Background
A small company in Virginia called MercExchange sued eBay,
claiming the auction company's 'Buy It Now' feature
infringed a business method patent that covered the conduct of
fixed-priced sales over the internet. A District Court agreed and
awarded damages of almost $35 million (later reduced to $29.5
million) – but refused to switch off the feature on eBay's site.
Then the Court of Appeals overruled that refusal and said a
permanent injunction should be granted. EBay appealed.
Yesterday, the Supreme Court said that both courts made
mistakes. But instead of ruling on whether the feature should be
removed from eBay's site or not, it explained the mistakes of the
lower courts and ordered further proceedings.
Analysis
The approach of the Court of Appeals for the Federal Circuit was
wildly inaccurate, it seems. It articulated a "general rule,"
unique to patent disputes, "that a permanent injunction will issue
once infringement and validity have been adjudged" except in the
"unusual" case, under "exceptional circumstances" and "in rare
instances … to protect the public interest."
There is no such rule, said the Supreme Court in its unanimous
verdict. The proper approach to the question of whether to award a
permanent injunction is to apply a four-point test. The plaintiff
must demonstrate:
- That it has suffered an irreparable injury;
- That remedies available at law are inadequate to compensate for
that injury;
- That considering the balance of hardships between the plaintiff
and defendant, a remedy in equity is warranted; and
- That the public interest would not be disserved by a permanent
injunction.
This test is well-established but the Court of Appeals lost
sight of it. The US District Court for the Eastern District of
Virginia was closer to the mark – it did apply the four-point test
– but its application was flawed, according to Justice Clarence
Thomas who delivered the opinion of the Court.
A court has discretion to grant or deny injunctive relief, but
its decision must be consistent with traditional principles of
equity, he said. These principles apply to patent cases as they do
to other cases. But the District Court failed to follow the
principles of equity, according to Justice Thomas. He said that it
appeared to adopt expansive principles suggesting that injunctive
relief could not apply to a broad swath of cases.
Justice Thomas rebuked the District Court for suggesting that a
"plaintiff's willingness to license its patents" and "its lack of
commercial activity in practicing the patents" would be sufficient
to establish that the patent holder would not suffer irreparable
harm if an injunction was not issued.
Traditional equitable principles do not permit such broad
classifications, he said. 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.
"Such patent holders may be able to satisfy the traditional
four-factor test," wrote Justice Thomas, "and we see no basis for
categorically denying them the opportunity to do so."
But at least the District Court was applying the right test,
unlike the Court of Appeals.
Justice Kennedy added some of his own thoughts. "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," he wrote.
He continued: "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."
Some people call such firms patent trolls; but are they doing
anything wrong?
Justice Kennedy continued: "When the patented invention is but a
small component of the product the companies seek to produce and
the threat of an injunction is employed simply for undue leverage
in negotiations, legal damages may well be sufficient to compensate
for the infringement and an injunction may not serve the public
interest."
He said that an injunction 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."
The District Court must now reconsider whether an injunction is
appropriate. EBay has previously reported that it changed its
'Buy It Now' service after the District Court ruling in
2003 to avoid future infringement, so the ultimate decision may not
affect the operation of its business.
Reaction
MercExchange said in a statement last night: "MercExchange is
pleased that the Supreme Court has ordered the district court to
reconsider MercExchange's request for an injunction to force eBay,
Inc., to stop infringing MercExchange's valid patent. We are
confident that the district court, when it fairly applies the
traditional principles of equity set forth in the Supreme Court's
opinion, will grant the injunctive relief to which MercExchange is
entitled."
According to reports, eBay said it was "extremely gratified" by
the decision and expects the District Court to deny an injunction
again.
Deborah Bould, a partner with Pinsent Masons who specialises in
intellectual property, said the case is good news for US companies
that fear lawsuits from pure licensing organisations.
"EBay was challenging the same court practices that nearly shut
down the BlackBerry service in the US," she said. "The Supreme
Court has said that an injunction is not an automatic right once
infringement is proved on a valid patent and there are other
factors to consider. The precise impact won't be known until the
lower Courts interpret the decision."
Bould speculated that if these circumstances came before a court
in Britain, a permanent injunction seems unlikely.
"The UK has a provision in its patent laws that if demand for a
patented product is not being met on reasonable terms, a would-be
licensee can apply to the Patent Office for a compulsory licence –
in effect a deterrent to so-called 'patent trolls'," she said.
She added that courts in Scotland and England have a discretion
to refuse an injunction in an exceptional case and award damages in
lieu.
