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

A Patent Split Emerges in the High Court

On May 15, 2006, the Supreme Court issued its opinion in the widely followed eBay Inc v. MercExchange, L.L.C. case. (A copy of the opinion may be downloaded here.) In reversing the Federal Circuit, the Supreme Court held that a patent holder who has demonstrated infringement at trial is not axiomatically entitled to injunctive relief. The Court held that injunctive relief in patent cases, like in any other case, is discretionary and can only be granted if the traditional four-factor test for equitable relief is satisfied. Reading the opinion between the lines, the decision might be called an example of a deeply divided unanimous court. Although the entire Court joined Justice Thomas’ opinion, two concurring opinions signal a deep divide on the issue of injunctions in patent cases that may be developed in future cases.

MercExchange, L.L.C., was the assignee of three business method patents for online auction applications. The patents describe methods allowing bidders to instantaneously purchase items that are listed on online auctions for a fixed price without having to bid on the items. After unsuccessfully offering to license the patents to eBay, MercExchange successfully sued eBay for patent infringement and was awarded $35 million in damages. After the trial MercExchange requested that a permanent injunction be entered against eBay.

The District Court denied the request for an injunction after concluding that MercExchange had not proven irreparable harm. This conclusion was based, in large part, on the fact that MercExchange had openly been willing to license the patents and had not itself commercialized the patents. 275 F. Supp. 2d 695, 712 (E.D.Va. 2003). The Federal Circuit reversed stating that “[b]ecause the ‘right to exclude recognized in a patent is but the essence of the concept of property,’ the general rule is that a permanent injunction will issue once infringement and validity have been adjudged.” 401 F. 3d 1323, 1338. The Supreme Court granted certiorari “to determine the appropriateness of this general rule.”

The Supreme Court reversed stating that neither the District Court nor the Federal Circuit had properly applied the law in deciding MercExchange’s request for a permanent injunction. The Court held that while the Patent Act does grant the right to exclude others from the patentee’s invention, nothing in the Act expressly exempted patent cases from the traditional four-factor equitable test for adjudicating the appropriateness of injunctive relief. The four-factor test requires a plaintiff to demonstrate:

(1) that it has suffered an irreparable injury; (2) that remedies available at law 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.

The Court took exception to the District Court’s determination that the patent-holder’s failure to market the patented invention meant that no irreparable harm was possible. On the other hand, the Court found that the Federal Circuit erred in stating a “general rule” that an injunction of patent infringement should issue in all but “exceptional circumstances.” The unanimous opinion appears to be a compromise between diverging views with regard to what circumstances are necessary to enter injunctions in patent infringement cases.

In the first concurring opinion, Chief Justice Roberts, joined by Justices Scalia and Ginsberg, remarked that “[f]rom at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases.” Noting the “difficulty of protecting the right to exclude” through money damages alone, Roberts contended that even as the general rule enunciated by the Federal Circuit was inappropriate, “there is a difference between exercising equitable discretion pursuant to the established four-factor test and writing on an entirely clean slate.” The Chief Justice’s concurrence leans more heavily in favor of the traditional position — that an injunction should in most cases be granted where a patent is found to have been infringed.

In the second concurring opinion, Justice Kennedy, joined by Justices Stevens, Souter and Breyer, advocated discarding historical practice in light of the changing nature of patents, claiming “that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases.” Justice Kennedy decried the practice of using patents “not as a basis for producing and selling goods but, instead primarily for obtaining licensing fees,” suggesting that those patentees were essentially extorting infringers with the threat of injunctive relief. Justice Kennedy suggested that the public would be better served if patent-holders were denied the ability to use the threat of an injunction to gain “undue leverage in negotiations” for licensing fees – particularly “[w]hen the patented invention is but a small component of the product the companies seek to produce.”

Justice Kennedy also expressed general skepticism of business method patents over their perceived “vagueness and suspect validity” writing (emphasis added):

[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.”

One could argue, based on this language, that in the case of patents Justice Kennedy calls for adding a fifth element to the traditional equitable test “calculus.” This additional hurdle would require patent holders to prove the general “worthiness” of their patents in order to secure injunctive relief. It is clear, therefore, that Justices Kennedy, Stevens, Souter and Breyer lean significantly towards stricter scrutiny of injunctive relief requests in patent cases, particularly where a business method patent is at issue.

It is notable that Justice Thomas did not join either concurring opinion and that Justice Alito did not participate in the deliberations on this case. The two Justices may provide the pivotal votes in future Supreme Court opinions touching on this issue.