On Friday, July 27, 2007, Judge Friedman of the United States District Court for the Eastern District of Virginia denied Plaintiff MercExchange’s renewed motion for a permanent injunction against eBay to prevent the future use of the patented "Buy It Now" feature. The ruling in MercExchange, LLC v. eBay, Inc. and Half.com, Inc., 2:01-cv-00736-JBF-JEB, applied the four-factor test announced in the Supreme Court’s May 2006 opinion in the same case. Judge Friedman held that, because MercExchange did not defend its right to exclude others from use of its patent, and in fact had a practice of licensing its patent portfolio for a reasonable royalty rate, it failed to demonstrate that it would suffer irreparable harm if an injunction did not issue, as monetary damages would be an adequate remedy to compensate for eBay’s infringement.
Background
In 2001, MercExchange sued online auction company eBay alleging, among other things, that eBay’s "Buy It Now" feature infringed a MercExchange business method patent. In May 2003, the jury found infringement and awarded damages of $35 million, later reduced to $29.5 million. MercExchange thereafter sought a permanent injunction. The district court denied the request. Finding that MercExchange did not practice its inventions and existed merely to license its patented technology, the district court held that MercExchange would not suffer irreparable harm since it had already expressed a willingness to license its patents. MercExchange LLC. v. eBay, Inc., 275 F. Supp. 2d 695 (EDVA 2003).
MercExchange appealed and the Federal Circuit reversed in March 2005, emphasizing that "injunctions are not reserved for patentees who intend to practice their patents, as opposed to those who choose to license." To the contrary, it held that, because the right to exclude recognized in a patent is the essence of the concept of property, the "general rule" is that a permanent injunction should issue "absent exceptional circumstances." MercExchange LLC. v. eBay, Inc., 401 F. 3d 1323, 1339 (Fed. Cir. 2005). eBay sought review, the Supreme Court granted certiorari, and on May 15, 2006, unanimously reversed the Federal Circuit’s near-automatic injunction policy.
The ruling in eBay Inc. v. MercExchange, LLC, 126 S. Ct. 1837 (2006), rejected the "categorical" approaches used by both lower courts. The Supreme Court rejected the notion that a "plaintiff’s willingness to license its patents" and "its lack of commercial activity in practicing the patents" are categorically sufficient to show that the plaintiff will not suffer irreparable harm without an injunction. The Court noted that "some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves." At the same time, the Court criticized the Federal Circuit’s "general rule" that injunctions should issue except in "rare" or "unusual" cases and under "exceptional circumstances."
Instead, the Court held that the traditional four-factor equitable test applicable in other injunction contexts also applied in patent cases. Under this test, the plaintiff must show (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. The Court held that applying this test was within the equitable discretion of the district courts and reviewable on appeal for abuse of discretion.
The District Court’s July 27, 2007 Ruling
On July 27, 2007, the District Court for the Eastern District of Virginia issued its order denying MercExchange’s motion for a permanent injunction. The court’s order involved a rigorous application of the Supreme Court’s four-factor test, particularly the irreparable harm factor. The court acknowledged that, although it reached the same decision to deny injunction relief as it did in 2003, it did so this time with particular attention to the facts of this case, as opposed to a categorical rule that would deny relief in a broad swath of cases. The court recited the new standard, that a finding of patent validity and infringement no longer creates a presumption of irreparable harm. Instead, a plaintiff bears the burden of showing it will suffer irreparable injury if an injunction does not issue. The patent holder’s right to exclude alone is no longer sufficient to show the necessary harm.
No Irreparable Harm
The court concluded that MercExchange did not set forth sufficient proof to establish that its harm was irreparable. The court found that MercExchange exhibited a "lack of commercial activity in practicing the [relevant] patents" and instead exhibited a "willingness to license its patents," both before the jury trial and in the years following the 2003 verdict. The key facts discussed by the court included:
- MercExchange’s willingness to license, including statements by MercExchange showing its preference for licensing its patents rather than enforcing its right to exclude.
- MercExchange’s lack of activity to commercialize any products or services practicing the patent, distinguishing self-made inventors and university researchers who seek to develop their patent in partnership with others.
- MercExchange’s failure to seek a preliminary injunction.
- The suspect nature of business-method patents in general, as well as the obviousness issues specific to the patents-in-suit.
- The facts surrounding MercExchange’s post-remand attempt to license its patents to UBid, which implied that the deal was only being done to placate the court and meet the four-factor test.
- MercExchange’s failure to adequately demonstrate loss of market share.
The court concluded its analysis of the irreparable harm factor by holding that "careful consideration of such facts reveals that MercExchange has no reputation to protect, no goodwill or brand recognition to protect, no customer base to retain, no well-established licensing program to follow, and no current royalty stream to maximize. Furthermore, it was MercExchange that freely chose to repeatedly indicate that it was willing to forgo its right to exclude and license its patents to eBay and others."
Adequate Remedies at Law
On the other side of the irreparable harm coin, the court found that monetary damages would compensate MercExchange for the harm done by eBay. The court relied on the following:
- MercExchange failed to develop its patent and established a pattern of utilizing patent in suit primarily as a sword to aid in litigation or threatened litigation against infringers or potential infringers.
- MercExchange’s attempts to use the possibility of an injunction as a bargaining chip "suggests both that such party never deserved a ruling in equity and that money is all that such party truly seeks, rendering monetary damages an adequate remedy in the first instance."
- MercExchange publicly indicated its willingness to license its patent portfolio to eBay which it viewed as the natural home for its patents.
Citing the Kennedy concurrence to the Supreme Court’s eBay opinion, the court held that MercExchange is part of the "industry [that] has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees." eBay, 126 S. Ct. at 1842 (Kennedy, J., concurring).
Balance of Hardships
The court held that the third prong, balance of the hardships, favors neither party due to the uncertainty surrounding MercExchange’s ability to partner with uBid and compete in the relevant market, uncertainty involving whether eBay has designed around the patent, and uncertainty involving whether such patent will survive reexamination.
Public Interest
The court found that this factor weighed against injunction relief, despite the public’s interest in protecting the patent holder’s right to exclude through injunctive relief. That interest is "strongest when a small patent holder utilizes its patent to benefit the public; that is, either seeks to develop the patent on its own or develop the patent through licensing agreements. Similarly, equity may favor a patent holder that seeks to defend its right to exclude and prevent development of its patent by others." MercExchange did neither, and the court held the public would benefit from a monetary damages remedy that would allow eBay to continue to operate, since that would adequately compensate MercExchange, which did not need a "strong patent system" to exact large payments from actual and potential infringers.
Impact Assessment
Going forward, it appears that case-specific facts will determine whether a court issues injunctive relief. Courts will be careful to avoid categorical rules that grant or deny permanent injunctions based on plaintiff’s status, be it a patent-holding company, non-manufacturing patent owner, self-made inventor, university or research organization, or a direct competitor of the infringer. Public and private statements and actions of a party can significantly affect the outcome of the permanent injunction analysis. Patent owners and parties accused of infringement should be cognizant of the effect that their licensing decisions, litigation strategy, and public comments can have on the four-factor injunctive relief inquiry.
While the Supreme Court’s decision clearly raised the bar for non-manufacturing patent owners seeking injunctive relief, opinions such as Judge Friedman’s leave open the possibility that injunctive relief could nonetheless issue given the appropriate facts.
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