Supreme Court Ruling Could Change Balance Of Power In Patent Infringement Cases

In eBay v. MercExchange, the court creates a high barrier by requiring that four conditions be met before issuing a permanent injunction.

InformationWeek Staff, Contributor

May 19, 2006

4 Min Read

The U.S. Supreme Court torpedoed a powerful weapon from patent holders' arsenals with its unanimous ruling last week that courts shouldn't automatically impose a permanent injunction against a patent infringer. If that had been the law when Research In Motion was defending its BlackBerry service, it could've dramatically changed how that case played out.

Though the high court didn't side with either litigant, the ruling in the case of eBay v. MercExchange favors eBay, which a jury in 2003 determined infringed on MercExchange's patent on a fixed-price sales process used over the Web. MercExchange contends, and the jury agreed, that eBay employs the patented innovation in its "Buy It Now" feature. The jury ordered eBay to pay MercExchange $35 million, which could be increased to more than $100 million.

An injunction is powerful because a patent infringer must stop using a technology immediately. Until now, legal precedent has made injunctions nearly automatic in cases where patent infringement was found. In the case against RIM, for example, the big threat was that an injunction would force RIM to quickly halt its BlackBerry service, cutting off its revenue source. That threat made it risky for RIM to hold out hoping for a favorable judgment. RIM ended up paying $612.5 million to settle the case.

Four Conditions Courts can impose injunctions if:

1. The innovator suffered an irreparable injury.

2. Available remedies such as monetary awards aren't adequate to compensate for the injury.

3. Balance of hardships between the infringer and patent holder are considered. If a business can be punished but remain viable through financial penalties, an injunction should be avoided.

4. Injunction wouldn't harm public interest.

In the eBay case, a federal district court judge denied MercExchange's motion for injunction. An appeals court reversed that ruling, saying a century-old precedent required a permanent injunction if a patent is infringed. Last week's Supreme Court action usurped that precedent and set up a four-factor test for an injunction (see box, Four Conditions).

If the Supreme Court ruling had been law in March, RIM would have been able to argue that shuttering its business through an injunction would have caused irreparable harm out of balance to any financial penalty, and even that the public interest wouldn't have been served because the government relies on BlackBerry services for homeland security, and millions of customers use it as part of their businesses.

Such a high barrier should make it rare for an injunction to be imposed for infringing a patent. It will help defendants accused of patent violations because they "are better off just taking their chances of having a jury determine the appropriate amount of damages," says patent lawyer Tim Meece, senior partner at Banner & Witcoff.

The ruling dismayed the head of a group of inventors who sided with MercExchange. Injunctions are valuable because they force infringers to settle quickly, says Ronald Riley, president of the Professional Inventors Alliance USA. He predicts an increase in litigation because infringers will have little motivation to negotiate an early settlement. "Young, really successful companies like eBay develop quite fat heads, and they think they can do what they want, when they want, with other people's property," Riley says. "The injunction is a powerful weapon against companies like that."

Shift In eBay's Favor

Some Justices cast a wary eye on patent holders without a product. "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," Justice Anthony Kennedy wrote in a concurring opinion. "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."

The Supreme Court decision isn't an outright victory for eBay, but it's a setback for MercExchange since the possibility of a permanent injunction is more remote. MercExchange already faced setbacks. In March, the U.S. Patent and Trademark Office issued a preliminary ruling saying it erred when it issued the patent, and that it now deems MercExchange's invention obvious, a precondition that would have prevented a patent from being issued. The Supreme Court ruling could buy eBay enough time to get the patent invalidated, since it's less likely to face an injunction that closes down part of its service. And if the patent is eventually invalidated, eBay wouldn't owe MercExchange a dime.

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