United States: Courts Proceed With Caution: Permanent Injunctions After Ebay, Inc. V. Mercexchange, LLC

Courts Proceed With Caution: Permanent Injunctions After Ebay, Inc. V. Mercexchange, LLC

In eBay, Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006), the U.S. Supreme Court (Supreme Court) invalidated the Federal Circuit’s traditional rule that if a patent is valid and infringed, then a permanent injunction automatically issues absent exceptional circumstances. In patent cases, like all other cases, district courts must apply the traditional four-factor test to determine whether injunctive relief is justified: "A plaintiff must demonstrate:

(1) that it has suffered an 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 plaintiff and defendant, a remedy in equity is warranted; and

(4) that the public interest would not be disserved by a permanent injunction."Id. at 1839.

The decision to grant injunctive relief is within the district court’s discretion and must be guided by the principles of equity. Id. The Supreme Court expressly emphasized that the eBay decision rests on the notion that "a major departure from the long tradition of equity practice should not be lightly implied." The Supreme Court vacated the Federal Circuit’s decision entering a permanent injunction in eBay and remanded for the district court to apply the four-factor test to the facts of the case. Id. at 1841.

The Northern District of Georgia was the first court to consider the Supreme Court’s eBay decision in KEG Technologies, Inc. v. Laimer, Case No. 04-CV-0253-RWS, 2006 U.S. DIST LEXIS 37726 (N.D. Ga. June 8, 2006). In KEG Technologies, the plaintiff owned patents on nozzles for cleaning sewer pipes. Id. at *1. Based upon the defendant’s failure to respond to pleadings, engage in discovery, or comply with various orders, the court held a Rule 55(b)(2) hearing to enter a default judgment on the same day the Supreme Court handed down the eBay decision. Id. at *13. The court found that "the fact that infringement was established in this case through default does not foreclose the availability of an injunction." Id. at *14.

Applying eBay, the court found that KEG must satisfy the four-factor test to justify injunctive relief. KEG Technologies, 2006 U.S. DIST LEXIS 37726 at *16. Based upon the evidence already in the record, the court found that KEG had demonstrated irreparable injury and that an injunction would be in the public interest. Id. However, the court requested additional evidence and argument from the parties on the availability of injunctive relief. Id. The court, therefore, reserved its ruling on KEG’s request for injunctive relief based upon its patent infringement claim.

The Eastern District of Texas was the first court to apply the eBay decision in z4 Technologies, Inc. v. Microsoft Corporation et al, Case No. 06-CV-142 (E.D. Tex. June 14, 2006) in ruling on a motion for a permanent injunction. In this case, z4 owned two patents covering "methods for limiting the unauthorized use of computer software, referred to as product activation." Id., Mem. Op. at p 1. The jury found that Microsoft’s Windows XP products and Office products infringed z4’s patents. Id. z4’s motion for a permanent injunction sought to order Microsoft to "deactivate the servers that control product activation for Microsoft’s infringing products and to re-design its Windows XP and Office software products to eliminate the infringing technology." Id. at Mem. Op. at p. 2. Denying the motion for a permanent injunction against Microsoft, the court found that Microsoft’s infringement did not threaten z4’s market share, z4 could be adequately compensated with a reasonable royalty, and the potential, if somewhat speculative, harm to Microsoft and to the public resulting from the proposed injunction was significant.

No Rebuttal Presumption of Irreparable Harm The court rejected z4’s argument that it was entitled to a rebuttable presumption of irreparable harm based upon the jury verdict of validity and infringement. The court pointed to the lack of Supreme Court or Federal Circuit authority for any rebuttable presumption, quoting Amoco Production Co. v. Gambell, Alaska, 480 U.S. 531 (1987). The Supreme Court cited Amoco in the eBay decision as an example of the four-factor test for obtaining injunctive relief. The court stated that a presumption of irreparable harm is "contrary to traditional equitable principles." z4 Technologies, Mem. Op. at p. 3. Emphasizing the prohibition against categorical rules in eBay, the court found that a plaintiff must demonstrate irreparable harm. Id., Mem. Op. at p. 4. The court found no irreparable harm because Microsoft does not compete with z4 in the product activation systems market and Microsoft’s infringement does not interfere with z4’s current or future licensing of the patents. The court also found that z4 will not lose profits, brand-name recognition, or market share in the absence of an injunction.

The court rejected z4’s argument that it had no adequate remedy at law. Relying on eBay, the court stated "the right to exclude alone is not sufficient to support a finding of injunctive relief . . . ." Id. at Mem. Op. at p. 6. The court found that calculating a reasonable royalty should not be "too indefinite or difficult." "Such future damages will not be based upon injuries that are difficult to measure such as the loss of market share or damage to brand name recognition and good will, but will be based upon a reasonable royalty for each of the infringing products sold by Microsoft." z4 Technologies, Mem. Op. at pp. 7-8.

The court also relied on the instruction in Justice Anthony M. Kennedy’s concurring opinion in eBay "to be cognizant of the nature of the patent being enforced and the economic function of the patent holder when applying the equitable factors." Id. at Mem. Op. at p. 6. Specifically, Justice Kennedy stated that where the "patented invention is but a small component of the product the companies seek to produce," "legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest." Id. at Mem. Op. at p. 6.

(Speculative) Hardships and Adverse Effects on the Public Interest May Preclude Injunction In balancing the hardships, the court found that the harm to Microsoft based upon re-designing its products and deactivating its servers outweighed any amount of irreparable harm to z4. Id. at pp. 8-9. Even though the court acknowledged that the harm to Microsoft was somewhat speculative, it found this factor weighed in favor of Microsoft.

Finally, the court found that an injunction may disserve the public interest because the "vast majority" of computer users rely on Microsoft’s products. Additionally, taking products off the shelves would harm retailers and may increase pirated versions of Microsoft products. Id. at Mem. Op. at pp. 10-11. The court stated, "Although these negative effects are somewhat speculative, such potential negative effects on the public weigh, even if only slightly, against granting an injunction." Id. at Mem. Op. at p. 11. Accordingly, the Supreme Court denied z4’s motion for a permanent injunction.