Amicus Curiae Brief — eBay Inc. v. MERCEXCHANGE, LLC

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No. 05-130 Gee 4 ain

IN THE

Supreme Court of the United States

EBAY INC. AND HALF.COM, INC.,

Petitioners,

Vv.

MERCEXCHANGE, L.L.C.,

Respondent.

On Writ Of Certiorari

To The United States Court Of Appeals

For The Federal Circuit

BRIEF OF

AMERICAN INNOVATORS’ ALLIANCE

AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

MAKAN DELRAHIM THEODORE B. OLSON

AMERICAN INNOVATORS’ Counsel of Record

ALLIANCE MATTHEW D. MCGILL

1350 I Street, N.W. AMIR C. TAYRANI

Suite 510 JUSTIN S. HERRING

Washington, D.C. 20005 GiBSON, DUNN & CRUTCHER LLP

(202) 296-7353 1050 Connecticut Avenue, N.W.

Washington, D.C. 20036 “

(202) 955-8500

Counsel for Amicus Curiae

il

TABLE OF CONTENTS

Page

CS PD ci cerctrceesicinensneviccectecesesenentinsinnecutins i

FRE Gr Fr ee ti ccitritntersstcicneininniminniiananioninn ili

INTEREST OF AMICUS CURIAE ......000ccsccsecsrseesscecscovseseccsees l

OE eepriciinitnsetaictenisinitnecivicnsintnvtsieniteininenidniinaamnndtge 2

Fk FE eee 6

PG. seciterstivinpsinrticstinsintivintenvtaintpiciatinetniniisienpenenass 8

I. PATENTS WERE HISTORICALLY VIEWED

AS A LIMITED RIGHT DESIGNED TO

Pere BO AS IU crc tetetncicecesstbinenitneestntnmineresnnnen 8

A. Common-Law Courts Were A Check Upon

PRANE PORE DIB cesscesessiceinctcerevsastccescnnsecsncnesse 9

B. The Founders Shared The English Suspicion

IO scsscssesncinictiiniinteintpsscicsiaiatinndadiininivensseni 11

Il. THE FEDERAL CIRCUIT’S AUTOMATIC-

INJUNCTION. RULE DISREGARDS

FUNDAMENTAL PRINCIPLES OF EQUITY.............. 14

A.. This Court Has Consistently Rejected Lower-

Court Efforts To Promulgate Automatic-

ON eniichicstiniediebnipusctbinieishsiltateiiciphndiadaiaidadingbintn 15

B. Violations Of Property Rights Are Not

Subject To Automatic Injunctions ....................:00+ 18

C. The Automatic-Injunction Rule Imposes A

Disproportionately Harsh Sanction On

Ee i cieectipiiasivtcneitiintiitiiictiivinninnieces 20

D. There Is A Strong Public Interest In Seeing

- EN PIL WI Mca enciesainnsneseclesbtasilnacivlisteanincnan 22

Il. APPLYING TRADITIONAL EQUITABLE

PRINCIPLES REMAINS THE BEST WAY TO

TE SIRE esisiciineienscdinicdsinnnistihintieinpicheibertiniinlsion 25

TT ienincthinginnictiniaeiiciatlachiaddiaiapititjeicebéiebenidaicienanettiinnts 30

QUESTIONS PRESENTED

1. Whether the Federal Circuit erred in setting forth a

general rule in patent cases that a district court must, absent

exceptional circumstances, issue a permanent injunction after

a finding of infringement.

2. Whether this Court should reconsider its precedents,

including Continental Paper Bag Co. v. Eastern Paper Bag

Co., 210 U.S. 405 (1908), on when it is appropriate to grant

an injunction against a patent infringer.

ili

TABLE OF AUTHORITIES

Page(s)

CASES

Amoco Prod. Co. v. Vill. of Gambell,

es Bee EE src cassdnetsticnnentisnominesinenatinniannenes 16, 17

Bacon v. Jones, 4 Myline & Craig 433 (1839)..........ccesecesee 11

Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found.,

Se es ee eR eetnnstccncssnenntngscntendttimndninindeonnanns 22, 23

Bonito Boats, Inc. v. Thunder Craft Boats, Inc.,

I es I ei sccsscendicinnnigtpansiieimmenseacsideveseceniencesinn 23

Campbell v. Acuff-Rose Music, Inc.,

ee PT cccticdadedhssidisnigdenbiningtmbncbiinionaibeinduiniplionts 19

Cont'l Paper Bag Co. v. E. Paper Bag Co.,

i ccticletipeiestneipcclanniatecesisasciincninintininsi i, 24

Foster v. Am. Mach. & Foundry Co.,

492 F.2d 1317 (2d Cir. 1974) ..........cceeeeeeceseeeeee 24, 25, 30

Graham v. John Deere Co., 383 U.S. 1 (1966).............. 11,13

Gucci Am., Inc. v. Daffy’s Inc.,

te Ne GO Gs Bp rrctentcareinresnctarpttanenieniscesontn 19

Harrisonville v. W.S. Dickey Clay Mfg. Co.,

Be By neiiciuteileinctinibisienanciininsbicieadiadsanmieiinietitie 19

Hecht Co. v. Bowles, 321 U.S. 321 (1944)........... 4, 15, 16, 20

Hoe v. Boston Daily Advertiser Corp., 14 F. 914

I a ci ell arias csianiieaiadll 26

Intel Corp. v. Hamidi, 7\ P.3d 296 (Cal. 2003) .............000 19

Maye v. Yappen, 23 Cal. 306 (1863) .00.......ccccccsecceseecereeseees 21

McCrary v. Pa. Canal Co.,

ie A A Os IT atte stieictnicsendanaetiiiuietansdiphee 20

iv

Morton Salt Co. v. G.S. Suppiger Co.,

DAS ULB, GG CIO ccmnescniecsecisicinsncccsictnisisitiicinsaaviitans 22, 23

Richardson v. Suzuki Motor Co.,

868 F.2d 1226 (Fed. Cir. 1989).................cecccrsssseoees 6, 18

Rite-Hite Corp. v. Kelley Co.,

$6 F.34 1536 (Red. Cas. 1995) ceccoscscsccrescccesescovsvescncasosssnnts 6.

R.R. Comm'n of Tex. v. Pullman Co., |

FID UD. GIG CIDA) scraccccsscconccsssesoncssosensictnctebintnteninneits 22

Vaughan v. Cent. Pac. R. Co.,

28 F. Cas. 1167 (C.C.D. Cal. 1G TT) nccrcccsssscasvocsscccescsccees 24

Weinberger v. Romero-Barcelo,

456 U.S. 305 (1982)......... inseiiareininiecssheasiininamadiaaaabiia 4,17

Windsurfing Int'l, Inc. v. AMF, Inc.,

782 F.2d 995 (Fed. Cir. 1986)......0.......ccerrsssssersesseccseses 25

Yakus v. United States, 321 U.S. 414 (1944) ......ccecceceseeees 20

CONSTITUTIONAL PROVISIONS

U.S. Carmat. ant. 0, § Sncscrccseoccceccoscoscsccssncsooserssssssnsssconssal passim

STATUTES

2B U.B.C. § 14GB cccsvvccrsccecoseccossesscrssssssoncsssnctsenseosssossasnesoreses 19

3S U.S.C. § 122 B)(1)......ccorccscceccccsosscsnsesseresrescossceseonssosseses 28

3S U.S.C. 6 DG1 nnccccccsssesessesscstocsassssssossosnescensossnoontenenennenrsbinn 18

BS UID. 6 TBD ccccccccsnvinnsssncsccocsistontescatmmenaccnentniainns 3,4, 14, 15

BS UBL. © FBG neccccccecseccsccccnssctnscscsnninsnnccieancsenesctantintesuntnion 17

Emergency Price Control Act of 1942, 56 Stat. 23........0000 16

LEGISLATIVE MATERIALS

S. Rep. No. 1979 (1952).....c.scscsssssseserersessssecsssaseesesesssssssnserees 4

OTHER AUTHORITIES

2 AMERICAN MUSEUM (1787) .............csssssssssssssscssssseseesesceees 1]

4 AMERICAN MUSEUM (1788) .............:ccsssccseceseeeseserenereesenees 11

6 AMERICAN MUSEUM (1789) ..........::cccccsssssssesseersseseseeeerenees 12

Dan L. Burk & Mark A. Lemley, Policy Levers in

Patent Law, 89 VA. L. REV. 1575 (2003) .........0.ccceceeees 21

DVD 6C Licensing Agency, Patent List, at http://

www.dvd6cla.com/patentlist_01.html

(last visited Jan. 20, 2006)................ccscsccsrsserssssrsrrensees 26

FED. TRADE COMM’N, TO PROMOTE INNOVATION:

THE PROPER BALANCE OF COMPETITION AND

PATENT LAW AND POLICY (2003).............csscsecsseeesereneeees 28

Thomas A. Hill, Origin and Development of

Letters for Patent for Invention, 6 J. PAT. &

TRADEMARK OFF. SOC’Y 405 (1923-24) .0......cccceeeeee 9,10

OLIVER WENDELI. HOLMES, THE COMMON LAW

ELS 21

E. Wyndham Hulme, The History of the Patent

System Under the Prerogative and at Common

Kam, 12 LGA. RRBV. 141 CEGBS) woneeccececrecccseccceserccccesccesscees 10

E. Wyndham Hulme, On the Consideration of the

Patent Grant Past and Present, 13 L.Q. REV.

INE a ae 10

ADAM B. JAFFE & JOSH LERNER, INNOVATION AND

EE enna 25

Ramon A. Klitzke, Historical Background of

English Patent Law, 41 J. PAT. & TRADEMARK

geen 9,10, 11

Mark A. Lemley & Kimberly A. Moore, Ending

Abuse of Patent Continuations, 84 B.U. L.

ITT cncqnehsuliishnincsninipasibtsnientamemanemabeinnemnaness 27

vi

Letter from Thomas Jefferson to Jeudy de

L’Hommande (Aug. 9, 1787), in 12 THE

PAPERS OF THOMAS JEFFERSON 11 (Julian P.

Boyd et all. CdS, 1956)...........0....-.ccecrocescsccereeessessssseseees 12

Letter from Thomas Jefferson to James Madison

(July 31, 1788), in 1 THE REPUBLIC OF LETTERS

545 (James Morton Smith ed., 1995) .........c-ccsceeeeeeeeeeees 12

Letter from Thomas Jefferson to Isaac McPherson

(Aug. 13, 1813), in XIII THE WRITINGS OF

THOMAS JEFFERSON 334 (Andrew A. Lipscomb _

8 OO ee 13

Kimberly A. Moore, Judges, Juries, and Patent

Cases—An Empirical Peek Inside the Black

Box, 99 MICH. L. REV. 365 (2000)............cccccceeeceereeeeeeee 29

MPEG-2, Patent List, at

http://www.mpegla.com/m2/m2-patentlist.cfm

(last visited Jam. 20, 2006)............ssccceceereeeeeenseeseecnneees 26

Philips, DVD patents, at

http://www.licensing.philips.com/licensees/

patent/dvd/ (last visited Jan. 21, 2006).......... <a ERE 26

Frank D. Prager, Historic Background and

Foundation of American Patent Law, 5 AM. J.

E.Ad, BRST. SOD CIGGE) .nncccccecccccesesevecesecsessscssescsenswesesvees 9

WILLIAM ROBINSON, THE LAW OF PATENTS (1890)

saa ciate tase aii tignettaetialtinastatiatlailiaaiiids 9, 13, 14, 23

JOSEPH STORY, COMMENTARIES ON EQUITY

JURISPRUDENCE, AS ADMINISTERED IN

ENGLAND AND AMERICA (rev. ed. 1877)...... 11, 15, 18, 24

JOSEPH STORY, COMMENTARIES ON THE

CONSTITUTION OF THE UNITED STATES (1833)......... 13,14

Nicholas Varchaver, The Patent King, FORTUNE,

May 14, 2001, at 203...........cscccsesseereneseseenensssereenenenens 27

Vii

EDWARD C. WALTERSCHEID, The NATURE OF THE

INTELLECTUAL PROPERTY CLAUSE: A STUDY IN

HISTORICAL PERSPECTIVE (William S. Hein &

Edward C. Walterscheid, Patents and

Manufacturing in the Early Republic, 80 J.

PAT. & TRADEMARK OFF. SOC’Y 855 (1998)..........000000 12

George Washington, Eighth Annual Message to

Congress (Dec. 7, 1796), in GEORGE

WASHINGTON’S WRITINGS 978 (John H.

en 12

BRIEF OF

AMERICAN INNOVATORS’ ALLIANCE i

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

INTEREST OF AMICUS CURIAE!

The American Innovators’ Alliance (“Alliance”) is a coa-

lition of United States high-technology companies that

includes Intel Corporation (“Intel”), Micron Technology, Inc.

(“Micron”), Microsoft Corporation (“Microsoft”), and Oracle

Corporation (“Oracle”). As innovators and intellectual prop-

erty holders in the software and hardware industries, the Alli-

ance’s members rely upon the protections of the United States

patent laws and believe that a strong patent system is impor-

tant to the vitality of today’s expanding knowledge-based

economy. The Alliance’s members are concerned, however,

that the Federal Circuit’s automatic-injunction rule in patent

infringement actions discourages investments by the most

innovative creators and implementers of technology, and ul-

timately reduces competition to the detriment of consumers. —

Intel is the world’s largest semiconductor manufacturer

and is also a leading manufacturer of computer, networking,

and communications products.

Micron is one of the world’s leading semiconductor

manufacturers. It produces an array of memory storage de-

vices and image sensors, and its products can be found in

everything from personal computers to digital cameras and

network servers.

Microsoft is the world’s largest software company. It

provides support for virtually every type of computing de-

1 Pursuant to this Court’s Rule 37.3(a), letters of consent from all

parties to the filing of this brief have been submitted to the Clerk.

Pursuant to this Court’s Rule 37.6, amicus states that this brief was

not authored in whole or in part by counsel for any party, and that

no person or entity other than amicus or tts counsel made a mone-

tary contribution to the preparation or submission of this brief.

2

vice, including servers, personal computers, and home enter-

tainment systems. Its products include the Windows operat-

ing system and the Xbox videogame system.

Oracle is a global leader in information management. It

sells software and services that enable organizations to man-

age their businesses worldwide. Oracle was among the first

software companies to make its applications available over

the Internet.

Together, the members of the Alliance have more than

210,000 employees and a market valuation of more than $480

billion.

The members of the Alliance each hold numerous pat-

ents. Indeed, Intel and Micron were among the ten most-

prolific producers of patents in the United States in 2004 and

2005. Because the Alliance’s members frequently litigate

patent infringement suits as both plaintiffs and defendants,

they have a vital interest in ensuring that the patent laws are

applied in a manner that strikes a reasonable balance between

protecting property rights and promoting innovation. The

members of the Alliance believe that the Federal Circuit’s

automatic-injunction rule upsets the balance that Congress

struck in the Patent Act, tipping the scale in favor of non-

practicing patent holders, with deleterious effects on innova-

tion.

~ STATEMENT

1. This case has profound implications for technological

innovation in the United States. The patent system is the

foundation for the United States’s global leadership position

in technological development. The promise of a patent and

possible royalty payments affords inventors a significant in-

centive to pursue new discoveries. These incentives flour-

ished where courts applied traditional equitable principles to

ensure that patent laws were enforced in a manner that “pro-

mote[d] the Progress of Science and the useful Arts,” U.S.

Const. art. I, § 8, and awarded injunctions only after carefully

3

considering the public interest considerations at stake. Re-

cently, however, the Federal Circuit has opened the door to

abusive patent litigation by replacing traditional equitable

principles with an inflexible and sweeping presumption that

an injunction will issue virtually automatically against any

patent infringer. Under this regime, patent rights actually sti-

fle innovation and significantly reduce incentives to invest in

manufacturing and research-and-development efforts in the

United States.

The Federal Circuit’s automatic-injunction rule is con-

trary to the plain language of the patent laws. The original

Patent Act of 1790 authorized only damages and forfeiture

remedies for infringement. 1 Stat. 109. The Patent Acts of

1793, 1 Stat. 318, and 1800, 2 Stat. 37, altered the measure of

damages, but still did not provide for injunctive relief. In

1819, Congress gave trial courts the discretion to issue patent

injunctions in accordance with the traditional principles of

equity: :

[Federal courts] shall have authority to grant in-

junctions, according to the course and principles

of courts of equity, to prevent the violation of the

rights of any authors or inventors secured to them

by any laws of the United States, on such terms

and conditions as the said courts may deem fit and

reasonable. ]

3 Stat. 481, 481-82 (1819) (emphases added). This provision,

with only cosmetic alterations, has survived to this day and

continues to treat injunctions as a discretionary remedy, to be

issued in accordance with traditional equitable principles:

“(The federal courts] may grant injunctions in accordance

with the principles of equity to prevent the violation of any

4

right secured by patent, on such terms as the court deems

reasonable.” 35 U.S.C. § 283 (emphases added).?

Section 283 reflects the long-standing rule that an injunc-

tion “is not a remedy which issues as of course.” Weinberger

v. Romero-Barcelo, 456 U.S. 305, 311 (1982) (internal quota-

tion marks omitted). The basis for injunctive relief “has al-

ways been irreparable injury and the inadequacy of legal

remedies.” /d. at 312. But even when those factors are pre-

sent, injunctions do not issue automatically. Courts of equity

must also consider “the public consequences in employing

the extraordinary remedy of injunction.” /d. “Flexibility

rather than rigidity” is the hallmark of equitable relief. Jd.

(quoting Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944)).

2. Petitioners eBay, Inc., (“eBay”) and Half.com, Inc.,

(“Half.com”) operate websites that allow sellers to list vari-

ous goods, and buyers to search and purchase those goods.

Although eBay is best-known for its auction feature, eBay’s

website also allows buyers to purchase selected goods at a

fixed, listed price. eBay gives sellers the option of a tradi-

tional auction that runs for several days, a fixed-price imme-

diate sale, or a hybrid that includes a multi-day auction and a

“Buy Now” option at a higher price for immediate sale.

Half.com, a wholly owned subsidiary of eBay, also offers

fixed-price purchases on its website.

MercExchange, L.L.C., (“MercExchange”) exists solely

to license patents. It neither practices its patents nor engages

in any other line of business. Pet. App. 54a. It holds two

valid patents pertaining to fixed-price sale technology.

3. MercExchange filed suit against eBay and Half.com

in the United States District Court for the Eastern District of

2 Legislative history further confirms that section 283 simply

restated then-existing law. See S. Rep. No. 1979, at 2423 (1952)

(Section 283 “is the same as the provision which opens [Revised

Statutes} 4292 with minor changes in language”).

5

Virginia, alleging willful infringement of three patents. Pet.

App. 54a. Before trial, the district court found that one patent

was invalid because of an inadequate written description. A

trial was conducted on MercExchange’s claims of infringe-

ment under the two remaining patents, and a jury found eBay

and Half.com liable. Pet. App. 29a. The jury assessed $10.5

million in damages against eBay and $19 million against

Half.com. Pet. App. 2a-3a.

Upon the finding of infringement, MercExchange sought

a permanent injunction prohibiting eBay and Half.com from

further infringing upon its patents. The district court weighed

the traditional factors governing injunctions, including (1)

irreparable injury, (2) the adequacy of a remedy at law, (3)

the public interest. and (4) the balance of hardships. Pet.

App. 52a-59a. On the basis of that multifactor inquiry, the

district court determined that an injunction was not war-

ranted. Pet. App. 59a. The court concluded that MercEx-

change would not suffer irreparable injury in the absence of a

permanent injunction because it did not practice the patents

itself but instead had publicly acknowledged that it intended

to license them. Pet. App. 54a-55a. The district court also

found that money damages could make MercExchange whole

and that it therefore had an adequate remedy at law. Pet.

App. 56a. The district court further determined that the pub-

lic interest factor was equally balanced between the plaintiff

and the defendants because the traditional interest in protect-

ing patent holders’ rights was offset by the growing concern

over the rising number of business-method patents. Pet. App.

57a-58a. Finally, the court found that the balance of hard-

ships “tip[ped]” slig/itly in favor of the defendants. Pet. App.

57a-59a.

The Federal Circuit affirmed the finding that eBay and

Half.com had infringed the patents held by MercExchange.

The Federal Circuit also held—-without reference to the tradi-

tional four-factor inquiry—that the district court abused its

discretion when it denied MercExchange’s request for injunc-

6

tive relief. The court of appeals therefore reversed the district

court’s order denying a permanent injunction. The court

premised its decision on what it identified as the “general rule

... that a permanent injunction will issue once infringement

and validity have been judged.” Pet. App. 26a (quoting

Richardson v. Suzuki Motor Co., 868 F.2d 1226, 1246-47

(Fed. Cir. 1989)). The court of appeals stated that the strong

presumption in favor of issuing an injunction could be over-

come only in “rare instances,” as where “an important public

need, such as . . . public health,” requires that the infringing

product or process continue to be marketed. Pet. App. 26a

(quoting Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1547

(Fed. Cir. 1995)). Finding that no such “important public

need” required that eBay and Half.com be permitted to con-

tinue to practice MercExchange’s patented business method,

the Federal Circuit directed the district court to enter a per-

manent injunction in favor of MercExchange.

In reaching this conclusion, the Federal Circuit dismissed

the possibility that the proliferation of business-process pat-

ents had any cognizable impact on the public, stating simply

that “this is not the type of important public need that justifies

the unusual step of denying injunctive relief.” Pet. App. 26a.

The court also noted that MercExchange’s professed willing-

ness to license its patents and its lack of intent to practice its

paicnts should not “deprive it of the right to an injunction to

which it is otherwise entitled.” Pet. App. 27a (emphasis

added). The Federal Circuit’s opinion makes clear that, in

patent cases, the court has discarded the four-factor test tradi-

tionally used to evaluate requests for injunctive relief and re-

placed it with a “presumption” that patentees are “entitled” to

a permanent injunction in all but the most “exceptional” cir-

cumstances. _

SUMMARY OF ARGUMENT

For centuries, the patent laws have encouraged useful in-

novation and discovery, fostering both the Industrial Revolu-

7

tion and the computer age. But the Federal} Circuit’s auto-

matic-injunction rule has transformed patents into a powerful

tool for litigation abuse. By disregarding traditional equitable

considerations such as the balance of hardships and the public

interest, the Federal Circuit has made it possible for one pat-

ent—no matter how trivial—to be used to shut down an entire

business. Such a possibility disrupts the careful balance em-

bodied in the Patent Act. Ultimately, it stifles innovation and

poses a significant threat to high-tech businesses and the

strength of the U.S. economy as a whole.

The problem of patent abuse is not a recent development.

Indeed, the historical prevalence of such abuse played a sig-

nificant role in the emergence of modern-day patent law. In

seventeenth-century England, the Crown was willing to sell

to the highest or most favored bidder a monopoly on almost

any “invention,” and patents thus became associated with cor-

ruption. The Founders were well aware of this history and

were wary of the potential for abuse inherent in any monop-

oly. The Founders therefore believed that patents should be

granted only when necessary to “promote the Progress of Sci-

ence and the useful Arts.” U.S. Const. art. I, § 8. Accord-

ingly, early patent statutes did not authorize courts to issue

injunctions as a remedy for infringement.

When Congress finally granted courts the potent power

to issue injunctions as a remedy against patent infringement,

it explicitly required courts to consider traditional equitable

principles when contemplating use of that power. Because

early American courts understood that patents existed to

serve the public interest by encouraging innovation, they de-

nied injunctive relief when it would- have imposed a sanction

disproportionate to the infringer’s culpability or the harm in-

flicted on the patentee.

The Federal Circuit's automatic-injunction rule is flatly

contrary to the text and evident purpose of Section 283,

which afforded courts the power to grant injunctive relief, but

8

also required that such relief be granted only in accordance

with principles of equity. The Federal Circuit’s stated basis

for its automatic-injunction rule—that property rights must

necessarily be protected by injunctions—fails because patents

are personal property and neither the patent laws nor the

common law has ever afforded holders of personal property

an entitlement to injunctive relief to cure a trespass. To the

contrary, injunctions to protect personal property are consid-

ered an extraordinary form of relief and are now—as they

have always been—exceedingly rare.

Moreover, the Federal Circuit’s abandonment of tradi-

tional equitable principles and its resultant disruption of the

balance struck by Congress stifles innovation by exacerbating

the serious and growing problem of patent “hold-ups.” In a

patent hold-up, a patent holder threatens to obtain an injunc-

tion to shut down an established product line or business.

The injunction, or threat of an injunction, enables the patentee

to hold an infringer hostage and extract a licensing fee that far

exceeds the invention’s actual value. The knowledge that an

injunction will issue automatically, without regard to the cir-

cumstances, has dramatically increased the rewards for initi-

ating a patent hold-up and emboldened patentees to exploit

their patents through litigation rather than development and

investment. Only restoration of the primacy of traditional

principles of equity can restore the balance between the rights

of patent holders and the social benefits to be garnered

through innovation.

The decision below should be reversed. _

ARGUMENT

I. PATENTS WERE HISTORICALLY VIEWED

AS A LIMITED RIGHT DESIGNED TO

‘PROMOTE INNOVATION.

Much of American patent law—including the provision

at issue in this case—dates back to the first few decades of

the Nation’s existence. The English legal principles and his-

9

torical experiences that served as the backdrop to enactment

of both the Patent Clause and early patent laws therefore shed

significant light upon the drafters’ intentions. Indeed, many

early Americans—like their English counterparts—were

deeply suspicious of all monopolies, including patents. These

sentiments resulted in a carefully circumscribed system of

patent rights and remedies designed to promote innovation

and minimize abuse.

A. Common-Law Courts Were A Check Upon

Rampant Patent Abuse.

In seventeenth-century England, patents were issued at

the discretion of the Crown, which inevitably led to al] man-

ner of abuse. See Frank D. Prager, Historic Background and

Foundation of America: Patent Law, 5 AM. J. LEGAL HIST.

309, 309-12 (1961). The Crown defined the concepts of

“discovery” and “invention” loosely, and, at various points in

time, granted monopolies of trade in such commodities as

sweet wine, salt production, knife handles, and playing cards.

Ramon A. Klitzke, Historical Background of English Patent

Law, 41 J. PAT. & TRADEMARK OFF. SOC’y 615, 626-35

(1959). Many patents were issued for “purely mercenary rea-

sons, [such as] attempting to obtain either a cash payment or

a share of the profits from a grant,” and the “monopoly sys-

tem became a system of plunder.” Jd. at 644; see also Tho-

mas A. Hill, Origin and Development of Letters for Patent for

Invention, 6 J. PAT. & TRADEMARK OFF. Soc’y 405, 407

(1923-24) (patents were frequently abused, and granted for

the Crown’s profit or even to “courtiers and favorites”). .

This history of abuse generated a deep public hostility

toward patents. 1 WILLIAM ROBINSON, THE LAW OF PATENTS

§ 14, at 20 (1890). “The inventor was looked upon as a mo-

nopolist, dependent for his exclusive rights upon the royal

bounty; and his privileges were rigidly confined within the

literal meaning of the words by which they were described in

his patents.” /d. § 14, at 21.

10

Despite this hostility, there was an underlying recogni-

tion that patents, properly confined, could serve the public by

encouraging innovation and—to that end—Parliament en-

acted the Statute of Monopolies to rein in the proliferation of

patents. Enacted in 1624, the Statute explicitly recognized

that an incentive for “true and first inventor[s] and inven-

tion{s]” was in the public interest because it encouraged in-

novation. Hill, supra, at 416 (quoting the Statute of Monopo-

lies). The Statute also established the fundamental principle

that common-law courts would determine the validity of pat-

ents. Thus, although the issuance of patents remained in the

monarch’s hands, only common-law courts could protect the

patentee’s rights and determine the appropriate remedy.

Klitzke, supra, at 649. By controlling the validity and scope

of patents and the remedies available, the courts could guard

against the excesses that accompanied the ever-growing

number of patents.

When adjudicating patent disputes, English common-law

courts were guided by the principle that the patent must serve

the public interest. The courts developed a number of tests to

promote the public interest, such as requiring that a patent

actually state a discovery or invention, an early form of the

novelty requirement. E. Wyndham Hulme, The History of the

Patent System Under the Prerogative and at Common Law,

12 L.Q. Rev. 141, 151 (1896). Foreigners who brought in-

novations to England and sought protection from English

courts were often required to take on English apprentices to

ensure domestic dissemination of the innovation. /d. at 145.

Moreover, a patent that was not “worked,” or put into use,

could be voided for failure to provide a public benefit.

Klitzke, supra, at 643; see also E. Wyndham Hulme, On the

Consideration of the Patent Grant Past and Present, 13 L.Q.

REV. 313, 315-17 (1897) (discussing the revocation of a pat-

ent for failure to work the patent within one year). This re-

quirement grew out of the recognition that an invention that

1]

lay fallow necessarily failed to benefit the public. Klitzke,

supra, at 643.

The English courts also protected the public interest

through a flexible remedial scheme. “When a party applie(d]

for the aid of the court, [in a patent case], .. . great latitude

and discretion [were] allowed to the court in dealing with the

application.” Bacon v. Jones, 4 Mylne & Craig 433, 436

(1839) (quoted in 2 JOSEPH STORY, COMMENTARIES ON

EQUITY JURISPRUDENCE, AS ADMINISTERED IN ENGLAND AND

AMERICA § 934, at 122 n.3 (rev. ed. 1877) [hereinafter

STORY, COMMENTARIES ON EQuity]}). The courts possessed

the discretion to develop remedies specific and appropriate to

the facts of each case. /d.

B. The Founders Shared The English Suspicion

Of Monopolies.

Like their English counterparts, early Americans had an

“instinctive aversion to monopolies.” Graham v. John Deere

Co., 383 U.S. 1, 7 (1966). This suspicion was grounded in

experience—both the English Crown and the colonial gov-

ernments granted monopolies to favored interests, in a prac-

tice that was widely considered corrupt. The Framers’ deci-

sion to authorize Congress to “secur{e] for limited Times to

... Inventors the exclusive right to ... Discoveries,” U.S.

Const. art. 1, § 8, therefore met with sharp criticism from

those Americans who viewed all monopolies with disdain.

George Mason, one of Virginia’s delegates to the Constitu-

tional Convention, identified Congress’s authority to “grant

monopolies in trade and commerce” as one of the reasons for

his refusal to sign the Constitution. 2 AMERICAN MUSEUM, at

534-36 (1787). The New York constitutional ratifying con-

vention urged that the Constitution be amended to provide

“(t}hat the congress [may] not grant monopolies, or erect any

company with exclusive advantages of commerce.” 4

AMERICAN MUSEUM, at 156 (1788). Massachusetts, New

Hampshire, and North Carolina also urged an amendment to

12

strip Congress of the power to create monopolies. 6

AMERICAN MUSEUM, at 303 (1789).

Thomas Jefferson, who—at least at the time of the

Founding—was deeply distrustful of patents, explained that

“(t]hough the interposition of government, in matters of in-

vention, has its use, yet it is in practice so inseparable from

abuse, that [Americans] think it better not to meddle with it.”

Letter from Thomas Jefferson to Jeudy de L’Hommande

(Aug. 9, 1787), in 12 THE PAPERS OF THOMAS JEFFERSON 11

(Julian P. Boyd et al. eds., 1956). After the Constitution had

been ratified, Jefferson advocated an amendment to remove

congressional authority to issue patents. See Letter from

Thomas Jefferson to James Madison (July 31, 1788), in 1

THE REPUBLIC OF LETTERS 545 (James Morton Smith ed.,

1995) (“[T]he benefit even of limited monopolies is too

doubtful to be opposed to that of their general suppression.”).

Even after the Constitution was ratified, the Founders’

antipathy for monopolies led them to explore means other

than patents to encourage innovation. Alexander Hamilton,

for example, proposed using “pecuniary rewards” as an alter-

native to granting patents. See Edward C. Walterscheid; Par-

ents and Manufacturing in the Early Republic, 80 J. PAT. &

TRADEMARK OFF. Soc’y 855, 861-63 (1998). President

Washington embraced that idea, and urged Congress to estab-

lish Boards to award direct payments for agricultural innova-

tions. George Washington, Eighth Annual Message to Con-

gress (Dec. 7, 1796), in GEORGE WASHINGTON’S WRITINGS

978, 982 (John H. Rhodehamel ed., 1997). This alternative

proposal for rewarding innovation gained little support, how-

ever, because the new federal government was still short of

money, and patents had the virtue of costing nothing. Eb-

WARD C. WALTERSCHEID, THE NATURE OF THE

INTELLECTUAL PROPERTY.CLAUSE: A STUDY IN HISTORICAL

PERSPECTIVE 91-92 (William S. Hein & Co. 2002).

13

Ultimately, Congress settled upon a system of patents to

reward inventors, embracing patents for the same reason as

the English: patents, properly regulated, serve the public in-

terest by promoting discovery and innovation. As Justice

Story explained:

[The Patent Clause} was beneficial . . . to the public,

as it would promote the progress of science and the

useful arts, and admit the people at large, after a

short interval, to the full possession and enjoyment

of all writings and inventions without restraint.

3 JOSEPH STORY, COMMENTARIES ON THE CONSTITUTION OF

THE UNITED STATES § 1147, at 48-49 (1833) [hereinafter

STORY, COMMENTARIES ON THE CONSTITUTION].

Even Jefferson eventually came to recognize the public

benefits that derive from patents, explaining that patents are

an “encouragemefit to men to pursue ideas which may pro-

duce utility.” Letter from Thomas Jefferson to Isaac McPher-

son (Aug. 13, 1813), im XIII THE WRITINGS OF THOMAS

JEFFERSON 334 (Andrew A. Lipscomb et al. eds., 1903).3 At

the time, however, patents were viewed as conveying the ex-

clusive right to the profits from an invention, not necessarily

the exclusive right to use an invention. See Robinson, supra,

§ 898 (“The interest of the patentee is represented by the

emoluments which he does or might receive from the practice

3 By this time, Jefferson spoke as the chief architect of the

American patent system. Ironically, after initially opposing the

Patent Clause altogether, Jefferson went on to be “the first adminis-

trator of our patent system” and its “moving spirit.” Graham, 383

U.S. at 7 (internal quotation marks omitted). As Secretary of State,

Jefferson, along with the Secretary of War and the Attorney Gen-

eral, was responsible for issuing the first United States patents. /d.

Jefferson was not merely an administrator; he advanced develop-

ments in patent law that are still in practice today, such as the nov-

elty and non-obviousness requirements. /d. at 7-8. He also played

a key role in the drafting of the first patent statute, the Patent Act of

1790, and was a noted inventor himself. /d. at 7.

14

of the invention by himself or others.”). As Jefferson ex-

plained, “[sjociety may give an exclusive right to the profits

arising from [patents], as an encouragement to men to pursue

ideas which may produce utility.” XIII] THE WRITINGS OF

THOMAS JEFFERSON, supra, at 333-34 (emphasis added); see

also 3 STORY, COMMENTARIES ON THE CONSTITUTION § 1147,

at 49 (“[T]he only boon, which could be offered to inventors

to disclose the secrets of their discoveries, would be the ex-

clusive right and profit of them, as a monopoly for a limited

period.”).

The Founders therefore carefully tailored early patent

laws to extend monopolies only as far as necessary to foster

innovation. The Federal Circuit’s automatic-injunction rule

disregards the Founders’ emphasis on “promot{ing] the Pro-

gress of Science,” U.S. Const. art. I, § 8, and instead has had

the effect of rewarding companies that amass patents without

having any intention of actually practicing them. Far from

promoting scientific progress, injunctions in favor of such

patent holders stifle innovation by effectively placing pat-

ented technology out of the reach of both researchers and the

public. Neither the Constitution’s Framers nor the drafters of

35 U.S.C. § 283—all of whom were keenly aware of the dan-

gers associated with monopolies—would have intended for

patent rights to impede technological progress or economic

development.

Il. THE FEDERAL CIRCUIT’S AUTOMATIC-

INJUNCTION RULE DISREGARDS

FUNDAMENTAL PRINCIPLES OF EQUITY.

In 1819, when Congress afforded courts the discretion to

issue injunctions in patent cases, it explicitly linked such re-

lief to traditional equitable principles. 3 Stat. 481, 481 (1819)

(“the circuit courts of the United States . . . shall have author-

ity to grant injunctions, according to the course and principles

of courts of equity, to prevent the violations of the nghts of

any authors or inventors”). Under those principles, an injunc-

15

tion would issue in patent cases only when it was the most

appropriate means of achieving justice between the parties

and promoting the public interest. Certainly, a patent holder

did not have an automatic right to injunctive relief against an

infringer. As Justice Story stated, “In cases . . . where a pat-

ent has been granted for an invention, it is not a matter of

course for courts of equity to interpose by way of injunction.”

2 STORY, COMMENTARIES ON EQuity § 934, at 121-22. In

determining whether to grant an injunction, Justice Story con-

tinued, a court should consider whether “the patent has been

granted for some length of time”; whether “the patentee has

put the invention into public use”; and whether the patentee

“has had an exclusive possession of it under his patent for a

period of time.” Jd.

The Federal Circuit’s automatic-injunction rule disre-

gards both this history and the statutory command of 35

U.S.C. § 283 that courts issue injunctions only in accordance

with equitable principles. In place of the traditional equitable

factors, the Federal Circuit has substituted what it refers to as

the “general rule ... that a permanent injunction will issue

once infringement and validity have been judged.” Pet. App.

26a. In so doing, the Federal Circuit has inverted the tradi-

tional test by requiring there to be “exceptional” circum-

stances justifying “depriv[ing]” the patent holder of a “right

to an injunction” to which it is purportedly “entitled.” Pet.

App. 26a-27a. Such an approach finds no support in either

this Court’s jurisprudence or historically rooted notions of

equity.

A. This Court Has Consistently Rejected

Lower-Court Efforts To Promulgate

Automatic-Injunction Rules.

This Court has repeatedly emphasized that automatic-

injunction rules are incompatible with the case-by-case in-

quiry demanded by traditional equitable principles. In Hecht

Co. v. Bowles, 321 U.S. 321 (1944), for example, this Court

16

held that violations of the Emergency Price Control Act were

not automatically subject to an injunction. The Act imposed

price controls in response to widespread shortages and infla-

tion sparked by World War Il. The Act provided that, upon a

violation, “a permanent or temporary injunction, restraining

order, or other order shail be granted without bond.” Jd. at

322 (quoting the Emergency Price Control Act of 1942, 56

Stat. 23) (emphasis added). Despite the dire economic situa-

tion, and the seemingly mandatory language of the Act, this

Court refused to countenance an automatic-injunction rule or

even a presumption in favor of an injunction.

Effectively requiring a clear statement by Congress to

override long-standing principles of equity, this Court de-

clared:

We cannot but think that if Congress had intended

to make such a drastic departure from the traditions

of equity practice, an unequivocal statement of its

purpose would have been made .... We are deal-

ing here with the requirements of equity practice

with a background of several hundred years of his-

tory.

Hecht Co., 321 U.S. at 329. The “essence of equity jurisdic-

tion,” the Court continued, “has been the power of the Chan-

cellor to do equity and to mould each decree to the necessities

of the particular case. Flexibility rather than rigidity has dis-

tinguished it.” Jd.

In Amoco Production Co. v. Village of Gambell, 480 U.S.

531 (1987), this Court reaffirmed Hecht’s conclusion that

automatic-injunction rules cannot be reconciled with tradi-

tional equitable principles. Amoco reversed a Ninth Circuit

decision holding that “injunctive relief is the appropriate

remedy for a violation of an environmental statute absent rare

or unusual circumstances.” Jd. at 541 (internal quotation

marks omitted). Although this Court agreed with the Ninth

Circuit that environmental damage is, “by its nature,” often

17

irreparable, it nevertheless deemed the Ninth Circuit’s pre-

sumption in favor of injunctive relief to be “contrary to tradi-

tional equitable principles.” /d. at 545. The Court explained

that courts considering whether to grant injunctive relief must

undertake a fact-specific balancing of traditional equitable

factors.

Similarly, in Weinberger v. Romero-Barcelo, 456 U.S.

305 (1982), this Court reversed a First Circuit decision that

entered an injunction after finding a violation of the Clean

Water Act. At issue were recurring United States naval train-

ing exercises on the Puerto Rican island of Vieques. These

exercises resulted in live fire rounds and ordnance being

dropped on beaches and into the waters off the island’s coast.

Id_at 307. Despite the government’s concession that the

Clean Water Act’s plain terms had been violated, this Court

relied upon Hecht to hold that “a federal judge sitting as

chancellor is not mechanically obligated to grant an injunc-

tion for every violation of law.” /d. at 313. The Court ex-

plained that “{a]n injunction [wa]s not the only means of en-

suring compliance” with the Clean Water Act because the Act

provided for fines and criminal penalties. /d. at 314.

The Federal Circuit’s automatic-injunction rule is indis-

tinguishable from the rules this Court rejected in Hecht and

its progeny. Even where the public. interest is truly over-

whelming—as in times of war or where the environment is

being irreparably harmed—equitable principles require case-

by-case, fact-specific adjudication. As Congress provided in

the Patent Act, an injunction is not the only means of remedy-

ing the infringement of a patent right because the Aci also

provides for monetary damages, which can fairly and ade-

quately compensate a non-practicing patent holder in appro-

priate cases. Congress has even provided for treble damages

for the willful infringement of a patent right. 35 U.S.C.

§ 284.

18

B. Violations Of Property Rights Are Not

Subject To Automatic Injunctions.

The Federal Circuit justified its rigid automatic-

injunction rule by claiming that patents are property and that

injunctions issue as a matter of course to protect property.

Pet. App. 26a. Specifically, the court has contended that “[i]t

is contrary to the laws of property, of which the patent law

partakes, to deny the patentee’s right to exclude others from

use of his property. The right to exclude recognized in a pat-

ent is but the essence of the concept of property.” Richard-

son, 868 F.2d at 1246-47 (internal quotation marks and cita-

tion omitted).

Although patents are indeed a species of personal prop-

erty, see 35 U.S.C. § 261 (“patents shall have the attributes of

personal property”), property law affords no support for the

Federal Circuit’s assertion that entitlement to an injunction is

the “essence” of such property. The truth is quite the oppo-

site: “Ordinarily, in cases of chattels, courts of equity will

not interfere.” 1 STORY, COMMENTARIES ON EQuiTy § 708,

at 694. Injunctions are issued to protect chattels only in the

unusual case where they have some unique quality that makes

an award of damages inadequate, such as singular works of

art or family heirlooms. /d. at § 709, at 694-96. Outside of

these rare circumstances, a damages remedy is sufficient and

an injunction will not issue.

The Federal Circuit has repeatedly stated that the “exclu-

sive” nature of the patent right compels the use of injunctions.

The premise, though, cannot support the conclusion, as there

are many “exclusive” rights in law that are not necessarily

protected by injunctive relief. Indeed, while patents have al-

ways been considered an “exclusive”, right, early patents

could not be protected by injunctions at all because the origi-

nal Patent Act of 1790 did not provide for the possibility of

injunctive relief. 1 Stat. 109. The only remedies available

were actual damages to the patentee and the forfeiture of the

19

infringer’s patented devices. Courts were not afforded the

discretion to enjoin the infringer’s use of the patent until

1819. 3 Stat. 481, 481-82. And, even today, injunctions are

not available in infringement suits against the United States.

28 U.S.C. § 1498. It therefore cannot be said that the right to

an injunction is inherent in the nature of patents as “exclu-

sive” rights. The right to a patent injunction derives instead

from statute and—as prescribed by that statute—must be ex-

ercised in accordance with traditional principles of equity.

Moreover, injunctions are certainly not automatically

available to protect the “exclusive” intellectual property

rights of copyright and trademark. See Campbell v. Acuff-

Rose Music, Inc., 510 U.S. 569, 578 n.10 (1994) (recognizing

that the “goals of the copyright law ... are not always best

served by automatically granting injunctive relief,” and not-

ing that injunctive relief is discretionary under the Copyright

Act); Gucci Am., Inc. v. Daffy’s, Inc., 354 F.3d 228 (3d Cir.

2003) (affirming the denial of a permanent injunction against

a trademark infringer after applying the traditional four-factor

test). And altHough injunctions are less extraordinary in

cases involving real property, even there injunctive relief is

not simply issued automatically. See Harrisonville v. W.S.

Dickey Clay Mfg. Co., 289 U.S. 334, 338 (1933) (denying

injunctive relief where a nuisance was injuring land); /nte/

Corp. v. Hamidi, 71 P.3d 296, 303 (Cal. 2003) (“Even in an

action for trespass to real property . . . the extraordinary rem-

edy of injunction cannot be invoked without showing the

likelihood of irreparable harm.”) (internal quotation marks

omitted).

Thus, the fact that patents are an exclusive property right

does not provide justification for the Federal Circuit’s auto-

20

matic-injunction rule, which has no equivalent in any other

area of property law.4

C. The Automatic-Injunction Rule Imposes A

Disproportionately Harsh Sanction On

Inadvertent Infringers.

The traditional function of equity has been to reach a

“nice adjustment and reconciliation” between the parties.

Hecht Co., 321 U.S. at 329. The court “balances the conven-

iences of the parties and possible injuries to them according

as they may be affected by the granting or withholding of the

injunction.” Yakus-v. United States, 321 U.S. 414, 440

(1944); see also McCrary v. Pa. Canal Co., 5 F. 367

(C.C.E.D. Pa. 1880) (denying a patent injunction because the

cost to the defendant would far exceed the benefit to the

plaintiff). Although this “reconciliation” is often referred to

as the “balance of hardships,” it also implicates a balance of

the parties’ rights with their culpability. Indeed, the intent of

a wrongdoer and the degree of harm inflicted have always

been critical to determining a just and equitable remedy be-

cause “[t]he historic injunctive process was designed to deter,

not to punish.” Hecht Co., 321 U.S. at 329. The automatic-

injunction rule entirely disregards this important considera-

tion.

Even the historically less-flexible common law looked to

a wrongdoer’s intent when determining an appropriate rem-

edy. Thus was reflected in the distinct forms of action for

harms to chattels, which prescribed different remedies based

4 The suggestion that application of traditional principles of eq-

uity will somehow effect a compulsory licensing regime that de-

prives patent holders of all meaningful property rights is baseless.

In many cases, the balance of equities may well favor the patent

holder and call for injunctive relief. In cases where the equities do

not favor the patent holder, that the patent holder may be limited to

a damages remedy can hardly be said to enact a system of compul-

sory licensing.

21

on the wrongdoer’s intent. In an action for trespass on chat-

tels, the plaintiff was entitled to recover only the profit ob-

tained by the defendant, and the intent of the-defendant was

irrelevant to the right of recovery. OLIVER WENDELL

HOLMES, THE COMMON LAW 96-98 (1881). But if the plain-

tiff could prove that the wrongdoing was knowing, or moti-

vated by “actual malevolence,” an action in trover would lie,

and the plaintiff could recover a punitive measure of dam-

ages. Id. at 143-44. For instance, in Maye v. Yappen, 23 Cal.

306 (1863), the defendants dug up gold-bearing earth from

land they mistakenly, but reasonably, believed to be their

own. The defendants were held liable for their profits in an

action for trespass on chattels. Jd. at 311-12. The court ex-

plained that in cases where intentional wrongdoing was not at

issue, a wrongdoer was required to repay only his profits, and

the defendants were thus permitted to deduct the reasonable

costs of extracting the gold. /d. But the court further stated

that where a wrongdoer took possession of chattels knowing

they were not his own, he would be liable in trover, and no

subtraction for costs would be permitted. /d. at 310-11. This

punitive award—often far out of proportion to the damage

suffered by the plaintiff—was justified on the ground that in-

tentional wrongs should be discouraged by severe penalties.

In modern patent litigation, this distinction between in-

tentional and inadvertent wrongdoing is more—not less—

relevant. As the number of patents continues to multiply, it is

becoming increasingly difficult for innovators to keep track

of all patents in a particular area and to avoid inadvertent in-

fringement. See Dan L. Burk & Mark A. Lemley, Policy

Levers in Patent Law, 89 VA. L. REV. 1575, 1614 (2003).

Not surprisingly, episodes—of—inadvertent infringement—

“tripping over” a patent—are no longer infrequent. As this

case well-illustrates, even highly sophisticated, well-financed

corporations can find themselves ensnared in the modern

“patent thicket.” By compelling district courts to impose the

extraordinary remedy of injunctive relief whatever the cir-

22

cumstances surrounding the infringement, the Federal Circuit

has disregarded traditional equitable principles, which have

always taken the infringers’ intentions into consideration as

part of the injunctive relief inquiry. The Federal Circuit’s

one-size-fits-all approach to patent remedies deems irrelevant

all such factual specifics, and thereby frequently imposes

burdens on inadvertent infringers far out of proportion to the

harm done to the patent holder. Such a result cannot be rec-_

onciled with the application of traditional principles of equity

mandated by Congress. :

D. There Is A Strong Public Interest In

Seeing Innovations Put To Use.

Because automatic-injunction rules are strongly disfa-

vored in the law, a patent holder’s eligibility for an injunction

must be determined in accordance with traditional equitable

principles. One of the most important aspects of that inquiry

is whether the patent holder is serving the public interest by

putting its patent to use or merely hoarding the patent in an

effort to collect license fees. See R.R. Comm'n of Tex. v.

Pullman Co., 312 U.S. 496, 501 (1941) (“The history of eq-

uity jurisdiction is the history of regard for public conse-

quences in employing the extraordinary remedy of the injunc-

tion.”).

Indeed, a “patent by its very nature is affected with pub-

lic interest,” Blonder-Tongue Labs., Inc. v. Univ. of Ill.

Found., 402 U.S. 313, 343 (1971) (internal quotation marks

omitted), and it therefore has long been axiomatic that

“courts, and especially courts of equity, may appropriately

withhold their aid where the plaintiff is using the right as-

serted contrary to the public interest.” Morton Salt Co. v.

G.S. Suppiger Co., 314 U.S. 488, 492 (1942). In Morton Salt,

for example, this Court ordered the dismissal of a patent in-

fringement action because the patent holder was using its pat-

ent to restrain trade in another, unpatented product by requir-

ing licensees of its patented salt tablet dispenser to use only

23

its unpatented tablets—rather than those of lawful competi-

tors—in the machine. /d. at 491. The Court concluded that

the patent holder’s attempt to suppress lawful competition

was “contrary to public policy” and that “the adverse effect

upon the public interest of a successful infringement suit . . .

disqualifie{d] [the patent holder] to maintain the suit.” Jd. at

494.

If—as Morton Salt demonstrates—use of a patent in a

manner contrary to the public interest bars the patent holder

from litigating an infringement action, it follows a fortiori

that such misuse also renders injunctive relief unavailable to

the patent holder. 314 U.S. at 494; see also Blonder-Tongue

Labs., Inc., 402 U.S. at 343 (the “far-reaching social and eco-

nomic consequences of a patent ... give the public a para-

mount interest in seeing that patent monopolies spring from

backgrounds free from ... inequitable conduct”) (internal

quotation marks omitted).

Historically, courts have considered it to be in the public

interest for patents to be put to use. See Bonito Boats, Inc. v.

Thunder Craft Boats, Inc., 489 U.S. 141, 146 (1989) (“the

federal patent laws have embodied a careful balance between

the need to promote innovation and the recognition that imita-

tion and refinement through imitation are both necessary to

invention itself and the very lifeblood of a competitive econ-

omy”). Indeed, patents are granted to “promote the Progress

of Science and useful Arts,” U.S. Const. art. I, § 8, and thus

whether a particular invention is being put to beneficial use is

highly relevant to whether the public interest is being served.

“{T]he inventor does not fulfil [sic] the spirit of his contract

unless he introduces his invention into actual use and puts its

benefits within the reach of others.” Robinson, supra, § 43,

at 66.

Thus, although Congress has never made it a defense to

patent infringement that the patent was not “worked,” the use

or non-use of a patent has traditionally been relevant to de-

24

termining whether a patent holder is entitled to injunctive re-

lief. See Vaughan v. Cent. Pac. R. Co., 28 F. Cas. 1107

(C.C.D. Cal. 1877) (denying injunctive relief in an

infringement action because the patent holder did not practice

the patent, but only licensed it). Justice Story, for example,

wrote that courts of equity should look to whether “the pat-

entee has put the invention into public use” when considering

whether to grant a patent injunction. 2 Story,

COMMENTARIES ON EQUITY § 934, at 122.

Respondents have erroneously argued that in Continental

Paper Bag Co. y. Eastern Paper Bag Co., 210 U.S. 405

(1908), this Court held that the use or non-use of a patent is

irrelevant to the patent holder’s eligibility for an injunction.

Cert. Opp. 3, 16-18. In that case, this Court was asked to de-

cide whether “unreasonable or sinister” non-use of a patent

justified withholding an injunction. Cont’ Paper Bag Co.,

210 U.S. at 428-29. This Court rejected the factual premise

of the argument, and found it “certainly disputable” that un-

reasonable non-use had occurred. /d. at 429. Although sub-

sequent dicta in the opinion is in tension with the traditional

equitable focus on a patent’s public use, this Court specifi-

cally limited its holding to the facts before it and stated that

“(whether . . . a case cannot arise where, regarding the situa-

tion of the parties in view of the public interest, a court of eq-

uity might be justified in withholding relief by injunction, we

do not decide.” /d. at 430.5 Subsequent courts have not in-

terpreted Continental Paper Bag as barring consideration of a

patent’s use during the injunctive relief inquiry, see Foster v.

5 Because Continental Paper Bag expressly left open the possi-

bility that denying injunctive relief might be appropriate in some

circumstances, this Court need not overrule that decision in order to

reject the Federal Circuit’s automatic-injunction rule. To the extent

that Continental Paper Bag is viewed as an impediment to that re-

sult, however, this Court should overrule the decision to that lim-

ited extent.

25

Am. Mach. & Foundry Co., 492 F.2d 1317, 1324 (2d Cir.

1974) (denying a permanent injunction after a finding of pat-

ent infringement based in part on the fact that the defendant

“manufactures a product; the [plaintiff] does not”), and the

Federal Circuit should not have done so here.

Ill. APPLYING TRADITIONAL EQUITABLE

PRINCIPLES REMAINS THE BEST WAY TO

CURB PATENT ABUSE.

The Federal Circuit’s automatic-injunction rule stifles

innovation by exacerbating the problem of patent “hold-ups.”

At its most basic level, a hold-up occurs when a business ven-

ture is blocked by a patent holder who claims that the product

or service is infringing on its patent. What makes patent

hold-ups especially pernicious is that they are often initiated

after the infringing company has already invested tremendous

resources in a business venture that cannot easily be changed

to work around the patent. Once the investment is made, the

patentee can hold the resulting line of business—and the as-

sociated profits and sunk costs—hostage with an injunction.

In extreme cases, a hold-up gives the patent holder the power

to shut down an entire business. See, e.g., ADAM B. JAFFE &

JOSH LERNER, INNOVATION AND ITs DISCONTENTS 113-14

(2004) (injunction granted in Kodak case estimated to have

caused 4,500 employees to lose their jobs and $200 million of

plant, property, and equipment to be rendered obsolete);

Windsurfing Int'l, Inc. v. AMF, Inc., 782 F.2d 995, 1003 &

n.12 (Fed. Cir. 1986) (permanent injunction issued even

though it would likely put the defendant out of business).

Usually, the patent holder’s real goal is not to shut down

the targeted business but to extract a licensing fee far in ex-

cess of the invention’s actual value. The Federal Circuit's

automatic-injunction rule is therefore crucial to any hold-up

scheme because it confronts infringing companies with the

Hobson’s choice of paying the requested licensing fee, or be-

ing put out of business and losing their entire investment.

26

Under these circumstances, the patent holder can set the li-

censing fee so high as to extract much of the profit from the

infringing business. But see Hoe v. Boston Daily Advertiser

Corp., 14 F. 914, 915 (C.C.D. Mass. 1883) (denying a patent

injunction because “the only advantage which the plaintiffs

could derive from an injunction, would be to put them in a

better situation .. . for the further conduct of the negotia-

tion’”’).

Moreover, a patent hold-up can generate these exorbitant

licensing fees even where the patent is only a tiny part of the

overall product. Indeed, as technology has grown more com-

plex, the number of patents implicated by even a relatively

simple product has multiplied into the hundreds. The rea- -

sonable royaity rate for any single invention in these com-

plex, high-tech devices is only a tiny fraction of the overall

value. But a patent hold-up creates so much leverage for the

patentee that it can demand—and expect to receive—a licens-

ing fee that is far higher than any conceivable reasonable roy-

alty. By facilitating these unjust and extortionate licensing

fees, the automatic-injunction rule violates traditional equita-

ble principles.

This case brings the hold-up problem into particularly

‘sharp relief. The Federal Circuit enjoined eBay and Half.com

from continuing much of their successful Internet sales busi-

ness, but only after eBay and Half.com rejected MercEx-

change’s demand for licensing fees that far outstripped the

actual value of its two patents. And as the undersigned

® To build a basic DVD video player, for example, a manufac-

turer must own or license more than three hundred patents. See

DVD 6C_ Licensing Agency, Patent List, aft http://

www .dvd6cla.com/patentlist_01.html (last visited Jan. 20, 2006);

MPEG-2, Patent List, at _ http://www.mpegla.com/m2/

m2-patentlist.cfm (last visited Jan. 20, 2006); Philips, DVD Patents,

at http://www.licensing.philips.com/licensees/patent/dvd/ (last v:s-

ited Jan. 21, 2006).

-

27

amicus can attest, this problem is repeating itself throughout

the technology-driven sectors of the U.S. economy.

Holding up an established business has become so lucra-

tive that it has given rise to a cottage industry cf hold-up enti-

ties known as “patent trolls.” Patent trolls are patent-holding

companies whose sole activities are [itigating and licensing

their patents. They account for an ever-growing proportion

of patent suits. In some cases, investors hire researchers to

develop patents that are then exploited through licensing.

More often, these non-practicing patent holders acquire pat-

ents from failing businesses at below-market values or from

individual inventors. Indeed, even some individuals have en-

tered the patent market by trying to stake out exclusive terri-

tory on the periphery of an important industry. See Nicholas

Varchaver, The Patent King, FORTUNE, May 14, 2001, at 203.

The one constant is that the non-practicing patent holder ex-

ploits its patent through litigation, the threat of litigation, and

licensing, rather than through technological development.

Non-practicing patent holders have developed a number

of hold-up strategies. See, e.g., Mark A. Lemley & Kimberly

A. Moore, Ending Abuse of Patent Continuations, 84 B.U. L.

REV. 63, 79-81 (2004). One of the most devious is so-called

“submarine patenting.” The submarine patent is filed with

the United States Patent Office, but deliberately kept from

issuing through a series of delaying maneuvers in the patent

application process. Once a business emerges that allegedly

infringes on the submarine patent, the patent troll completes

the application process and then immediately sues for in-

fringement of the freshly issued patent. This strategy allows

the non-practicing patent holder to spring the infringement

suit at the ideal time—after the target business has already

made the start-up investment and established a successful

_product. This is referred to as submarine patenting because it

is so difficult for the infringing business to avoid—the patent

is effectively concealed from view until the patent holder is

ready to initiate a hold-up.

28

Non-practicing patent holders have proved to be highly

sophisticated, often adapting to and circumventing legislative

attempts to curb their litigation-based strategies. For exam-

ple, Congress recently acted to curtail submarine patenting by

mandating that all patent applications be published eighteen

months after their submission. 35 U.S.C. § 122(b)(1). But

this measure has proved largely ineffective for two reasons.

First, in rapidly shifting high-tech industries, eighteen months

is often sufficient time to initiate a hold-up. Second, non-

practicing patent holders have adapted by using the claims

amendment process to broaden their claims after the eight-

een-month publication occurs. The patent holder simply files

a narrow patent claim, waits out the eighteen months, and

then, after publication, broadens its claim via amendment to

cover the desired technology. See FED. TRADE COMM’N, TO

PROMOTE INNOVATION: THE PROPER BALANCE OF

COMPETITION AND PATENT LAW AND POLICY ch. 4, at 27-28

(2003). Thus, despite Congress’s efforts, submarine patent-

ing remains alive and well. This legislative failure under-

scores the importance of safeguarding the courts’ traditional

equitable powers when adjudicating patent disputes.

Moreover, as a practical matter, patent hold-ups are often

possible even without sophisticated strategies like submarine

patenting. We are long past the days when it was common

for a single patent to cover a single product. With so much

complexity, it is virtually impossible for a company to be

aware of every conceivable patent that could arguably be in-

fringed by its products. Diligent patent trolls have become

adept at searching for and acquiring patents that allegedly

touch upon some aspect of a popular product, whether by

searching for existing patents or by simply taking out new

patents on the periphery of existing technology.

The impact of the hold-up problem extends far beyond

the few cases actually litigated to final judgment. Patent liti-

gation is complex and highly uncertain, often involving issues

well beyond the understanding of the ordinary juror or even

29

the average judge. They are unlikely to understand the intri-

cacies of a semiconductor, gene splicing, or a network server

based on a few hours of testimony from polarized experts.

Studies have confirmed that it is especially difficult to defend

against a patent infringement suit, where there is a presump-

tion that the patent is valid. See Kimberly A. Moore, Judges,

Juries, and Patent Cases—An Empirical Peek Inside the

Black Box, 99 Micu. L. REV. 365, 406 (2000) (study of pat-

ent trial decisions between 1983 and 1999 indicating that pat-

entees won 58% of suits overall and 68% of jury trials).

In light of these difficulties, many companies will simply

settle rather than face the uncertainties of a bet-the-company

trial. Even when a company has a strong invalidity or non-

infringement argument, the automatic injunction is so potent

a threat that the small possibility of losing at trial is often

enough to force a settlement. This, in turn, undermines the

patent system generally by preventing challenges to patents

of dubious validity.

The bottom line is simple and harsh: Under the Federal

Circuit’s automatic-injunction rule, any patent holder who

can bring a colorable claim of infringement against a success-

ful product has both the means and motivation to engage in

“rent-seeking,” a practice whereby unproductive and non-

contributory claimants use legal or regulatory processes to

extract unjust enrichment from productive economic players.

The Federal Circuit's presumption of “entitlement” to injunc-

tive relief encourages such practices—which are inimical to

the broader interests of society. Money that could go to pro-

ductive investments is instead diverted to legal fees and set-

tlement payments. The costs of these practices are less inno-

vation or a slower rate of innovation, and higher costs for

consumers.

The hold-up problem can be substantially diminished by

returning patent law injunctions to their traditional equitable

moorings. First, injunctions issued in hold-up situations vio-

30

late equitable principles because they impose a sanction on

infringers that is so harsh as to be punitive and entirely out of

proportion to the harm incurred by the patent holder. Second,

equity demands that relief be consistent with the public inter-

est, but the public interest is ill-served by the litigation-based

strategy of patent trolls, who do little to implement or develop

their innovations. When a patent is used only as “a club to be

wielded by a patentee to enhance his negotiating stance,”

Foster, 492 F.2d at 1324, courts should exercise the equitable

discretion that is mandated by both statute and centuries of

tradition to deny an injunction, and should instead implement

a remedy such as a reasonable royalty that is more consistent

with the public interest.

CONCLUSION

For the foregoing reasons, the judgment of the court of

appeals should be reversed.

Respectfully submitted.

MAKAN DELRAHIM THEODORE B. OLSON

AMERICAN INNOVATORS’ Counsel of Record

ALLIANCE MATTHEW D. McGILL

1350 I Street, N.W. AMIR C. TAYRANI

Suite 510 JUSTIN S. HERRING

Washington, D.C. 20005 GIBSON, DUNN & CRUTCHER LLP

(202) 296-7353 1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 955-8500

Counsel for Amicus Curiae

American Innovators’ Alliance

January 26, 2006