United States: Implications Of eBay v. MercExchange

Originally published in Patent World, June 2007

The Supreme Court's eBay decision requires district courts to consider a four-part test in deciding whether to grant injunctive relief in patent cases, Courts can no longer grant such relief as a matter of course.

The Supreme Court surprised practitioners in eBay v. MercExchange by holding that district courts should not automatically grant injunctive relief in patent cases. Instead, patent owners, like other litigants seeking equitable relief, must demonstrate entitlement to a permanent injunction under a four-factor test:

In so holding, the Court decoupled a patent owner's right to exclude from the remedy of stopping the violation of that right.

Since the May 2006 ruling in eBay, numerous courts have employed the four-factor test and still granted injunctive relief. But others have denied such relief, particularly where the plaintiff did not itself use the patented invention. In cases where injunctive relief matters more than monetary damages — for instance, in areas of technology having short product cycles or where market leadership can be irretrievably lost — the eBay decision adds an element of uncertainty about whether injunctive relief will be available to a successful litigant. In such instances, patent owners should consider enforcing their patents at the United States International Trade Commission ("ITC"), where injunctive relief against importers of infringing products remains readily available. Indeed, ITC patent infringement filings have increased substantially in 2007 over the number of pre-eBay filings during time same period in 2006.

Permanent injunctions at the District Court Section 283 of the Patent Act provides for granting injunctive relief at the district court "in accordance with the principles of equity":

Courts may grant preliminary injunctions and/or permanent injunctions under § 283.

The district court in eBay employed such "traditional equitable principles" in analyzing whether to grant a permanent injunction after the jury found infringement. But while the district court employed the right test, its assessment of these factors ran afoul of the Supreme Court in the eBay decision.

MercExchange attempted to license eBay under patents concerning electronic commerce MercExchange did not practice the patents but had licensed them to others. The parties failed to reach agreement, and MercExchange sued eBay and its subsidiary Half.com, Inc. for infringing three business method patents relating to buying goods online at a fixed price. A jury found infringement of two patents and determined that MercExchange should be awarded monetary damages. But while recognizing that permanent injunctive relief was "the norm" upon a finding of infringement of valid patent claims, the district court nevertheless denied MercExchange's motion for a permanent injunction.

The Federal Circuit reversed the district court's denial of a permanent injunction. In so doing, it stated that "the general rule is that a permanent injunction will issue once infringement and validity have been adjudged." It noted that in rare instances, such as where the invention protects public health but the patentee fails to practice the invention, an injunction may not be appropriate. According to the Federal Circuit, the district court's generalized concern about business methods patents, MercExchange's public statements about its willingness to license the patents, and the fact that MercExchange did not itself practice the patents did not justify denying injunctive relief.

eBay appealed and the Supreme Court granted certiorari, issuing its decision on May 15, 2006. Justice Thomas delivered the Court's unanimous opinion. He observed that "well-established principles of equity" require plaintiffs to satisfy a four-factor test in order for a court to grant an injunction, and nothing in the Patent Act supporting a departure from this general rule. To the contrary, the Court noted that "the Patent Act expressly provides that injunctions 'may' issue 'in accordance with the principles of equity'." While acknowledging that the Patent Act also provided for 'the right to exclude others from making, using, offering for sale, or selling the [patent invention]," the eBay Court drew a distinction between "the creation of a right" and "the provision of remedies for violation of that right."

The Court found that neither the district court nor the Federal Circuit had correctly applied traditional equitable principles in assessing MercExchange's motion for a permanent injunction. As to the district court, it appeared to have wrongly concluded that patentees who license their inventions instead of practicing them cannot obtain injunctive relief. And the Supreme Court dismissed the Federal Circuit’s "general rule" that injunctions should issue in patent cases as a departure "in the opposite direction from the four-factor test." The Court also disagreed with the Federal Circuit’s statements "that injunction should be denied only in the 'unusual' case, under 'exceptional circumstances' and 'in rare instances... to protect the public interest'." Because neither court had correctly applied the four-factor test, the Supreme Court vacated the Federal Circuit's judgment and remanded the case to the district court.

Chief Justice Roberts wrote a concurring opinion joined by Justice Ginsburg and Scalia. He agreed that "a major departure from the long tradition of equity practice should not be lightly implied," and that the district courts must exercise their discretion in deciding whether or not to issue injunctions. While historical practice did not justify a general rule granting equitable relief, Justice Roberts stated that the discretion vested in time district courts was circumscribed: "[t]here is a difference between exercising discretion pursuant to the four-factor test and writing on an entirely clean slate."

Justice Kennedy also issued a concurring opinion, and Justice Breyer, Souter, and Stevens joined it. He asserted that "in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases" and argued that an entire industry had developed that used patents primarily for obtaining licensing fees, rather than for producing and selling goods. For firms in this industry, the threat of an injunction could be employed to charge exorbitant licensing fees to companies seeking to practice their patents. Hence, Justice Kennedy identified two situations where money damages alone should suffice — where "the patented invention is but a small component of the article" the infringer seeks to sell, or where the patent holder asserts business method patents that allegedly suffer from "potential vagueness and suspect validity."

Post-eBay Decisions

At lest 24 district courts have addressed motions for permanent injunctions in patent case since the Supreme Court issued its eBay decision. Those courts have granted 16 requests, deferred deciding three requests, and denied five requests.

z4 Technologies, Inc. v. Microsoft Corp. contains one of the earliest and most detailed post-eBay discussions of the four-factor test. In z4, a jury awarded $115 million in damages against Microsoft and $18 million against Autodesk for infringing two z4 patents directed to software activation technology. z4 moved for a permanent injunction, arguing that the right to exclude created a rebuttable presumption of irreparable harm. The court rejected this argument, noting that z4 had not commercialized its invention prior to suit, and that there was no logical reason for a potential consumer or licensee to be dissuaded from purchasing or licensing z4's product activation technology because of Microsoft's infringement. The court also observed that Microsoft did not produce product activation software that it then sells, licenses or distributes to other software manufacturers.

The z4 Court discussed Justice Kennedy’s concurrence in eBay in determining that z4 had an adequate remedy at law. The court noted that "product activation is a very small component of the Microsoft Windows and Office software products" found to infringe, and that this technology was being phased out. Moreover, z4 had not demonstrated the insufficiency of monetary damages. Additionally, the balance of hardships tilted in Microsoft's favor because enjoining the sale of Windows and Office software products, or turning off their product activation features, would have enormous repercussions to Microsoft, whereas Microsoft's use of z4's intellectual property could be remedied with monetary damages. Last, the z4 Court found the public interest in continuing to use Microsoft's "immensely popular" Windows and Office products, and the need to keep pirated copies of this software off the market, to weigh in Microsoft's favor.

In Finisar Corp. v. DirectTV Group, Inc., the jury found DirectTV liable for willful patent infringement and awarded damages of $78.9 million. Although the court awarded enhanced damages of $25 million for willfulness, it nevertheless denied the request for permanent injunctive relief. The court specifically rejected Finisar’s claim that its right to exclude others from using its patent "could be priceless," noting that Finisar had "never sold the rights to the patent [and] never made the slightest effort to ever use the patent." Accordingly, Finisar had not shown irreparable harm.

Nor had it shown the inadequacy of money damages. The Finisar Court held that the past damages awarded by the jury, plus future damages in the form of a compulsory license, were sufficient to compensate Finisar for DirectTV's use of the patented technology. As to the balance of hardships, the court determined that the cost of an injunction against DirectTV would be enormous, especially compared to Finisar's lack of hardship. Last, an injunction would not serve the public interest.

In Paice LLC v. Toyota Motor Corp., the court refused to enjoin Toyota's sale of hybrid drive vehicles despite a jury finding of infringement under the doctrine of equivalents of two asserted claims. Paice did not manufacture hybrid vehicles and had been unsuccessful in licensing its technology. The court rejected Paice's argument that Toyota's sales of infringing vehicles were to blame for the failed licensing program, and noted that concerns about loss of brand name recognition and market share were not implicated for this non-producing entity. Hence, Paice had not demonstrated irreparable harm absent an injunction.

The court also found that Paice had not shown monetary damages to be inadequate. The court noted that Paice had continued offering to license its technology throughout the post-trial motions period, demonstrating the sufficiency of a monetary award. As to balancing hardships, in the court's estimation this factor favored denying injunctive relief. Two of the accused vehicles had only been introduced in 2006, and enjoining their sales would disrupt the Toyota's business and the operations of its dealers and suppliers, and could stifle research and development in the "burgeoning hybrid market."

The patents at issue in Voda v. Cordis concerned angioplasty guide catheters and techniques for using catheters to perform angioplasty. While the jury found infringement and a reasonable royalty amount, and the court awarded enhanced damages, prejudgment interest, and attorneys fees, the court stopped short of granting an injunction. Citing the four-factor test, the Voda Court denied injunctive relief because Voda had failed to demonstrate two of its factors — irreparable harm and the inadequacy of monetary damages. The court observed that Voda had only identified harm to a non-party (its exclusive licensee Scimed) and agreed with Cordis that this harm was irrelevant since Scimed had not elected to enforce the patent rights. According to the Voda Court, since patents have the attributes of personal property, "the person seeking a permanent injunction must demonstrate harm infringement of those rights that is personal as well." The court also rejected Voda's argument regarding the inadequacy of monetary damages because it viewed the alleged harm — damage to Voda’s relationship with its licensee, Scimed — as simply the other side of the right-to-exclude coin.

Sundance Inc. v. Demonte Fabricating Ltd. contains a brief discussion of the eBay factors. The jury found infringement by Demonte of a patent directed to segmented tarp covers for flatbed truck trailers. Sundance argued that absent an injunction, it would suffer irreparable harm because its licensees competing with Demonte would be at a competitive disadvantage. The court was not persuaded. The Sundance Court also found adequate remedies available at law, noting that Sundance had licensed its patent to others and had even offered a license under it to Demonte prior to filing suit. The court found this to evince a real interest in only obtaining money damages.

While the facts of the cases differ, none of the plaintiffs in z4, Finisar, Paice, Voda, or Sundance made or sold articles covered by their patents or otherwise practiced the patents. In some instances their licensees practiced the patents (z4, Voda, and Sundance), and in others the patents-in-suit had not been licensed (Finisar and Paice). For all these patentees, eBay frustrated their claims for injunctive relief. For similarly situated patent holders and other patentees concerned with obtaining injunctive relief, the ITC offers a viable alternative.

Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, provides that unfair methods of competition and unfair acts in the importation of articles into the United States, or their sale for importation, or sale within the United States after importation, are unlawful. The most common alleged unfair method of competition under section 337 involves assertions of utility patent infringement. Upon a finding of infringement, the ITC grants injunctive relief through exclusion orders prohibiting the importation of infringing articles into the United States. The ITC may also issue injunctive relief in the form of cease and desist orders that prevent parties before the ITC from engaging in continued infringement. But unlike the district courts, the ITC has no authority to award monetary relief.

ITC Offers Only Injunctive Relief

Section 337 enumerates the different types of injunctive relief available upon a finding of violation. The most common are exclusion orders that prohibit entry of infringing articles into the United States:

The ITC usually issues "limited" exclusion orders that only apply to persons determined by the ITC to be violating section 337. But in some instances, the ITC may issue a "general" exclusion to prevent importation of a category of infringing goods, regardless of who manufactured them.

The ITC can also issue cease and desist orders directing persons who are violating, or believed to be violating, section 337 to stop engaging in the improper behavior. Violation can lead to heavy fines.

The ITC can decline to issue injunctive relief based on the effect of the proposed exclusion on the public interest factors set forth above in the statute. But these public interest factors have rarely been relied upon to deny a remedy against infringers.

eBay Equitable Considerations

The equitable considerations that figured so prominently in the eBay decision do not apply at the ITC. The ITC is an administrative agency, not a court of equity. And while the ITC adjudicates equitable defenses in section 337 cases, defenses differ from remedies. In eBay the Supreme Court drew a distinction between the right to exclude others from making, using, offering for sale, or selling an invention and the entitlement to injunctive relief, observing that "the creation of a right is distinct from the provision of remedies for violations of that right." Similarly, the defenses available to a party accused of violating patent rights are distinct from the available remedies for the violation of those rights.

The eBay Court relied heavily on the Patent Act’s express provision that injunctive relief "may" issue "in accordance with the principles of equity". In contrast, neither of the statutory provisions governing injunctive relief at the ITC — § 1337(d)(1) for exclusion orders and § 1337(f)(I) for cease and desist orders — mentions the principles of equity. The fact that section 337 statutorily encompasses "all legal and equitable defenses" but fails to mention traditional equitable principles in its remedy provisions supports the argument that such equitable considerations are not part of the ITC's remedy determination.

To be sure, section 337 provides for public interest considerations in connection with the remedy calculus. And under the four-factor test, the effect of a proposed injunction on the public interest must be considered by the district courts. But the ITC's consideration of the effect of a proposed exclusion order on the public interest by no means necessitates consideration of the other three eBay factors.

As a practical matter, consideration of the four-factor test by the ITC may be unworkable. The ITC has little experience in determining whether a patent holder will suffer irreparable harm. And the ITC has no statutory authority to assess monetary damages for a violation of section 337. Hence, it has no basis to determine whether or not monetary damages would be adequate to compensate for the injury caused by patent infringement. Finally, if the ITC were to balance hardships between complainants and respondents in deciding whether to issue injunctive relief, the ITC would really be deciding whether to issue any relief whatsoever in the event of a proven violation of section 337.

The eBay four-factor test has proven most difficult for patent holders who do not themselves produce articles covered by their patents. In the z4, Finisar, Paice, Voda, and Sundance cases, the courts denied injunctive relief despite the eBay Court's admonition that it saw "no basis for categorically denying" non-producing entities the opportunity to obtain injunctive relief. While this post-eBay district court trend may change over time, some patentees may have a better chance at obtaining injunctive relief before the ITC.

The ITC's jurisdiction is based on the importation of accused articles into the United States. Hence, the ITC offers an alternative forum to non-producing patent holders only where this importation requirement has been satisfied. Additionally, before the ITC can award relief, the complainant (e.g., the patent holder) must show that "an industry in the United States, relating to the articles protected by the patent,... exists or is in the process of being established." This "domestic industry" requirement can be satisfied where the patent holder has made substantial investments in the United States in exploiting its patent rights through engineering, research and development, or licensing activities.

In 1988, Congress amended section 337 to expressly allow engineering, research and development, and licensing activities to satisfy the domestic industry requirement. Congress sought to make it easier to prove the existence of a domestic industry and to make section 337 '"a more effective remedy for the protection of United States intellectual property rights' because the existing protection was 'cumbersome and costly."' Congress made these amendments with full knowledge that the ITC could only grant injunctive relief upon a violation of the statute. In contrast with the reluctance shown by some district courts to provide injunctive relief post-eBay, it can be argued that Congress has already spoken to the issue with respect to section 337 investigations.

The Supreme Court's eBay decision requires district courts to consider a four-part test in deciding whether to grant injunctive relief in patent cases. Courts can no longer grant such relief as a matter of course. Since the eBay decision in May of 2006, patent owners who do not themselves make products covered by their asserted patents have had a more difficult time obtaining injunctive relief. Provided the accused products have been imported into the United States, patent holders should consider pursuing infringement claims at the ITC, where the eBay decision's equitable considerations do not apply. Section 337's statutory framework expressly provides for such non-producing entities to vindicate their exclusionary rights at the ITC.

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