United States: Implication Of eBay For Non-competes, Other Entities

Originally published in IP law 360, September 2, 2008.

The eBay v. MercExchange ("eBay") case has affected the issuance of a permanent injunction in patent cases. Previously, a permanent injunction was issued after a patent was determined to be valid and infringed. In May 2006, the Supreme Court ruled in eBay case that for a permanent injunction to be issued a four-part test would have to be satisfied beyond the previously held precedent of patent validity and infringement.

To be granted an equitable relief such as permanent injunction, 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 the defendant, a remedy in equity is warranted; and
4. That the public interest would not be disserved by a permanent injunction.¹

Can Non-Competing, Non-Practicing Entity be Irreparably Harmed by Infringement of its Patents?

The practical application of the four-part test has resulted in permanent-injunction cases being decided based on one primary factor: competition between the patent holder and the infringer. In the majority of cases, district courts have interpreted factors (1) and (2) as being applicable to only parties that directly compete. Factor (1), i.e., irreparable injury, has been interpreted by district courts as an injury that cannot be remedied by monetary compensation, and, therefore, an injunction needs to be issued in order to prevent future harm to the patent owner. Irreparable injury has, most often, been interpreted as a proven loss in market share and lost sales of the patent holder.^{2, 3}

In cases where the two parties are non-competitors, permanent injunctions have been mostly denied. That is, non-competing patent holders have not been able to satisfy parts (1) and (2) of the four-part test because the courts have often ruled that monetary compensation is adequate compensation for non-competing patent holders. The courts have, then, cited the other two factors as additional reasons for denying the permanent injunction. For example, in the z4 v. Microsoft case, a permanent injunction was denied to z4 because it was a non-competitor in the market even though z4 had tried to use their patent and failed. The court also cited, in conjunction with the competition factor, the disserve-to-public-interest factor as an additional reason for denying the permanent injunction.⁴

It seems competition between the patent holder and the infringer has become synonymous with irreparable harm. However, competition should not weigh so heavily in the decision to grant or deny permanent injunction. A non-competing patent holder can also be irreparably harmed by infringement of his/her patent(s). For example, in several markets, there are substantial benefits to the first entrant in the market. The first mover may be able to garner substantial market share comparatively quickly. However, if the first entrant in the market is a patent infringer, it vitiates the market for the legal licensees of the patent holder and, thus, causes irreparable harm to the patent holder and his/her licensing activities.

The non availability of the right to exclude to a non-competing patent owner also affects the monetary compensation a non-competing patent owner can seek as damages through reasonable royalty. If injunctions are no longer granted based on the criteria of infringement, then the bargaining power of a non-competing patent holder is greatly reduced. Prior to eBay, a non-competing patent holder could use its ability to push the infringer out of the market as a bargaining chip during the hypothetical licensing negotiation.⁵

Moreover, a competing patent holder is already -- with due right -- given more in the way of lost profits damages because lost profits damages generally tend to be higher than reasonable royalty damages. If competitors are compensated monetarily with lost profits and non-competitors with reasonable royalties then both should have an adequate and equal protection under the law regarding injunctions.

Besides affecting the monetary compensation available to a non-practicing, non-competing patent holder, an elimination of the award of permanent injunction to a non-practicing, non-competing patent holder may also affect the incentive of a non-practicing patent holder to file for a patent in the first place. Such a patent holder may prefer to keep his/her invention a trade secret and limit the availability of its knowledge in this way. Since most of the research today is cumulative in nature, this incentive for not-to-patent could have far reaching implications for the economy.

The Supreme Court decision explained that all four factors should be weighed to decide whether a permanent injunction should be granted. In the opinion authored by Justice Thomas, he warned against the use of "broad classifications" in the application of the principles of equity. Justice Thomas said

To accurately weigh all the four factors, a complete analysis of the market and past actions of the patent holder and infringer is required. It also seems prudent to have an economic expert opine on the relevant market and on the competition between the patent holder and the infringer in the market so defined. In case of non-competing entities, the economic expert should identify any other sources of harm, if any, to the patent holder that can not be compensated through monetary damages.

eBay and Other areas of Law – Trademark and Copyright

eBay has also affected other areas of law. The trademark law under Lanham Act provides that courts "shall have the power to grant injunctions, according to the principles of equity."⁷ So, "it would seem beyond argument that eBay applies with equal force in Lanham Act trademark cases."⁸

The likelihood of confusion between the infringing trademark and the registered trademark increases the likelihood of a permanent injunction being issued.⁹ In fact, since eBay, the likelihood of confusion has been cited as a source of irreparable harm and has been enough to satisfy the four-factor test. For example, in Audi AG v. D'Amato after applying the eBay opinion to the case, the court stated, "D'Amato's website used Audi's trademarks in its domain name and in the goods and services sold on it. If the district court did not grant an injunction, Audi would be irreparably harmed by consumers on D'Amato's site purchasing counterfeit items, instead of those that were lawfully sold by Audi."¹⁰

Similarly, in JA Apparel Corporation v. Joseph Abboud after applying the eBay opinion to the case, the court stated, "A finding that a trademark infringement gives rise to a likelihood of confusion is sufficient to establish irreparable injury if the injunction is not granted." ... "This is true because monetary damages stemming from Lanham Act violations are 'difficult if not impossible to calculate.'" ¹¹

In Citizens Banking Corporation v. Citizens Finance Group, a trademark case involving two competing banks, eBay's four-part test was applied and a permanent injunction was denied because confusion was not established. ¹² The court ruled, "Because Plaintiff has not proven any likelihood of confusion nor any imminent injury that requires redress by injunctive relief, and because of its own conduct knowingly creating confusion in entering new markets, the Court finds that Plaintiff is not entitled to injunctive relief." ¹³

Some analysts argue that "in copyright cases, eBay does not seem to have changed much." ¹⁴ Prior to eBay, courts issued permanent injunctions "on such terms as it may deem reasonable to prevent or restrain infringement of a copyright." ¹⁵

In Disney Enterprises, Inc. v. Tyler Delane, eBay's four-factor test was explicitly applied to a copyright case. The court explained "Plaintiffs allege, and the record supports, that they have suffered irreparable injury. Delane has made Plaintiffs' copyrighted programs available through his Web site and trackers, and there is no way to know how many times this content has been accessed and downloaded, or if he is continuing this infringing behavior. Also, Delane has not appeared or participated in this litigation, and because of the nature of his Web site and trackers, further infringements are a continuing threat, making remedies at law insufficient to compensate for Plaintiffs' injuries." ... "Finally, the public interest would not be disserved by a permanent injunction, as there is greater public benefit in securing the integrity of Plaintiffs' copyrights than in allowing Delane to make Plaintiffs' copyrighted material available to the public. The court therefore will grant the permanent injunction." ¹⁶

In another copyright case, eBay was explicitly cited in the denial of a permanent injunction. The permanent injunction was denied in Christopher Phelps & Associates v. Galloway case based on the third and fourth factors of the four-part test. The Fourth Circuit Court of Appeals opinioned in this case that eBay was equally applicable in patent and copyright cases. ¹⁷

In Propet USA v. Lloyd Shugart, another copyright infringement case, the court ruled that eBay should be applied. The court explained, "The Supreme Court described the four-factor test as required by 'well-established principles of equity' and stated that applying the approach in patent cases was 'consistent with [its] treatment of injunctions under the Copyright Act.' The Supreme Court further noted that it 'has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a copyright has been infringed.' ... Accordingly, in order to justify a permanent injunction, Shugart must satisfy eBay's four-factor test. As discussed below, the Court finds a permanent injunction appropriate upon consideration of the eBay factors in relation to this case." ¹⁸ {Citation omitted}

In summary, eBay case has impacted far beyond the area of patent law. It has firmly re-established the equitable nature of an award of injunction in patent and other intellectual property cases. Moreover, it has clearly warned against the use of broad categories, such as "non-competing, non-practicing patent holder," in the application of the equitable principles.

Footnotes:

^{1 eBay Inc., et al., Petitioners v. MercExchange, L.L.C., 126 S. Ct. 1837, 1839 (2006)}

^{2 Benjamin H. Diessel. "Trolling for trolls: the pitfalls of the emerging market competition requirement for permanent injunctions in patent cases post-eBay." Michigan Law Review, November 1, 2007}

^{3 For example, in Praxair, Inc. v. ATMI, Inc., the two parties were found to be direct competitors. Praxair argued that it would lose market share, profits and goodwill if a permanent injunction was not granted. However, the judge denied permanent injunction because Praxair had not "provided or described any specific sales or market data to assist the court, nor had it identified precisely what market share, revenues, and customers Praxair has lost to ATMI." Praxair, Inc. v. ATMI, Inc., No. 03-1158-SLR, 2007 WL 906704 (D. Del. March 27, 2007)}

^{4 Z4 Technologies, Inc. v. Microsoft Corp., 434 F. Supp. 2d 437 (E.D. Tex. 2006)}

^{5 Reasonable royalty damages are often determined using the construct of a hypothetical negotiation assumed to occur between the patent holder and the infringer before the infringement began.}

^{6 eBay Inc., et al., Petitioners v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006)}

^{7 15 U.S.C. § 1116 (a)}

^{8 Thomas Casagrande. "The Reach of eBay Inc. v. MercExchange, L.L.C.: Not Just for Trolls and Patents." The Houston Lawyer, 2006}

^{9 See, for example, Ryan McLeod. "Injunction Junction: Remembering the Proper Function and Form of Equitable Relief in Trademark Law." Duke Law & Technology Review, 2006}

^{10 Audi AG v. D'Amato, 469 F. 3d 543, 542 (6th Circuit 2006)}

^{11 JA Apparel Corp. v. Abboud, No. 07 Civ. 7787, 2008 U.S. Dist. LEXIS 44599, 2008 WL 2329533 (S.D.N.Y. 2008)}

^{12 Citizens Banking Corp. v. Citizens Fin. Group, Inc., Case No: 07-11514 ( E.D. Mich. May 6, 2008)}

^{13 Id.}

^{14 Jetti Gibson. "Almost Quiet on the Copyright Front: eBay's False Alarm." Richmond Journal of Law & Technology, 2007}

^{15 17 U.S.C §502, Sony BMG Music Entertainment v. Armas, No. CV-04-1682-HU (D. Oregon 2005)}

^{16 Disney Enterprises, Inc. v. Tyler Delane, 446 F. Supp. 2d 402, 408 (D. Md. 2006)}

^{17 Christopher Phelps & Assocs., LLC v. Galloway, 492 F.3d 532 (4th Circuit 2007)}

^{18 Propet USA, Inc. v. Lloyd Shugart, Case No. C06-0186-MAT (W.D. Washington, 2007)}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.