Business Method Patents and the Equitable Standard for Granting Permanent Injunctions: The eBay Case*
|Written by Eric W. Guttag
Eric W. Guttag IP Law Office
Posted: January 4, 2013 @ 9:15 am
EDITORIAL NOTE: The decision denying Apple’s permanent injunction was recently followed by the CAFC decision in Presidio that tilts the pendulum back toward the awarding of permanent injunctions when competitors are involved. Eric Guttag and I have communicated via e-mail about permanent injunctions. Guttag wrote the following article in 2006. I asked if I could republish it here and he agreed. Here is Guttag’s take on eBay v. MerchExchange.
Once upon a time, the view was that “methods of doing business” could not be patented. That view changed forever with the 1998 case of State Street Bank & Trust Company v. Signature Financial Group Inc. [i] In State Street, the Court of Appeals for the Federal Circuit (Federal Circuit) held there was no “business method” exception to patentability: “Whether the [patent] claims are directed to subject matter within § 101 [ii] should not turn on whether the claimed subject matter does “business” instead of something else. [iii]
In certain quarters, the grant of patents on “business methods” has been increasingly viewed with alarm and concern. One concern is that the holder of such patents could permanently enjoin such infringement, thus potentially increasing the bargaining position of the “business method” patent holder. That concern is very real. For example, in the “non-business method” patent context, the Federal Circuit held in the 1989 case of Richardson v. Suzuki Motor Company that, in view of the recognized “right to exclude” under the patent, “the general rule [is] that an injunction will issue when infringement has been adjudged, absent a sound reason for denying it.” [iv]
The standard for granting permanent injunctions for patent infringement generally, and “business method” patents specifically, became the focus of eBay, Inc. v. MercExchange L.L.C. [v] The eBay case involved a patent owned by MercExchange which covered a system for selling goods through an electronic network of consignment stores. While upholding a jury verdict that this patent was infringed by eBay and others, the Eastern District of Virginia in eBay refused to grant a permanent injunction against such infringement. One reason expressed for denying the permanent injunction: “a growing concern over the issuance of business-method patents.” [vi]
On appeal, the Federal Circuit ruled that the Eastern District of Virginia had improperly denied the permanent injunction. Instead, the Federal Circuit, relying on the “general rule” of the Richardson case, held that such an injunction would usually issue “once infringement and validity have been adjudged.” As the Federal Circuit saw it, “a general concern regarding business-method patents” was “not the type of important public need that justifies the unusual step of denying injunctive relief.” [vii] The Federal Circuit further held that the other three concerns expressed by the Eastern District of Virginia for denying the permanent injunction (i.e., contentious litigation, MercExchange’s willingness to license the patent, and the failure to request a preliminary injunction) were also not persuasive for denying the permanent injunction.
Justice Thomas delivered the opinion of the Supreme Court in unanimously vacating the Federal Circuit’s ruling on the appropriate standard for granting a permanent injunction for patent infringement. [viii] As stated by Justice Thomas, the traditional “four-factor” equitable test for granting a permanent injunction equally applied to cases of patent infringement: (1) irreparable harm to the plaintiff (i.e., MercExchange); (2) legal remedies, such as damages, were inadequate to compensate the plaintiff for its injury; (3) a remedy in equity (i.e., injunction) was warranted by the “balance of hardships” between the parties (i.e., MercExchange and eBay et al.); and (4) the public interest would not be disserved by the permanent injunction. In fact, Justice Thomas further relied on Section 283 of the Patent Act [ix] as recognizing that injunctions “may issue” in patent infringement actions in accordance with the principles of equity (i.e., the traditional “four-factor test”).
Justice Thomas also found that, like the Federal Circuit, the Eastern District of Virginia had not “fairly applied these traditional equitable principles in deciding” the request for permanent injunction. While the Eastern District of Virginia recited the traditional “four-factor” test, Justice Thomas said the Eastern District of Virginia erred in adopting “expansive principles suggesting that injunctive relief could not issue in a broad swath of cases,” including those where the patent holder offered to license the patent or did not practice the patented invention. In addition, Justice Thomas was aware of the tension created by the Eastern District of Virginia’s “categorical rule” relative to the Supreme Court’s 1908 decision in Continental Paper Bag Company v. Eastern Paper Bag Company. [x] In Continental Paper Bag, the Supreme Court had rejected the “categorical” proposition that “a court of equity has no jurisdiction to grant injunctive relief to a patent holder who has unreasonably declined to use” the patented invention. [xi]
In contrast, the Justice Thomas found that the Federal Court had go awry in the “opposite direction” by articulating a “general rule” on granting equitable relief that was “unique to patent disputes.” Just as the Eastern District of Virginia was wrong in “its categorical denial of injunctive relief,” the Federal Circuit “erred in its categorical grant of such relief.” Instead, Justice Thomas held that “the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with the traditional principles of equity, in such patent disputes no less than other cases governed by such standards.” [xii]
Chief Justice Roberts’ concurring opinion was both brief and obtuse. While agreeing with Justice Thomas’ ruling that the traditional “four-factor” test for injunctive relief also applied to patent disputes, Chief Justice Roberts’ concurring opinion then made a nebulous reference to “a difference between exercising equitable discretion pursuant to the established four-factor test and writing on an entirely clean slate.” It would have been helpful if Chief Justice Roberts had spelled out exactly what was “written” on that “slate,” but nothing in his concurring opinion clearly does this. [xiii]
The concurring opinion of Justice Kennedy is even more unfortunate. Like Chief Justice Roberts, while agreeing with Justice Thomas’ holding that the traditional “four-factor” test applied to the grant of injunctive relief in patent cases, Justice Kennedy’s concurring opinion went even further to suggest that “trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier patent cases.” As Justice Kennedy saw it, “an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent.” What is particularly distressing about Justice Kennedy’s concurring opinion is the further comments he makes about injunctive relief in the context of patents on “business methods”:
[I]njunctive relief may have different consequences for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test.” (Emphasis added.)
Why Justice Kennedy felt compelled to make these unfortunate remarks (especially those italicized) about applying the traditional “four-factor test” to patent cases generally and “business method” patents specifically is anybody’s guess. No citation is made by Justice Kennedy to the record, other facts or even case law to support these remarks. These remarks are not only completely unnecessary, but completely inconsistent with the holding in the eBay case that there is nothing “unique” about applying the traditional “four-factor test” to patent disputes. One can only hope that these regrettable remarks will be ignored as the dicta they are. [xiv] If not, these remarks may be cast unfortunate, as well as erroneous, doubt on the validity of many patents characterized (rightly or wrongly) as involving “business methods.”
*© 2006 Eric W. Guttag; Published in Cincinnati Bar Association Report, page 18 (August 2006).
[i] 149 F.3d 1368, 47 U.S.P.Q.2d (BNA) 1596 (Fed. Cir. 1998), cert. denied, 119 S. Ct. 851 (1999).
[ii] 35 U.S.C. § 101 (Inventions Patentable): “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”
[iii] 149 F.3d at 1377, 47 U.S.P.Q.2d (BNA) at 1604. See also AT&T Corp. v Excel Communications, Inc, 172 F.3d 1352, 1356, 50 U.S.P.Q.2d (BNA) 1447, 1450 (Fed. Cir. 1999) (State Street discarded the so-called “business method” exception).
[iv] 868 F.2d 1226, 1246-47, 9 U.S.P.Q.2d (BNA) 1913, 1929 (Fed. Cir. 1989). One such reason for denying a permanent injunction is when “a patentee’s failure to practice the patented invention frustrates an important public need for the invention,” such as to protect public health. Rite-Hite Corp. v. Kelley Inc., 56 F.3d 1538, 1547, 35 U.S.P.Q.2d (BNA) 1065, 1071 (Fed. Cir. 1995)(). See also Roche Products., Inc. v. Bolar Pharm Co., 733 F.2d 858, 865-66, 221 U.S.P.Q. (BNA) 937, 942 (Fed. Cir. 1984)(“standards of the public interest, not the requirements of private litigation, measure the propriety and need for injunctive relief”).
[v] 401 F.3d 1323, 74 U.S.P.Q.2d 1225 (Fed. Cir. 2005).
[vi] The Eastern District of Virginia provided three other reasons for denying the permanent injunction: (1) the litigation in the case was “contentious such that the alleged infringers would attempt to design around the patent, resulting in repeated contempt hearings; (2) public statements by MercExchange of its willingness to license the patents; and (3) failure by MercExchange to request a preliminary injunction.
[vii] 401 F.3d at 1339, 74 U.S.P.Q.2d at 1237-38.
[viii] 547 U.S. ____ (2006). There was also a concurring opinion by Chief Justice Robert (joined by Justices Scalia and Ginsburg) and a concurring opinion by Justice Kennedy (joined by Justices Stevens, Souter and Breyer).
[ix] 35 U.S.C. § 283 (Injunctions): “The several courts having jurisdiction of cases under this title 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.”
[x] 210 U.S. 405 (1908).
[xi] 210 U.S. at 422-30.
[xii] In fact, Justice Thomas said that the Supreme Court took “no position on whether permanent injunctive relief should or should not issue in this particular case.”
[xiii] Chief Justice Roberts’ concurring opinion quotes from two other Supreme Court cases that appear to have nothing to do with the grant of equitable relief: (1) “Discretion is not whim, and limiting discretion according to legal standards helps promote the basic principle of justice that like cases should be decided alike” (citing page 6 of the slip opinion to Martin v. Franklin Capital Corp., 546 U.S. ___, ____ (2005)); and (2) “When it comes to discerning and applying those standards, in this area as others, ‘a page of history is worth a volume of logic’” (citing the opinion of Justice Holmes in New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921)).
[xiv] These unfortunate remarks in Justice Kennedy’s concurring opinion in the eBay case may already be causing mischief with regard to the grant of permanent injunctions in patent infringement disputes. In the recent case of z4 Technologies, Inc. v. Microsoft Corp., F.Supp.2d (E.D. Tex. 2006), the District Court for the Eastern District of Texas denied a motion for entry of a permanent injunction after two patents were determined by a jury to be willfully infringed. In considering the second factor (adequacy of remedies available at law), the Eastern District of Texas noted that Justice Kennedy in eBay had “instructed courts to be cognizant of the nature of the patent being enforced and the economic function of the patent holder when applying the equitable factors.” See z4 Technologies, supra, slip opinion at page 6. Whether the Federal Circuit will accept this assessment by the Eastern District of Texas if the z4 Technologies case is appealed remains to be seen.
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