Why eBay v. MercExchange Should, But Won’t, Be Overruled

As anyone who follows the United States Supreme Court knows, the Court has historically been extremely fond of taking important cases with cutting edge issues, only to dodge the real issues and address some insignificant procedural or hyper-technical issue. Such disappointment is all too frequent, so Supreme Court watchers are seldom surprised when the Court passes on an opportunity to breathe clarity into otherwise unsettled waters. But what the Supreme Court did in eBay Inc. v. MercExchange LLC, 547 U.S. 388 (2006) was far more disappointing. In eBay, the Supreme Court decided to throw out longstanding and well-established Federal Circuit jurisprudence and offered little or nothing in its place. The result has been an extraordinary shift in the balance of power between patent owners and infringers.

A New Landscape

Although there never was a mechanical rule from the Federal Circuit that mandated an injunction in all cases, permanent injunctions for victorious patent owners could be routinely expected. So, the Supreme Court’s decision in eBay v. MercExchange has been one that significantly altered the patent litigation landscape and, therefore, is easily one of the most important Supreme Court patent cases in recent memory.

In order to understand the decision, we must rewind the clock, beginning with the well-established law that was in place up until the early morning hours of May 15, 2006—the day the Supreme Court issued the decision in question.

Prior to May 15, 2006, when a patent owner prevailed on the merits in a patent infringement lawsuit, there was a well-established general rule that an injunction should ordinarily issue absent the presence of a sound reason for denying it. In reality, what this general rule meant was that permanent injunction should issue, and if an injunction did not issue the district court was required to explain the rationale for denying the injunction. While the routine issuance of a permanent injunction to the victorious patent owner may seem reasonable given the exclusive nature of the patent grant itself, such a bright-line rule was believed by some to be inconsistent with well-established equitable principles that apply to all areas of law. This view, however, ignores the essence of the patent grant, which by its very nature and verbiage grants to the patent owner the right to exclude others. In other words, the patent is a de facto injunctive right earned by the patent owner against the world and granted by the U.S. federal government.

In addressing the issues in eBay, the Supreme Court determined that the familiar principles of equity as applied to permanent injunctions should apply to disputes arising under the Patent Act. Translation: What the Supreme Court incorrectly viewed as a bright-line rule was erased in favor of the traditional four-factor test for granting injunctions.

Four Fateful Factors

Starting late in the morning on May 15, 2006, in order to receive a permanent injunction in a patent litigation the victorious plaintiff needs to demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, 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.

This would not be so bad if irreparable harm would be presumed, which it should be because a patent is a time limited – or wasting asset – that will become a nullity after a prescribed period of time has passed. Once the patent falls into the public domain it is free to be used by anyone and everyone, as are all obvious variations of the invention described. Therefore, the patent owner must derive all economic benefit from the patented invention during the finite period of time the patent is in force. This means the finite period of exclusivity must really be exclusive. No amount of monetary damages can pay the patent owner for the loss of the right to the exclusive marketplace for the proscribed period of time. In fact, the law does not even recognize the loss of the exclusive right to the market as a recognizable or quantifiable monetary damage, although it most certainly does cause harm when the true innovator is forced to share the market they created with a callous, calculating, free-riding infringer. That exclusive marketplace for a period of time not only allows the patent owner to reap the rewards of invention alone, but to establish themselves alone as the source. Thus, free-riding patent infringers cause an identifiable yet uncompensated trademark and unfair competition damage upon patent owners. That is why, with a wasting asset like a patent, irreparable harm must be presumed.

Sadly, since the Supreme Court decided eBay, irreparable harm is not presumed in patent infringement litigation.

Little Solace in the ITC

So, what does this all mean? As a consequence of the Supreme Court’s decision, the United States International Trade Commission (ITC) has also become a far more desirable forum for patent owners, both non-practicing entities and practicing entities alike. The ability to obtain an exclusion order from the ITC provides great leverage to those who can use the ITC, which has jurisdiction under Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, to determine whether there is an unfair act in the importation of products into the United States, and/or subsequent sale of products in the United States. Section 337 defines the infringement of a patent, copyright, registered trademark or mask work to be such an unlawful act.

The ITC is more attractive today post eBay v. MercExchange because a different standard is applicable to exclusion orders and cease and desist orders issued by the ITC than to injunctions issued in federal courts. So, while the ITC cannot award damages, the ITC proceeding is far quicker than a proceeding in federal district court and can result in blocking of infringing products coming into the United States, thereby taking away competition and turning up the heat for a settlement. But the ITC is not an available jurisdiction for everyone. For example, the ITC cannot get involved in purely domestic matters, and certain patent owners, such as non-practicing entities, find it difficult to resort to the ITC due to domestic activity requirements.

What is most alarming about the Supreme Court’s decision isn’t the increase in ITC filings, or even that there now exists a two-tiered patent system where some patent owners can get some injunctive relief by turning to the ITC while others are shut out. Most alarming is the number of cases in federal district court in which the patent owner prevails and there is no permanent injunction issued. This is difficult to swallow when you factor into the equation that the patent grant itself is supposed to guarantee to the patent owner the right to prevent others from making, using, selling, offering for sale or importing into the United States infringing devices. The patent by its very nature provides the owner an exclusionary right. A permanent injunction in a patent infringement case does nothing other than conclusively tell the losing party (i.e., an adjudicated infringer who lost on all defenses to valid patent claims) that they cannot make, use, sell, offer for sale or import infringing devices. So, a permanent injunction issued to a victorious patent owner plaintiff does little more on a substantive level than reiterate the patent rights provided the patent owner as a part of the patent issued.

Infringement Now Pays

Of course, a permanent injunction does one more very important procedural thing for the patent owner. A permanent injunction allows the district court judge to retain jurisdiction of the patent infringement case and gives the patent owner the ability to return to the district court to seek redress from a recalcitrant infringer without needing to file a new patent infringement lawsuit should the infringer keep up with the old infringing ways. That is what the Federal Circuit authorized in TiVo v. Echostar, 646 F.3d 869 (2011), for example. Without a permanent injunction in place, a recalcitrant infringer could simply start to infringe immediately, and the patent owner would be forced to again file a new patent infringement lawsuit and wait the five or more years it typically takes to get to resolution. With a wasting asset, time is of the essence, and infringers do play a war of attrition seeking to outlast patent owners because they often can. With a permanent injunction such gaming of the system becomes more difficult.

In essence, without a permanent injunction, infringement pays, which is a terribly unfortunate reality of the Supreme Court’s decision in eBay.

Still further, because injunctions are about equity, the district court judges have broad discretion and their decisions will be reviewable only for abuse of discretion, which in lay terms means they won’t be disturbed or overruled in virtually any situation. This is particularly problematic due to the fourth traditional injunction factor, which asks whether the public interest would be disserved by the issuance of a permanent injunction. If the public is deriving benefit from the infringement, then infringement logically should not be stopped under the traditional injunction test. This flies in the face of the premise of the patent grant and smacks of a compulsory licensing scheme, which never existed in U.S. patent law, at least not until eBay.

Logically, it would seem that based on the fourth factor those patent owners who own the rights to the most important technologies may be those most at risk of not obtaining a permanent injunction, which is absurd. The entire point of a patent system is to encourage innovation, particularly groundbreaking and paradigm shifting innovation. Indeed, the Supreme Court has told us in KSR v. Teleflex that they want inventions to be based on more than merely “common sense” in order to be considered non-obvious and patentable, yet the more important and the more non-obvious and the more ubiquitous and fundamentally important an invention, the less likely a permanent injunction will be obtained? Obviously, the Supreme Court did not think through the logical ramifications, and has been unwilling to reconsider the real world consequences based on actual evidence.

Yes, I Mean “Overruled”

The entire patent system is based on dangling a capitalistic carrot. Innovators are given the right to extract monopoly profits for a limited time in exchange for knowledge and advancement. How, then, does it make any sense to say that those really great, universally important, paradigm shifting inventions are entitled to fewer rights?  How can it make any sense to anyone that a patent owner possesses a right to exclude everyone from making, using, selling or importing, but then once they become a victorious plaintiff having proved actual infringement and survived all invalidity challenges they lose the right to exclude the defendant who was just adjudicated to be an infringer (i.e., wrongdoer)?

In an effort to make it harder for patent trolls to obtain injunctions, a bad decision from the Supreme Court weakened the patent system for everyone. That is why Congress should explicitly overrule eBay. Unfortunately, that is not going to happen anytime soon. Although the STRONGER Act includes such a provision, as long as that provision remains, the bill will not make it out of Committee because Republicans on the Senate Judiciary Committee believe eBay was rightly decided and that the status quo on injunctions is not only appropriate, but good for the system. The hope inside the beltway among advocates for a return to a patent with true exclusivity is that over time positions will change, but there is no evidence of that presently.

Overruling eBay and restoring the previous system for issuing injunctions in patent cases would instantly shift the balance of negotiating power back to even, which would give infringers incentive to take licenses and use means other than the court and the Patent Trial and Appeal Board processes to settle their disagreements with patent owners. For those interested in pro-patent reform, overruling eBay  should be a top Congressional priority.

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Copyright: Devon