Restoring the patent balance of power

Last month's ruling by the U.S. Supreme Court in eBay v. MercExchange will have effects felt far beyond the "buy-it-now" button that was the subject of the original lawsuit.

The ruling does away with the routine granting of injunctions for patent infringement. The court's decision requires that patent owners show "irreparable injury" resulting from the defendant's acts in order to receive injunctive relief. For patent owners who actively promote their technology, this standard will be easily met. In this regard, the decision may reflect an intent to reward exclusivity only to those patent owners who use their inventions.

At the same time, it may promote progress by allowing others to use idle patented technologies, for the price of a royalty. For patent owners who don't practice their inventions, though, it removes the threat of an injunction as a negotiating tool.

Fundamentally, what the court has done is to tell patent holders that if they are not using their patented inventions in business, then other companies and individuals may use those inventions as long as they pay fair-market royalties.

The court's decision does not affect patent holders who are actually using their patented technologies or business processes. Companies, organizations or individuals whose patents are being used in business will likely pass the court's test for injunctive relief, because their position in the marketplace is injured by infringing competition.

This decision will have the greatest effect on patent "holding companies" that own patents but do not make, use or sell patented products. A fundamental part of their business model relies on the threat of enjoining others from using their patented technologies without a negotiated license fee. Because courts routinely granted injunctions for patent infringement, patent holding companies have been able to command licensing fees in excess of what many consider to be fair market values. This is particularly true when the patented invention formed only a small part of a more complex product, like an automobile or medical device. In his concurring opinion in eBay v. MercExchange, Justice Kennedy (joined by three other justices) specifically addressed this imbalance of power:

"When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest," he wrote. Without the threat of an injunction, though, infringers will have less incentive to settle. At a minimum, the costs to patent holding companies seeking licensing fees will increase as they will have to prove irreparable harm, or accept lower royalties absent an injunction premium.

Some may consider the decision as promoting progress by permitting use of technologies that may have otherwise been sequestered by unreasonable patent holders. In such cases, some companies simply chose not to use viable technologies during the life of a patent. However, this decision by the Supreme Court will have far-reaching ramifications beyond the patent holding companies and their legal opponents. Companies that include intellectual property assets as significant components of their balance sheets may be forced to re-evaluate the value of their holdings. Universities with strong technology transfer and licensing operations may see a decrease in their ability to negotiate high license fees from corporate customers, affecting future research budgets and other operations.

Companies that have taken out "defensive patents" to preclude a competitor's entry into a particular field may find themselves forced to either put those technologies in play in the marketplace or simply accept licensing fees. Other changes are sure to develop as the marketplace digests the meaning of this decision.

Intellectual property is such a critical part of any healthy economy that the framers of the Constitution thought it important enough to enumerate as one of Congress' responsibilities. In recent decades, however, the intent of rewarding exclusivity to inventors who disclose their ideas has been lost as some parties used patents to block competition and frustrate innovation by holding certain technologies for ransom under threat of an injunction. The court has gone a long way to restoring a balance of power between those who would own innovation and those who would use it.