Supreme Court rules in favor of eBay

Justices order a lower court to review the case and consider a medley of factors before issuing patent injunctions.

Anne Broache Staff Writer, CNET News.com
Anne Broache
covers Capitol Hill goings-on and technology policy from Washington, D.C.
Anne Broache
6 min read
A unanimous U.S. Supreme Court on Monday sided with eBay in an ongoing patent spat, handing down a ruling that could make it harder for some patent holders to force shut-offs of infringing products in the future.

About six weeks after hearing oral arguments, the justices on Monday ruled (click here for PDF) that the U.S. Appeals Court for the Federal Circuit was wrong when it issued a permanent injunction that would have prohibited eBay from using patents held by MercExchange, a small, Virginia-based company.

That injunction, which was put on hold pending the Supreme Court appeal, followed a 2003 jury finding that eBay's "buy-it-now" feature, which allows customers to purchase items without participating in an auction, had infringed on two of MercExchange founder Tom Woolston's patents.

In an 11-paragraph majority opinion penned by Justice Clarence Thomas, the justices concluded that neither court had "fairly" applied a number of factors prescribed by federal law. They ordered a lower court to revisit the injunction order against eBay.

MercExchange said it was not discouraged by the Supreme Court's finding, saying in a statement that it remained confident that a lower court, upon reconsideration, "will grant the injunctive relief to which MercExchange is entitled." eBay said in a statement that it was "gratified" by the Supreme Court's ruling and believed the lower court would again decide an injunction was not appropriate.

During oral arguments before the Supreme Court on March 29, eBay argued that the appeals court's interpretation resulted in "near automatic" injunctions. It urged the court to force courts to consider a "four factor" test prescribed by federal law for determining whether injunctions are appropriate. That test considers 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.

The Supreme Court seemed to accept that argument, though Thomas noted, "in doing so, we take no position on whether permanent injunctive relief should or should not issue in this particular case, or indeed in any number of other disputes arising under the Patent Act."

On one hand, the ruling may make it easier for large companies to avoid injunctions against their products in patent infringement cases. At the same time, the judges sought to protect the rights of individual inventors.

Licenses OK
When eBay lost its patent infringement suit, the district court denied MercExchange an injunction, in part because the company appeared willing to license its patents and did not practice its patents in commercial products.

The Supreme Court shot down that reasoning, saying such "broad classifications" don't mesh with the law. "Some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves," and they should be given equal opportunity to obtain injunctions, Thomas wrote.

Even so, judges should consider the broader implications of issuing injunctions to such patent holders because "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 signed by Justices John Paul Stevens, David Souter and Stephen Breyer. In such cases, "legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest," they wrote.

That language could deal a blow to so-called patent trolls, companies that exist primarily to make money from patent litigation and are using the system to force lucrative settlements.

The Business Software Alliance was quick to hail the decision, calling it "a clear victory for innovation and for consumers, and a defeat for patent trolls and others who are abusing the legal system."

The eBay patent dispute has drawn an unusual amount of attention because of its potentially profound influence on the way patent injunctions are issued. That question proved central to a recent case when Research In Motion's wildly popular BlackBerry service, which was itself at the center of a heated patent dispute, faced the threat of a shutdown.

eBay's legal tussle dates back to 2001, when MercExchange filed suit. MercExchange said it once harbored big e-commerce plans of its own but failed to come up with enough capital to commercialize its inventions--and to negotiate a patent licensing deal with eBay.

Exploring alternative remedies
eBay lost that infringement suit, and the district court ultimately ordered it to pay about $25 million in damages but decided against issuing a permanent injunction cutting off eBay's use of the patents. 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 overturned the decision not to grant the permanent injunction, holding that as a "general rule" injunctions must follow all infringement findings unless "exceptional circumstances," such as protecting public health, exist. That injunction, however, remained on hold pending eBay's Supreme Court appeal.

Many of the nation's largest software, hardware and Internet companies sided with eBay in their own briefs, warning that "near automatic" injunctions threaten their day-to-day business operations and give too much power to owners of patents of dubious quality.

On the other side are individual inventors and pharmaceutical giants, which argued that patent holders have an exclusive right to keep others from using their inventions and that allowing judges broader discretion to withhold injunctions will "water down" the entire system.

Monday's decision wasn't a total loss for that group, but it still leaves something to be desired, said Ronald Riley, president of the Professional Inventors Alliance, which advocates for independent inventors and small- and medium-size businesses. With an arguably higher standard for injunctions, inventors could find themselves left with monetary damages as their only recourse--an alternative that "amounts to a compulsory license at the whim of a judge," he said in an e-mail interview.

The high court's decision should reduce the likelihood that infringing products will be shut down "automatically" and it should supply greater bargaining power to accused infringers seeking out-of-court settlements, industry lawyers said Monday.

That development should address a major complaint from the technology industry, which has argued that it's unreasonable for an entire product, which often relies on thousands of patents, to face shutdown when as few as one component infringes. They've said monetary damages should be enough in such situations.

"The clearest thing that will happen is that the plaintiff will not go into a case with the belief that if they win, the injunction is automatic," said Sharon Barner, chair of the intellectual property department for the Washington, D.C. firm of Foley & Lardner.

That change in bargaining posture could drive down litigation costs, Barner suggested, as firms may be more motivated settle early on if they know they can't bank on an easy, court-ordered shutdown of the offending product. Right now, less than 5 percent of patent infringement cases are actually decided by a judge.

In fact, if the timetable for the high court proceedings had been a few months earlier, RIM may have been found itself in a better bargaining position before ultimately reaching a $612.5 million settlement with NTP back in March, patent lawyers said Monday.

"The reason they had to pay that kind of money was that they were staring down the barrel of a gun," said Michael Sacksteder, a patent litigation partner with Fenwick & West in San Francisco. "They were very likely to be enjoined in the very near future, and so they had to pay the money to avoid that."