U.S. Supreme Court Rules Tests For Injunctive Relief In Patent Infringement Must Be Applied on Case-by-Case Basis

The U.S. Supreme Court on May 15 handed down a unanimous decision which revisited the traditional rule that a finding of patent infringement automatically entitles the patent holder to injunctive relief. Instead, the Court held, traditional tests for injunctive relief must be applied on a case-by-case basis to determine whether injunctive relief, as opposed to money damages, is warranted.

The case, eBay, Inc. v. MercExchange, LLC, concerned a jury finding that the "Buy It Now" feature of eBay's online auction business infringed two MercExchange patents. The Federal District Court in Virginia denied the request by MercExchange, a small local company which had failed to raise the capital necessary to commercialize its invention, for an injunction in addition to the $25 million damages it won on jury verdict. The District Court found that MercExchange was not entitled to an injunction because it had not engaged in "commercial activity" to market its patents. Justice Clarence Thomas, writing for the Court, held that the District Court had incorrectly applied an absolute rule: "Some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves."

However, Justice Thomas also held that the Federal Circuit Court of Appeals in Washington, D.C., which handles patent case appeals nationally, was also too absolute when it overturned the District Court denial of the injunction on the basis of the "general rule" that "a permanent injunction will issue once infringement and validity have been adjudged." In patent cases just like any other, he wrote, the party seeking an injunction must show that it has "suffered an irreparable injury," that money damages would be inadequate, that an injunction is warranted, and that the public interest "would not be disserved by a permanent injunction."

Notwithstanding the unanimous decision, a concurring opinion from Chief Justice Roberts, joined by Justices Scalia and Ginsberg--usually at opposite ends of the ideological spectrum--suggested that the denial of an injunction should be rare, noting that "from at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases."

By contrast, a second concurring opinion by Justice Kennedy, joined by Justices Stevens, Souter, and Breyer, took note of the changing business climate and suggested that courts should consider the nature of the patent in issue and the economic function of the patent holder. Clearly, the implication here was that the public and the economy are ill-served when a patent holder is unable or unwilling to commercialize an invention. Justice Kennedy further criticized abusive exploitation by a patent holder: "An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. For these firms, 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."

In the meantime, as the lower courts now reexamine the case, the U.S. Patent and Trademark Office has begun a reconsideration of the validity of MercExchange's patents. This could take years and obviously spawn even more litigation. Collectively these developments likely put pressure on MercExchange to be more reasonable in negotiations with eBay for a license.

What is the practical significance of this ruling for clients? First, if you are a patent holder, there is a heightened risk in withholding your patents from market. This is consistent with the policy basis of the patent system to encourage invention to benefit the public and the economy. A patent, after all, is a legal monopoly, the right to exclude others from use; but if no one uses it, no one benefits. Therefore, patent holders should act affirmatively to commercialize their inventions and, if they cannot, to try to license them on commercially reasonable terms.

Second, one can read into this decision the seeds of heightened scrutiny for the practice of patent pooling and banking, whereby IP holding companies or other licensors engage in the business of licensing rather than directly commercializing their patents. This practice already imposes a significant restriction on damages recovery, because damages are then limited to a reasonable licensing fee. Extensive patent portfolios, particularly if they involve cross-licensing in "patent pools" with other patent holders, can serve as a "trap for the unwary" and an effective barrier to entry to a given industry. Firms engaged in such business methods should take care to act in a commercially reasonable manner.

Third, it is possible to read too much into this new Supreme Court decision, which could be argued to be "a hard case making bad law." Suspicions linger that it will be a rare case in which a finding of patent infringement will not lead to injunctive relief. Clearly the Justices did not relish the prospect of withholding or withdrawing from the public a widely-used current methodology offered on eBay when the patent holder itself was not prepared to and had already been awarded $25 million. The concurring opinion from Justice Roberts, joined in by three Justices, suggest it will not take much to justify an injunction. There will likely continue to be a practical bias or presumption in its favor.

Each case and each client must be evaluated on their own merits. This general discussion is not intended to be, and should not be read as, legal advice.