcome of the negotiations—whether they end in a license agreement or exclusion of an infringer—is preferable to a judicial “guesstimate” about what the royalties should be. Second a denial of the statutory right to exclude others will result in diminished incentives for patentees to innovate. Third, the Patent Act enables individual inventors, small firms, and start-up companies that lack the means to commercialize their inventions to license or sell their inventions to firms that have the resources to bring the inventions to the market. Without the right to obtain injunctive relief, these small entities would be unable to license or sell their inventions, which will have little to no value. See Id. at 28–29.

Discussion

Background

eBay users in 2005 bought and sold $44.3 billion worth of merchandise on eBay. See Verne Kopytoff, Google service a threat to eBay?, San Francisco Chronicle, Feb. 28, 2006. In the United States alone, 724,000 eBay sellers relied on eBay sales as their primary or a secondary source of income. See Thousands of Small Businesses Use eBay as a Sales Channel, WA Business News, Jan. 27, 2006. A decision against eBay will therefore potentially affect millions of people. Moreover, any decision affecting the rule for issuing patent injunctions will affect a large population outside the eBay community.

Policy Implications

Implications if the Court Affirms

If the Court upholds the “near-automatic injunction rule,” then patentees will have a “powerful and coercive remedy” that can “produce tremendous leverage” in litigation. Adopting the Federal Circuit’s rule may also make it easier for “patent trolls” to continue benefiting from and disrupting the operations of genuine innovators. See Brief of Petitioners at 14; Brief of Amicus Curiae Yahoo! Inc. in Support of Petitioner at 2. Patent trolls acquire broad and nebulous patent claims that encompass existing technologies relied on by companies with deep pockets. By threatening or pursuing litigation, patent trolls often receive monetary settlements that greatly exceed the true economic value of the patents. If the Court upholds the near-automatic injunction rule, then patent trolls will be able to use the additional threat of an injunction shutting down a company’s production to demand a licensing agreement or share of the company’s profit. Brief of Amicus Curiae Yahoo! Inc. in Support of Petitioner at 6–7.

Also, as a result of this “patent thicket” created by patent trolls, legitimate computer and Internet companies have had to engage in “defensive patenting.” See Id. at 11. In order to protect itself, a company will patent a wide range of novel, non-obvious, and useful ideas relating to its products, even though it knows that not all those ideas will ultimately be incorporated into its products. See Id. at 12. Although acquiring these patents may help preserve the company’s “freedom to operate” by acknowledging the possibility that the company may eventually need to use the patented technologies, the company will often have expended a great amount of time and money obtaining the patents.

Upholding the near-automatic injunction rule may also undermine important public interest factors other than health, such as free speech. See Brief of Electronic Frontier Foundation, Public Patent Foundation, American Association of Law Libraries, American Library Association And Special Libraries Association as Amici Curiae in Support of Petitioners at 6. The Patent and Trademark Office has patented methods for publishing “blogs” and web pages, sending email messages, and making internet telephone calls. See Id. Injunctions against uses of these technologies will inevitably affect—and may even chill—free expression on the Internet. See Id.

It is also important to note that the full scope and even the validity of a patent are often not clear. In fact, after the adverse district court judgment, eBay went back to the Patent and Trademark Office to challenge the MercExchange patents. Thus, a “general rule” of granting injunctions in the light of this uncertainty seems inequitable. See Brief of Petitioners at 2.

Implications if the Court Reverses

Patent laws grant patent holders the right to exclude others from producing or using the patented invention for a limited time. These laws arguably encourage economically efficient research and development (R&D): without patent protection, companies would be much more conservative about the R&D investments they make, as third parties would be free to exploit the new developments. See Brief in Opposition at 2. Without patent protection, then, R&D would be stifled, limiting the possibility of technological advances or breakthroughs. See Id. One component of patent protection takes the form of an injunction—a means to stop patent infringers from infringing a patent. See Id. Injunctions therefore arguably protect the important flow of new products and manufacturing processes from the patent system into the economy.

A departure from the general rule requiring injunctions except in extraordinary circumstances would lead to a decrease in the number of injunctions issued and, for the most part, allow infringers to continue using the patented product, thereby subverting the purposes and benefits of patent law. See Id. Knowing that infringers may be able to continue using the patented product may give inventors less incentive to expend their time and effort to develop products that will benefit society. See Id. The inventor may also choose to maintain the invention as a trade secret, depriving the public of knowledge of the invention and, therefore, the opportunity to improve on the invention. See Id. The limited availability of injunctive relief may also lower the market value of patents for which a license has been granted, and cause patent holders to think twice before granting a license. See Id. at 29. A decrease in the number of injunctions issued may also encourage more patent infringement, leading to increased litigation. See Id. at 28. Similarly, depriving patent holders of the right to exclude others from using their patents may create an “unwise” incentive for patent holders to refrain from licensing, and would therefore also encourage litigation. See Id. at 28-29.

A holding that the right to an injunction is dependent on the court’s discretion may additionally affect how injunctions are granted to patentees who intend to license their patents, as opposed to those who intend to practice their patents. See Id. at 13. 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. See Id. But courts, using their equitable discretion, may favor patentees who intend to practice their patents, because patentees who only license their works may be typecast as patent trolls. See Id.

Conclusion

How the Supreme Court answers the question of whether a patentee has an automatic right to a permanent injunction once infringement is found will reflect its analysis of Continental Bag and its view on which social considerations are most worthy of being protected. If the Court upholds the “near-automatic injunction rule,” then patent holders may gain tremendous leverage in litigation, but upholding the rule may also make it easier for “patent trolls” to continue benefiting from genuine innovators. If the Court instead finds that patent holders do not automatically have the right to an injunction, infringers will be able to continue using the patented product, thereby subverting the purposes of patent law. Not granting automatic injunctions, however, may also encourage more patent infringement.Written by:

Thomas F. Lavery IV

Vi T. Vu