The Supreme Court of the United States gave its decision on 15 May 2006 in the controversial patent case between eBay and MercExchange. eBay argued that despite a finding that it had infringed MercExchange’s patent, no injunction should be awarded. The Supreme Court said that injunctions were not an automatic remedy, and courts must apply equitable principles in every case in deciding whether to award an injunction.
MercExchange owned a business method patent for an electronic market for the sale of goods between individuals, involving the use of a centralised authority. The patent was filed in 1995, a few months before eBay started its business. eBay was found to infringe the patent by the lower court and the jury awarded damages for past infringement of $25 million, but the District Court declined to award an injunction.
The eBay trading platform is the central part of eBay’s ‘marketplaces’ division, which had revenue for 2005 of about US$1.7 billion. If MercExchange could obtain an injunction to prevent infringement of its patent then it would have a very strong bargaining position to negotiate a high royalty for a patent licence. Much of the controversy arises from the perceived disparity between the value of that bargaining position, and the true ‘value’ of the invention that was patented.
On appeal, the Court of Appeals for the Federal Circuit said that injunctions are to be awarded in patent cases unless there are ‘exceptional circumstances’. eBay appealed to the Supreme Court.
The Supreme Court
In what has been viewed as one of the most important US patent cases of recent years, the Supreme Court said that Congress did not intend any special principles to apply to patent cases, and that an injunction should be awarded in accordance with the general principles of equity. In the United States, this involves the application of a four-factor test:
- the plaintiff must show that it has suffered an irreparable injury
- the plaintiff must show that damages are inadequate
- the plaintiff must show that an injunction is warranted, after balancing the hardships of the plaintiff and defendant, and
- the court must consider the public interest.
The court expressly said that it was not deciding whether or not an injunction was appropriate on the facts of the case, but found that neither the District Court nor the Court of Appeals for the Federal Circuit had followed the correct approach. The case was sent back to the District Court to decide whether an injunction should be awarded, following the directions given by the Supreme Court.
Implications For Future US Patent Cases
One clear outcome from the decision is that a District Court (the trial court) will have a much greater degree of discretion to exercise in whether or not to grant an injunction, since it will no longer need to identify ‘exceptional circumstances’. This of course creates greater uncertainty, but would enable a court to prevent a ‘ransom’ scenario from occurring. Some would say that the patent case involving the Blackberry technology, settled in March this year for US$612 million, was such an example.
Part of the uncertainty from the eBay case arises from the fact that the Supreme Court, in its short judgment, did not discuss how any of the four factors will apply to patent cases. Further uncertainty arises from the two concurring judgments that were delivered.
Three of the judges, in a concurring judgment, said that the longstanding practice of injunctions usually being awarded in patent cases should guide future courts in their exercise of their discretion—that is, injunctions should usually be awarded.
However, a separate concurring judgment, by four judges, said that historical practice may have less relevance for new patent practices, including where patents are used ‘not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees’. These four judges said that in this scenario the threat of an injunction can be used to charge ‘exorbitant’ royalties.
An interesting question is whether as a result of this decision a patent will have a different value depending on who owns it: a business competitor, or a licensing company. For companies which own US patents, in particular business method patents, the increased uncertainty resulting from the Supreme Court’s decision must reduce the value of such patents, at least to a degree.
The Australian Patents Act clearly provides that a court ‘may’ grant an injunction for infringement of a patent, and it is generally accepted that equitable principles will guide the exercise of that discretion. However, it is also generally accepted that an injunction will almost always follow a finding of patent infringement.
A recent Federal Court case which discussed the issue of this discretion in intellectual property cases focused primarily on whether there was a likelihood of the defendant infringing again in the future, and appeared to accept that if a likelihood could be shown, then an injunction would be ordered.
While recent Australian High Court cases have shown a reluctance to import into Australia principles developed by overseas courts, the eBay v MercExchange decision would provide some comfort that if a patent infringement case could be portrayed as amounting to a demand for payment of a ransom, it would be at least arguable that an injunction should not be awarded.
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