Happy 5th Anniversary: The Impact of eBay v. MercExchange

As anyone who follows the United States Supreme Court knows, the Court has historically been extremely fond of taking important cases, with cutting edge issues, only to dodge the real issues and address some insignificant procedural or hyper-technical issue.  Such disappointment is all to frequent, so Supreme Court watchers are seldom surprised when the Court passes on an opportunity to breathe clarity into otherwise unsettled waters.  But what the Supreme Court did five years ago today in the eBay v. MercExchange case was far more sinister than merely refusing to address important issues of the day.  The Supreme Court decided to throw out long standing and well established Federal Circuit jurisprudence and offered little or nothing in its place.

According to research Patstats.org, which is an ongoing patent statistics project by the University of Houston Law Center, since the Supreme Court’s decision in eBay v. MercExchange (through April 11, 2011) there have been 131 cases where a permanent injunction has issued and 43 cases where a permanent injunction has been denied.  Some have tried to pass this off as not much of a departure from the practice prior to the Supreme Court’s decision.  Such a viewpoint is, however, not correct.  Prior to the Supreme Court’s decision it was virtually unheard of for a district court to deny a victorious plaintiff a permanent injunction in  patent infringement case.  So the Supreme Court’s decision in eBay v. MercExchange has been one that has significantly altered the patent litigation landscape and, therefore, is easily one of the most important Supreme Court patent cases in recent memory.

The Court’s decision in eBay v. MercExchange related to the issuance of injunctions to victorious patent owners upon successful completion of patent litigation.  In order to understand the decision we will rewind the clock in pursuit of greater understanding, beginning with the well established law that was in place up until the early morning hours of May 15, 2006, the day the Supreme Court issued the decision in question.

Prior to May 15, 2006, when a patent owner prevailed on the merits in a patent infringement lawsuit, there was a well established general rule that an injunction should issue absent the presence of a sound reason for denying it.  In reality, what this general rule meant was that permanent injunction should issue, and if they didn’t issue the district court had some explaining to do.  While the routine issuance of a permanent injunction to the victorious patent owner may seem reasonable given the exclusive nature of the patent grant itself, such a bright-line rule was believed by some to be inconsistent with well established equitable principles that apply to all areas of law.

In addressing the issues in eBay v. MercExchange, the Supreme Court determined that the familiar principles of equity as applied to permanent injunctions should apply to disputes arising under the Patent Act.  The translation: the often applied bright-line rule is erased in favor of the traditional four-factor test for granting injunctions.  Starting late in the morning on May 15, 2006, in order to receive a permanent injunction in a patent litigation the victorious plaintiff needs to demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.

So what does this all mean? According to Michael Marion of Birch, Stewart, Kolasch & Birch, one particular consequence of the Supreme Court’s decision in eBay v. MercExchange has been to slam the door in the face of so-called non-practicing entities (who are sometimes referred to as patent trolls).  It had been a tactic of many non-practicing entities to attempt to use injunctions as leverage in order to get accused infringers to pay licensing fees.  Marion says that “removing the presumption of irreparable injury from the equitable balancing creates the near-impossibility that a company focused solely on monetizing its patents through licensing could not be made whole through money damages alone.”

Of course, non-practicing entities, or patent trolls, are not the only ones experiencing difficulty with respect to obtaining injunctions.  The test “requires proof of non-economic factors such as loss of goodwill or loss of market share,” says Marion, which makes it harder for all entities to obtain an injunction.

As a consequence of the Supreme Court’s decision the United States International Trade Commission (ITC) has also become a far more desirable forum for patent owners, both non-practicing entities and practicing entities alike.  “The ability to obtain an exclusion order from the ITC… provides a very large hammer to entities,” says Marion.

But why is the ITC more attractive today post eBay v. MercExchange? In contrast to the traditional four-prong injunction analysis, which has now become a mandatory part of determining the issuance of injunctions in patent cases, there is a different standard applicable to exclusion orders issued by the ITC.

If imports are found to violate Section 337 of the Tariff Act of 1930, an exclusion order will be issued by the ITC to the U.S. Customs Service, thereby excluding these products from importation into the United States. To prove a violation of Section 337, a complainant must establish some kine of unfair competition or an unfair act, such as patent infringement. Thus, going to the ITC to seek redress for patent infringement is an option for patent owner when infringing products are being imported into the United States.

“The delineation between injunctions from district courts and exclusion orders from the ITC was expounded in the recent decision of Spansion, Inc. v. Int’l Trade Comm’n, 629 F.3d 1331 (Fed. Cir. 2010),” explains Marion. “The Federal Circuit explicitly held that eBay does not apply to the remedy determinations from the ITC. Although the USITC will decline to grant an exclusion order where the public interest would be negatively affected, the Federal Circuit noted there have been no such instances since 1984.”

So it would seem that an unintended consequence of the Supreme Court’s decision in eBay v. MercExchange, has been to make it even more attractive for patent owners to rush to the ITC for redress.  While the ITC cannot award damages, the ITC proceeding is far quicker than a proceeding in Federal District Court and and result in a blocking of infringing products coming into the United States, thereby taking away competition and turning up the heat for a settlement.  Meanwhile, it can be easier to obtain an exclusionary order at the ITC than it is to obtain an injunction in Federal District Court, despite the relative closeness of the remedies in functional terms.

What is most alarming about the Supreme Court’s decision isn’t the increase in ITC filings, but rather that in 25% of cases in Federal District Court where the patent owner prevails there is no permanent injunction issued.  This is exceptionally difficult to swallow when you factor into the equation that the patent grant itself is supposed to guarantee to the patent owner the right to prevent others from making, using, selling, offering for sale or importing into the United States infringing devices.  You see, the patent by its very nature provides the owner an exclusionary right.  A permanent injunction in a patent infringement case does nothing other than conclusively tell the losing party (i.e., the INFRINGER) that they cannot make, use, sell, offer for sale or import infringing devices.  So a permanent injunction issued to a victorious patent owner plaintiff does nothing more on a substantive level than reiterate the patent rights provided the patent owner as a part of the patent issued.

Of course, a permanent injunction does do a lot more though.  A permanent injunction allows the district court judge to retain jurisdiction of the case and gives the patent owner the ability to return to the district court without needing to file a new patent infringement lawsuit should the infringer keep up with the old infringing ways.  That is what the Federal Circuit recently authorized in TiVo v. Echostar.  Without the issuance of a permanent injunction the prevailing patent owner plaintiff is left to continually sue time and time again to seek redress.  So a well funded infringing defendant could just keep on infringing and force the patent owner to expend many millions of dollars pursuing the infringer.  In essence, without a permanent injunction infringement pays, which is a terribly unfortunate reality of the Supreme Court’s decision in eBay v. MercExchange.

Still further, because injunctions are about equity the district court judges have broad discretion and their decisions will be reviewable only for abuse of discretion, which means they won’t really be reviewable at all in most situations. This is particularly problematic due to the fourth traditional injunction factor, which asks whether the public interest would be disserved by the issuance of a permanent injunction.  So, if the public is deriving benefit from the infringement then infringement logically should not be stopped under the traditional injunction test.  This flies in the face of the premise of the patent grant and smacks of a compulsory licensing scheme, which never existed in US patent law, at least not until after the Supreme Court decision in eBay v. MercExchange.

Logically it would seem that based on the fourth factor those patent owners who own the rights to the most important technologies may be those most at risk of not obtaining a permanent injunction, which is ridiculous.  The Supreme Court has told us in KSR v. Teleflex that they want inventions to be based on more than merely “common sense” in order to be considered non-obvious and patentable, but the more important and the more non-obvious and fundamentally important the less likely a permanent injunction will be obtained?  So the groundbreaking, paradigm shifting, disruptive technologies that the patent system is supposed to encourage are those that will find it hardest to achieve a permanent injunction?  Obviously the Supreme Court didn’t exactly think this through to its logical conclusion, which is unfortunately the problem with almost all Supreme Court patent decisions.

The entire patent system is based on dangling a capitalistic carrot.  We give you the right to extract monopoly profits for a limited time in exchange for knowledge and advancement.  How then does it make any sense to say that those really great, important, paradigm shifting inventions that are universally important are entitled to fewer rights?  Aren’t we supposed to encourage those types of inventions and try and figure out ways to stop patenting things like a head mounted letter “M” display?

In an effort to make it harder for patent trolls to obtain injunctions yet another bad decision has weakened the patent system for everyone.