United States: Supreme Court Reins In Permanent Injunctions in Patent Cases

In a May 15, 2006 landmark decision from a unanimous Court, the Supreme Court rejected a rule applied by the Federal Circuit requiring district courts to issue permanent injunctions against patent infringement absent exceptional circumstances. Rather, the Supreme Court held that consistent with the "long tradition of equity practice," a patent holder must satisfy the four-prong test: (1) that it has suffered 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 patent holder and patent infringer, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. This decision will likely have a significant impact on patent licensing and patent litigation since the patent holder no longer can assert the significant threat of essentially inevitable injunctive relief upon a finding of infringement.

MercExchange LLC, a patent holding company, sued eBay Inc. and its subsidiary Half.com Inc., alleging infringement of three business method patents, including U.S. Patent No. 5,845,265 which is directed to facilitating the electronic sale of goods between private individuals by establishing a central authority to promote trust among participants. A jury found the '265 patent valid and infringed and the Federal Circuit affirmed. However, the Federal Circuit reversed the District Court's denial of permanent injunction upon concluding that the case was not "sufficiently exceptional to justify the denial of a permanent injunction."

Writing for the Court, Justice Thomas noted that permanent injunctive relief was a matter of equitable discretion, and found that the principles of equity set forth in the traditional four-prong test for granting permanent injunctions applied with "equal force" to disputes arising under the Patent Act. The Court found that the "right to exclude" others from making, using, offering for sale or selling the patented invention under the Patent Act is distinct from the remedies under the Act. Drawing parallels to the Copyright Act, the Court noted that under 35 U.S.C. §283 of the Patent Act, Congress did not intend a departure from principles of equity, but instead provided that a court "may" issue injunctive relief "in accordance with principles of equity."

The Court proceeded to provide some guidance on application of the four-prong test in patent cases. Specifically, the Court rejected the District Court's conclusion that the irreparable harm prong could not be satisfied where the patent holder was willing to license the patent and was not engaged in commercial activity in practicing the patent. Rather, the Court found that such a patent holder may still be able to satisfy the four-factor test, and found "no basis for categorically denying" patent holders the opportunity to do so. In sum, the Court found that "[j]ust as the District Court erred in its categorical denial of injunctive relief, the Court of Appeals erred in its categorical grant of such relief." Because neither court below correctly applied the traditional four-prong test, the Supreme Court vacated the judgment of the Federal Circuit and remanded the case so that the District Court can apply the traditional test in the first instance.

In a concurring opinion, Justice Kennedy, joined by Justices Stevens, Souter and Breyer, noted the recent rise of patent holding companies that do not use patents as "as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees" and the ability of such companies to use the possibility of injunctive relief "to charge exorbitant fees" to license the patents. While not controlling Supreme Court precedent, it is worth noting that at least four Justices are of the view that where the patented invention is a small component of the accused product 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."

For the full opinion, see: http://www.supremecourtus.gov/opinions/05pdf/05-130.pdf

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