The U.S. Supreme Court issued a short ruling Monday that will allow eBay users to continue to use the popular “Buy It Now” option on its website. In the process, the Court may have significantly changed the shape of patent litigation.
At issue in eBay Inc. et al. v. MercExchange, L.L.C., was U.S. Patent No. 5,845,265, a business method patent held by MerExchange for an electronic market designed to facilitate the sale of goods between individuals on the Internet. The patent is designed to promote trust among buyers and sellers by establishing a central authority to process the transaction.
In 2003, a Virginia jury found that MercExchange’s patent was valid and that eBay had willfully infringed the patent. The jury awarded MercExchange $35 million in damages. MercExchange then sought a permanent injunction to prevent eBay from continued infringement, but the District Court denied the injunction. The District Court concluded that MercExchange’s willingness to license its patents and lack of commercial activity in practicing its patents prevented it from establishing the irreparable harm necessary to justify a permanent injunction. The Court of Appeals reversed, holding citing “a ‘general rule,’ unique to patent disputes, ‘that a permanent injunction will issue once infringement and validity have been adjudged.'” In a unanimous decision, the Supreme Court rejected both approaches because neither court correctly applied the traditional four-part test for injunctive relief.
The importance of this decision goes far beyond the impact it will have on those consumers who wish to “Buy It Now” on eBay. Rather, the Court has taken a large weapon from the arsenal of patent holders who bring infringement suits, who until now relied on the ‘automatic’ injunction. In a concurring opinion, Justice Anthony Kennedy expressed his concern 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. 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.”
Justice Kennedy was likely referring to what critics of the patent system have labeled “patent trolls,” small companies that sue large companies for infringing patents that the patent trolls have never developed into products. The threat of injunctions is enough to force many large companies to pay these patent trolls very high license fees for questionable patents. A recent example is BlackBerry paying $612 million for licenses to use patents held by Research In Motion, even though the U.S. Patent Office was ready to declare RIM’s patents invalid. Likewise here, the patent office has issued preliminary ruling that it erred in issuing the MercExchange patent, saying the invention was “obvious.”
On the other hand, patent holders complain that the ruling will make it more attractive for large companies to make the business decision to infringe the patent without getting a license and pay whatever judgment is eventually handed down. With an injunction more difficult to obtain, the patent holder will have less leverage in negotiations for licenses with these large companies, who can better afford to sustain lengthy legal battles. This is especially true if the large company is enjoying the profits of their infringement while defending the lawsuit.
At the end of the day, the decision means that a patent holder who prevails at trial against an infringer is not done fighting. He must still show that he is entitled to an injunction. That requires that he show (1) he will suffer irreparable injury if the injunction is not issued, (2) money damages are not a sufficient remedy, (3) he will suffer more hardship if the injunction is not issued than the infringer will suffer if it is, and (4) public interest would not preclude issuing an injunction. In the case where a patent holder has never tried to produce an market a product embodying his patent, and the infringer has made the patent an important part of his business, the patent holder will probably not be able to make this showing. At the very least it will prolong patent disputes and make them more costly for patent holders to maintain.
In the present case, the Supreme Court’s decision will likely give eBay the time it needs for the patent office to invalidate MercExchange’s patents. At that point, no license will be needed and MercExchange loses. No doubt BlackBerry wishes it had that time.
Scott Cameron is an associate in Weintraub Genshlea Chediak Tobin & Tobin’s litigation section. For more interesting articles on intellectual property, visit