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Supreme Court to hear patent injunction case

Tech industry hopes case brought by eBay will put the kibosh on patent trolls by making injunctions more difficult.

When Research In Motion's wildly popular BlackBerry service faced a shutdown earlier this month, the legal spat illustrated the potentially disruptive effects of a court injunction based on patent infringements.

On Wednesday, the U.S. Supreme Court will address the question of when such court orders are appropriate, in a case brought by eBay that the online auction site hopes will curb what it calls "near-automatic" injunctions.

A federal appeals court affirmed in March 2005 that eBay's "buy-it-now" feature infringes on a patent held by MercExchange, a small Virginia company that holds the patents and says it once harbored big e-commerce plans of its own.

Most patent disputes proceed in mind-numbing obscurity, but this one has drawn an unusual amount of attention in part because the BlackBerry shutdown threat was so recent. Many of the nation's largest software, hardware and Internet companies have sided with eBay in their own briefs, while individual inventors and pharmaceutical giants have opposed the online auctioneer.

"While the legal issues might seem arcane, the practical impact of this case is potentially enormous," said Michael Sacksteder, a patent litigation partner at Fenwick & West in San Francisco.

Ebay is fighting an interpretation of patent law that it says leads to nearly automatic injunctions with potentially devastating financial repercussions. MercExchange, on the other hand, insists that an injunction against eBay aligns with a centuries-old tradition of remedies for inventors who win infringement suits.

No one seems to disagree that in some cases, a patent holder should have the right to an injunction after a court finds infringement is taking place. But the crucial details about what legal standards should apply are bitterly contested.

The "automatic" injunction standard seems to haunt many Silicon Valley companies. Such a standard, they say, would mean that if the maker of a microprocessor with as many as 5,000 patented components unknowingly infringed on even one invention, it would potentially have to pull his product from the market or undertake expensive workarounds--in addition to paying damage awards.

Growth rates for federal litigation

Type Last year 3 years 5 years
Patent 9.3% 6.7% 5.5%
Trademark -4.5% 0.5% -2.7%
Copyright 22.8% 20.1% 8.0%
Personal Injury 27.9% -7.4% 12.3%
Bankruptcy 25.4% 0.5% 5.5%
Labor 5.8% 0.1% 6.7%

Source: Intellectual Ventures

The companies are also concerned that the standard contributes to what they consider a rise in the scourge of "patent trolls," who don't commercialize their inventions but instead sit on portfolios, poised to threaten litigation and seek inflated licensing deals from accused infringers.

"Companies who are in the real business of commercializing are being held ransom," said Makan Delrahim, executive director for the American Innovation Alliance, four of whose members--Microsoft, Intel, Micron and Oracle--filed a brief supporting eBay. "And so the costs not only for them to commercialize the innovation are increased, but also those costs have to be passed on to U.S. consumers."

Johnson & Johnson's patent defense
But MercExchange has plenty of allies of its own. Those include the Bush administration, major pharmaceutical and biotechnology trade associations, independent inventors, research universities, and blue-chip companies, including Proctor & Gamble and Johnson & Johnson, with broad patent portfolios.

They tend to be sympathetic to MercExchange's argument that it should have the same rights as a company that's actively using its patents. "Not every inventor is going to have the capital or the management experience or all the other things that go into building a business...and bringing a product to market," said Robert Asher, an attorney who worked on a brief on behalf of the nonprofit United Inventors Association, which represents individual inventors and local associations of inventors.

Two tech manufacturers that frequently license out thousands of patents also filed a brief opposing eBay's stance. Qualcomm, which invents wireless technology, and Tessera, which specializes in "miniaturization" technology for the semiconductor industry, both dismissed their industry counterparts' concerns over patent trolls as overblown and unsupported by hard facts, pointing to a as an example.

Besides, 200 years of patent law have affirmed the patent holder's exclusive right to keep others from using his invention, others siding with MercExchange have argued, adding that allowing judges broader discretion to withhold injunctions will "water down" the entire system.

"It should not come from places like the judge reading one of (a reporter's) very interesting stories in the paper and...saying, 'People think there's a problem with drug patents,'" Philip Johnson, chief patent counsel for Johnson & Johnson, told reporters at a recent roundtable discussion.

It's conceivable that, using the right standard, eBay still loses, but the rest of us win.
--Jonathan Band, outside counsel, Computer and Communications Industry Association

The Bush adminsistration, which had argued against an injunction for alleged patent-infringer RIM in its spat, instead agreed in its brief with the need for an injunction against eBay.

At the same time, the administration said a four-part test is the most appropriate standard for deciding whether an injunction should apply. That test involves weighing not only the public interest but also other factors, such as whether the patent owner would experience irreparable harm if an injunction weren't granted or whether other remedies, such as monetary compensation, would be enough.

If the Supreme Court listens to that suggestion, the tech industry would get a boost, said Jonathan Band, outside counsel for the Computer and Communications Industry Association, which filed a brief in support of eBay. That group, like the other tech entities on eBay's side, isn't so much interested in whether eBay is ultimately enjoined from using MercExchange's patents as it is in solidifying what it considers a more stringent standard for issuing injunctions, Band said.

"It's conceivable that, using the right standard, eBay still loses, but the rest of us win," he said.

The injunction question before the high court may seem obscure, but it's actually one of several major points of contention in a larger debate about state of the U.S. patent system. Reform proposals underway in Congress have stalled amid fractures primarily along high-tech and pharmaceutical or biotechnology industry lines, which have surfaced again in this case.

Origins of MercExchange v. eBay
The inventions at the heart of the case date back to nearly five months before eBay's launch on Labor Day 1995, when MercExchange founder Tom Woolston filed his first application for a patent describing an "electronic market" for buying and selling goods. That application was initially rejected, according to eBay's brief, though the Patent Office went on to accept it in 1998. According to MercExchange's brief, Woolston, an electrical engineer and patent attorney, drew up a business plan, hired programmers and planned to commercialize his patents.

EBay took notice of Woolston's patents, even approaching MercExchange in 2000 with interest in snapping up its portfolio. But negotiations between the two sides crumbled, as did MercExchange's attempts to raise capital to support its ventures. In September 2001, the firm filed suit against eBay, accusing it of using its patents in its "Buy It Now" feature, which allows shoppers to circumvent the auction process and purchase items at a fixed price.

A jury found eBay guilty of infringing on two of Woolston's patents in 2003, and the court ordered eBay to pay about $25 million in damages--but decided against issuing a permanent injunction. It cited several factors for justification, including MercExchange's "willingness to license" and nonpractice of its patents and what it termed a "growing concern" from the public over key aspects of the current patent system.

The U.S. Appeals Court for the Federal Circuit found flaws in the lower court's reasoning. It held that a permanent injunction must follow all infringement findings unless cutting off the patent in question would "frustrate an important public need," such as protecting public health. That injunction, however, remained on hold pending eBay's Supreme Court appeal.