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

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No. 05-130 7

OFFICE OF THE CLERK

IN THE SUPREME COURT, U.S.

Supreme Court of the United States

eBAY, INC. and HALF.COM, INC.,

Petitioners,

MERCEXCHANGE, L.L.C.,

Respondent.

On Writ oF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

~ BRIEF OF INTERNATIONAL BUSINESS

MACHINES CORPORATION AS AMICUS CURIAE

IN SUPPORT OF NEITHER PARTY

Davin J. Kappos CHRISTOPHER A. HUGHES

Marc A. EHRLICH Counsel of Record

IBM Corporation Mark J. ABATE

One North Castle Drive MorGANn & FINNEGAN, L.L.P.

Armonk, NY 10504 3 World Financial Center

(914) 765-4343 New York, NY 10281

MarIAN UNDERWEISER (212) 415-8700

IBM CorporaTION

Rte 134/110] Kitchawan Rd

Yorktown Heights, NY 10598

(914) 945-2756

Counsel for Amicus Curiae

International Business Machines Corporation

January 26, 2006

1LY9L1O ce

TABLE OF CONTENTS

TABLE OF CITEDAUTHORITIES ............

INTEREST OF AMICUS CURIAE .............

INTRODUCTION AND SUMMARY

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THE “GENERAL RULE” CONCERNING

PATENT INJUNCTIONS JS NOT FAITHFUL

TO THE PATENT STATUTE ............

THE “GENERAL RULE” CONCERNING

PATENT INJUNCTIONS IGNORES THE

FULL SCOPE OF EQUITABLE PRINCIPLES

ANALYZED IN CONTINENTAL PAPER

SU nea Pew 4b cave a6eke uss hs ede ess

DEVELOPMENTS IN TECHNOLOGY AND

BUSINESS OPERATIONS REINFORCE

THE WISDOM OF THE STATUTORY

REQUIREMENT FOR APPLYING

EQUITABLE PRINCIPLES WHEN

CONSIDERING PATENT INJUNCTIONS ..

A. Except For The Remedy Of Injunctions,

The Patent Laws Have Adapted To

Changes In Technology And Business

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Contents

The “General Rule” Ignores Modern

Business Inter-dependency Whereby The

Impact Of Patent Injunctions Extends Far

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IV. THE UNIQUE NATURE OF PATENT CASES

WARRANTS CONSIDERATION OF

EQUITABLE PRINCIPLES IN GRANTING

AND STRUCTURING INJUNCTIONS ....

Consideration Of Irreparable Injury To

The Patentee Focuses On The Conduct

And Needs Of The Patentee .........

The Adequacy Of The Patentee’s Legal

Remedies Includes Consideration Of

Patentee’s Damages ................

The Public Interest Encompasses

Consideration Of The Overall Impact On

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The Balance Of Hardships To The Parties

Includes Consideration Of Their

Respective Business Models And

Commercial Needs .... ccc cccccces

Balancing Of Equitable Principles Will

Ensure Flexibility In Considering Stays

Of Patent Injunctions Pending Appeal .. .

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TABLE OF CITED AUTHORITIES

Page

Cases:

Archive Corp. v. Cipher Data Prods., Inc.,

12 USPQ2d 1464 (C.D. Cal. 1988) ........... 13

AT&T Corp. v. Microsoft Corp.,

414 F.3d 1366 (Fed. Cir. 2005) .............. 1]

Barnard v. Gibson, .

SB US. CF ew. PGC IBGE) cc cv cccccccccces: 27

BIC Leisure Prods., Inc. v. Windsurfing Int'l, Inc.,

BS ge 7). he A. Breer Tere 19-20

Boomer y. Atl. Cement Co.,

26 N.Y.2d 219, 257 N.E.2d 870 (1970) ........ 24

Cochrane v. Deener,

6 cea aah wKEKSS Ge Ket 5, 6

Continental Paper Bag Co. v. Eastern

Paper Bag Co.,

Pe OME oc odu ses hpb 2660005 0808 passim

Cook Inc. v. Boston Scientific Corp.,

a ee 22

Crown Die & Tool Co. v. Nye Tool & Mach. Works,

ee ee EE bb uh eeedevenbinvenvesss 5

Diamond v. Chakrabarty,

a a i ca os bees 10

Cited Authorities

Diamond vy. Diehr,

GSOU.S. TTS CIUSE). oo 5 nckcsccveguusseeeen

Dynacore Holdings Corp. v. U.S. Philips Corp.,

363 F.3d 1263 (Fed. Cir. 2004) .............

E.I. du Pont de Nemours & Co. v. Phillips

Petroleum Corp.,

S35 F.26 277 (Fed. Cie. 1967) 2 cen ccescccers

Eolas Techs. Inc. v. Microsoft Corp.,

399 F.3d 1325 (Fed. Cir. 2005) .............

Ericsson, Inc. v. Harris Corp.,

352 F.3d 1369 (Fed. Cir. 2003) ............%.

Fonar Corp. v. Gen. Elec. Co.,

107 F.3d 1543 (Fed. Cir. 1997) .............

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

492 F.2d 1317 (2d Cir. 1974) ..........-....

Friends of the Earth, Inc. v. Laidlaw

Envtl. Servs., Inc., 528 U.S. 167 (2000) .......

Gen. Motors Corp. v. Devex Corp.,

461 U.S. GEE (IDES) . cc csssvusseveecseviuet

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

20? U.S. SFR (IFS) . ccvccvvevesccwseueuss

Hecht Co. v. Bowles,

S20 U.S. S21 (IGS) .. osvcviccccevesesvees

Page

| ll

Cited Authorities

Page

High Tech Med. Instrumentation, Inc. v.

New Image Indus., Inc.,

49 F.3d 1551 (Fed. Cir. 1995) ............... 18

Interactive Pictures, Corp. v. Infinite Pictures Inc.,

274 F.3d 1371 (Fed. Cir. 2001) .............. 20

King Instrument Corp. v. Otari Corp.,

Fee Wee re Ce Ct. ISGS) nn cc cccccsccess 20

Landis Tool Co. v. Ingle,

a, SEED ocecccserces seeeeeees 26, 27

Litton Sys., Inc. v. Sundstrand Corp.,

750 F.2d 952 (Fed. Cir. 1984) ............4-. 12

MercExchange, L.L.C. v. eBay, Inc.,

401 F.3d 1323 (Fed. Cir. 2005) .......... 4,7, 14,17

Metabolite Labs., Inc. v. Lab. Corp. of Am.,

370 F.3d 1354 (Fed. Cir. 2004),

cert. granted, 126 S. Ct. 601 (2005) .......... 9

Monsanto Co. v. Scruggs,

249 FSupp.2d 746 (N.D. Miss. 2001) ......... 25

Moxness Prods., Inc. v. Xomed, Inc.,

Civ. No. 86-100-CIV-J-14, 1988 U.S. Dist. LEXIS

16060 (M.D. Fla., May 10, 1988) ............ 27

NTP, Inc. v. Research in Motion, Ltd.,

418 F.3d 1282 (Fed. Cir. 2005),

oe SE | 11

Cited Authorities

Pfaff v. Wells Elec., Inc.,

Se a PD pbb. tesa cde dewasweeeeees

Riles v. Shell Exploration & Prod. Co.,

298 F.3d 1302 (Fed. Cir. 2002) ..............

Rite-Hite Corp. v. Kelley Co., Inc.,

ee Se PPT ee eee

Roche Prods., Inc. v. Bolar Pharm. Co., Inc..,

733 F.2d 858 (Fed. Cir. 1984) Be Se ee ee ate

Root v. Lake Shore & Mich. S. Ry. Co.,

2 BE rr ee emer s

SmithKline Beecham Corp. v. Apotex Corp.,

247 F.Supp.2d 1011 (N.D. Ill. 2003), aff'd in part,

403 F.3d 1313 (Fed. Cir. 2005) ..............

Standard Havens Prods., Inc. v. Gencor Indus., Inc.,

og pif . kt. 8 | ee

State Indus., Inc. v. Mor-Flo Indus., Inc.,

883 F.2d 1573 (Fed. Cir. 1989) ..............

T.J. Smith & Nephew Ltd. v. Consolidated

Med. Equip., Inc.,

821 F.2d 646 (Fed. Cir. 1987) ...............

Transmatic Inc. v. Gulton Indus. Inc..,

180 F.3d 1343 (Fed. Cir. 1999) ..............

Page

vil

Cited Authorities

Page

United States v. Oakland Cannabis Buyers’ Coop.,

Se ED Wks 6.4 bkadcK bb ee eee ne cs 21

Walgreen Co. v. Sara Creek Prop. Co.,

Se See SPP CONE, FOU «ccc dccecccccss 25

Weinberger v. Romero-Barcelo,

PO PPC CPE ETT TTT TT ee 8, 15

Constitution, Statutes And Rules:

NE ee i eg adews w)

PTE :6.6 cued eens eeuh en chee eaaceaee 6

Se > ob can Gkhimennbadhudeenkakas . 10, 11

PRE. Seivensekbdectecke ces dcedees 10

2 NG BR Pee a peere ery per 18, 25

AD Perr rr rrr rT Sats ae 5, 6,7

a: wid bnencakecwaeeeu aud nesters 10

35 DME: =i¢euvnusete ea6ies den eenkenes 10, 11

re oer ee 2,4, 7, 29

DEY ao cadaceuuesectosesadadauw 7, 19, 20

PP EEE bd dcesedebcueibatchienccs 27

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Cited Authorities

Patent Act of 1790, ch. 7, 1 Stat. 109-12

St CEU ka onan 65540 bran keedeaeeanee

Patent Act of 1819, ch. 19, 3 Stat. 481

ERE aD ecier pO ae Re one re men AON

Patent Act of 1836, ch. 357, 5 Stat. 117-25

ee, SEE nica 3 i's 44S OU RCH ES eee RES Aas

Patent Act of 1870, ch. 230, 16 Stat. 198-217

5 | RE ra Oe re ee Pee

Patent Act of 1897, ch. 391, 29 Stat. 692-94

I sn ed ee eee bare

United States Supreme Court Rule 37.6 ..........

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Other Authorities

Anick Jesdanun, Patent Spat Kills Anti-Spam Plan,

CBS News, Sept. 28, 2004, at http://www.cbsnews.

com/stories/2004/09/28/tech/main645915.

GEE nce ceknde dead webeesetsndcacnees

ASTM Handbook of Standardization, available at

http://www.astm.org/NEWS/handbook02/images/

Handbook02.pdf (last visited Jan. 26, 2006) ....

Page

Cited Authorities

ASTM International, 2004 ASTM International

Annual Report, Focus 2004 (2004), available at

http://www.astm.org/NEWS/2004Annual

NEES. ba dacacdcencddcwcoeae ta cenwexs

Cari SHapiro & Har R. VARIAN, INFORMATION RULES

(Harvard Business School Press 1999) ........

Complaint, QUALCOMM Inc. v. Nokia Corp.,

No. 05-CV-2063 (S.D. Cal., Nov. 4, 2005) .....

Eric Marks & MARK WERRELL, Executive’s GUIDE TO

Wes Services (Wiley & Sons 2003) ...........

Eric vON Hiprec, DEMOCRATIZING INNOVATION

SD og cn dws a nb eee ak-<K'ss

http://www. fsa.org/association/milestones.asp

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

Institute of Electrical and Electronic Engineers, IEEE

802.11, at http://grouper.ieee.org/groups/802/1 1

(last visited Jan. 26, 2006) ......... dh a a eee

Kimberly A. Moore, Markman Eight Years Later: Is

Claim Construction More Predictable ?, 9 Lewis &

eR a SE sd nc od vo a eee xk da es

Kurt M. Saunders, Patent Nonuse and the Role of Public

Interest as a Deterrent to Technology Suppression,

1S Harv. J.L. & Tec. 389 (2002) ............

Page

Cited Authorities

National Innovation Initiative, Innovate America,

National Innovation Initiative Report (Council on

Competitiveness 2004), available at http://

www.publicforuminstitute.org/nde/sources/

NH_Fimel_Report.ogf ..... cc cccccccccecess

Paul Festa, Eolas Suit May Spark HTML Changes,

CNET News.com, Sept. 19, 2003, az http://

news.com.com/2100-1023-5079580.html ......

Paul Morgan & Bruce Stoner, Reexamination vs.

Litigation — Making Intelligent Decisions in

Challenging Patent Validity, 86 J. Pat. &

TRADEMARK Orff. Soc’y 441 (2004) ............

RICHARD A. PosNeR, Economic ANALYsIS OF LAW

(Aspen Law & Business, Sth ed. 1998) ........

S. Rep. No. 1979 (1952), as reprinted in 1952

sb Pet i Y fi Fe ae ‘nu béneunces

THOMAS L. FRIEDMAN, THE Wor-pb 1s Fiat: A Brite

HistoRY OF THE TWENTY-First CENTURY (Farrar,

ee eae

USPTO Releases Annual List of Top 10 Organizations

Receiving Most U.S. Patents (Jan. 10, 2006),

available at http://www.uspto.gov/web/offices/

COMMEROCCRESIUS-OS.TMM ow cece cccccnnce

World Wide Web Consortium (“W3C”), at http://

www.w3c.org (last visited Jan. 26, 2006) ......

Page

12,13

BRIEF OF INTERNATIONAL Business MACHINES

Corporation As Amicus CuriAE IN SupPORT

OF NEITHER Party '

INTEREST OF AMICUS CURIAE

International Business Machines Corporation (IBM) is

a globally recognized leader in the field of information

technology research, development, design, manufacturing

and related services. IBM has received tens of thousands of

United States patents, including more patents than any other

corporate assignee for the past thirteen years.” Many of IBM’s

patents are universally recognized as pioneering.

IBM has frequently been involved in patent infringement

lawsuits, both as patentee seeking to enforce its patent rights

and as accused-infringer defending itself against charges of

patent infringement. IBM has thus experienced first-hand the

importance of, and the threat posed by, the rights embodied

in a United States Letters Patent. IBM therefore believes it

can provide a balanced view on important issues implicated

by this case - — namely, the guidelines governing permanent

injunctions in patent cases and, in particular, the application

of equitable principles in granting and structuring patent

injunctions.

1. In accordance with Supreme Court Rule 37.6, Amicus states

that this brief was authored in its entirety by the counsel listed herein.

No person or entity other than Amicus listed on the cover made a

monetary contribution to the preparation or submission of this brief.

A blanket consent to the filing of amicus briefs in support of either

party has been filed with the Clerk of the Court by petitioners and

respondent.

2. The United States Patent and Trademark Office has reported

that in 2005 IBM received 2,941 patents, which is over 1,100 more

United States patents than any other company. See USPTO Releases

Annual List of Top 10 Organizations Receiving Most U.S. Patents

(Jan. 10, 2006), available at http://www.uspto.gov/web/offices/com/

speeches/06-03.htm.

INTRODUCTION AND SUMMARY OF ARGUMENT

In this case, the Federal Circuit repeated what it calls the

“general rule” that a permanent injunction will issue in a patent

case once infringement is found. The only exception to the

“general rule” involves consideration of public interest in the

form of public health concerns.

This so-called “general rule” is inconsistent with the patent

statute which provides that entitlement to an injunction is not

absolute and that principles of equity should be applied in

adjudicating a patentee’s request for an injunction. 35 U.S.C.

§ 283 (2005). The history and development of the patent statute

confirms that the patentee’s “right to exclude” does not require

issuance of injunctions in patent cases. Under the original Patent

Act of 1790, patentees had the “right to exclude” others from

practicing the invention, but only had a remedy of monetary

damages. The statutory provision for patent injunctions was not

introduced until 1819. Thus, the “right to exclude” alone does

not dictate grant of a patent injunction.

The “general rule” is also inconsistent with this Court's

analysis of a broad spectrum of equitable considerations in

Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S.

405, 422-24, 428-29 (1908) — the case specifically mentioned

in the grant of certiorari. There, the Court affirmed the injunction

and, in effect, addressed each of the four equitable factors

traditionally evaluated in deciding whether to grant an

injunction.

These considerations apply not only in deciding whether

to grant an injunction but also in determining the scope of an

injunction if granted. In the 98 years since Continental Paper

Bag, the patent laws and their interpretation have adapted to

changes in technology and business operations, but the Federal

Circuit's approach in addressing patent injunctions has become

rigid. The intervening century of continuous, multi-dimensional

change only serves to reinforce the appropriateness of applying

equitable principles to patent injunctions.

It is therefore appropriate to consult the traditional four-

factor analysis used in injunctive relief determinations when

addressing patent injunctions. Thus, for example, a court

should consider whether the patentee has a legitimate

economic interest to be protected by injunction in assessing

the presence of irreparable harm. When the patentee and the

infringer are competitors, such that an injunction will

preserve the patentee’s position in the marketplace, the

patentee’s legitimate economic interest will likely weigh in

favor of an injunction. However, if the patentee has no

substantial business, and no plan to launch a business, other

than patent enforcement, that fact may weigh against grant

of a broad injunction and perhaps any injunction at all.

Under the patent statute, a patentee must receive full

compensation for damages suffered as a result of

infringement. The patent damages law is highly developed,

ensuring the patentee a full opportunity to prove its damages.

Where the patentee is fully compensable in damages, a court

could fairly conclude that the patentee has an adequate

remedy at law, weighing against a broad injunction, and

possibly any injunction.

The balance of hardships is important in determining

whether an injunction will have a disproportionate impact

on either party. If an injunction would cause the infringer to

abandon a significant investment or incur significant

additional costs unrelated to technological merits of the

invention, that may weigh against a broad injunction.

Similarly, where an infringing product contains many

thousands of technological elements, an injunction against a

minor, infringing element could have a disproportionate

impact on the infringer by preventing the marketing of the

entire product, an entire product line and/or interrelated

products. The balance of hardship analysis is thus particularly

relevant to the scope of an injunction.

The public interest broadly encompasses consideration

of the potential impact of a patent injunction on the public.

In the case of patent claims covering industry standards, there

is a public interest in maintaining the products embodying the

standard in the marketplace, which may counsel in favor of

denying an injunction or structuring an injunction in such a way

that certain products embodying the standard remain available

in the marketplace.

Finally, equitable factors traditionally considered with

respect to the granting and structuring of injunctions should

also be considered when determining whether to stay an

injunction pending appeal in a patent case. The impact of an

injunction, even if lifted on appeal, may force settlements on

terms that are otherwise not justified. The high reversal rate at

the Federal Circuit further counsels in favor of stays.

While expressing no view on the merits of the present case,

IBM wishes to explain why courts should be encouraged to

consider well-accepted principles of equity when granting and

structuring patent injunctions.

ARGUMENT

I. THE “GENERAL RULE” CONCERNING PATENT

INJUNCTIONS IS NOT FAITHFUL TO THE

PATENT STATUTE

In this case, the Federal Circuit reiterated what it termed

the “general rule” of granting permanent injunctions in patent

cases —- namely, “the general rule is that a permanent injunction

will issue once infringement and validity have been adjudged.” *

MercExchange, L.L.C. v. eBay, Inc., 401 F.3d 1323, 1338 (Fed.

Cir. 2005). This so-called “general rule,” however, is at odds

with the patent statute which provides that patent injunctions

may be granted “in accordance with principles of equity.”

35 U.S.C. § 283. The right to exclude others from practicing an

3. What the Federal Circuit describes as its “general rule” has

been applied for over twenty years. See Roche Prods., Inc. v. Bolar

Pharm. Co., Inc., 733 F.2d 858, 866 (Fed. Cir. 1984) (marking the

last time the Federal Circuit explicitly recognized that an injunction

does not automatically follow a finding of infringement).

~~ ——

invention, as is accorded by the patent grant under 35 U.S.C.

§ 154, does not command automatic grant of injunctions in

patent cases. To the contrary, the history and development of

the patent statute make clear that the right to exclude does not

automatically result in issuance of an injunction.

Under the original United States Patent Statute, a patent

grant gave inventors “the sole and exclusive right and liberty of

making, constructing, using and vending” their inventions.

Patent Act of 1790, ch. 7, § 1, 1 Stat. 109-12 (Apr. 10, 1790).

This Court interpreted that statutory language as conferring “the

right to exclude others from making, using or vending his

invention.” Crown Die & Tool Co. v. Nye Tool & Mach. Works,

261 U.S. 24, 35 (1923) (citing Continental Paper Bag Co. v.

Eastern Paper Bag Co., 210 U.S. 405, 424 (1908)). But, under

the original statute, the sole remedy for patent infringement,

i.e., violation of the “right to exclude,” was an award of the

patentee’s damages. Patent Act of 1790; Root v. Lake Shore &

Mich. S. Ry. Co., 105 U.S. 189, 192 (1882); Cochrane v. Deener,

94 U.S. 780, 782 (1877). The original patent statute did not

have a provision enabling patent injunctions.

The enabling provision for patent injunctions was

introduced into the patent statute some thirty years later, with

the Patent Act of 1819, and provided:

that these courts should have “Original cognizance,

as well in equity as at law, of all actions, suits,

controversies, and cases arising under any law of

the United States, granting or confirming to authors

or inventors the exclusive right to their respective

writings, inventions and discoveries; and upon any

bill in equity, filed by any party aggrieved in

any such cases, should have authority to grant

injunctions, according to the course and principles

of courts of equity.”

Cochrane, 94 U.S. at 782 (quoting Patent Act of 1819, ch. 19,3

Stat. 481 (Feb. 15, 1819)) (emphasis added). Before 1819, courts

did not have equity jurisdiction in patent cases. Root, 105 U.S.

at 191-92. Thus, although this Court interpreted the original

patent statute as providing a “right to exclude,” before 1819 a

patentee could only recover damages; it could not invoke equity

jurisdiction to request an injunction.*

Since their separate introductions into the patent laws,

the statutory provisions relating to the patentee’s right to

exclude and the remedy of injunctive relief have remained

essentially unchanged in the subsequent patent statutes.° The

current patent statute provides the patentee with the “right

to exclude others trom making, using or selling the invention

throughout the United States.” 35 U.S.C. § 154 (2005). The

remedy of patent injunctions appears in another section

— namely, section 283 which provides:

The several courts having jurisdiction of cases

under this tithe may grant injunctions in

accordance with the principles of equity to prevent

4. Under the original Patent Act of 1790, the federal courts

had no jurisdiction in equity to hear patent infringement cases. Root,

105 U.S. at 191-92. The courts “had cognizance of actions at law

brought to recover damages for the infringement of patents.”

Cochrane, 94 U.S. at 782. The courts, therefore, could not grant

injunctive relief in a case whose jurisdictional basis rested solely on

the Patent Act. Root, 105 U.S. at 191-92; Cochrane, 94 U.S. at 782.

If. however, there was another basis for federal jurisdiction (/.e.,

diversity), a court could grant injunctive relief. Root, 105 U.S. at

191-92; Cochrane, 94 U.S. at 782.

5. See Patent Act of 1819, ch. 19, 3 Stat. 481 (Feb. 15, 1819);

Patent Act of 1836, ch. 357, 5 Stat. 117-25 (July 4, 1836); Patent

Act of 1870, ch. 230, 16 Stat. 198-217 (July 8, 1870); Patent Act of

1897, ch. 391, 29 Stat. 692-94 (Mar. 3, 1897); 35 U.S.C. § | et seq.

(1952); see also S. Rep. No. 1979 (1952), as reprinted in 1952

U.S.C.C.A.N. 2394, 2417 (“The wording of the granting clause is

changed to ‘the right to exclude others from making, using, or

selling’, following language used by the Supreme Court, to render

the meaning clearer.”).

the violation of any right secured by patent, on such

terms as the court deems reasonable.

35 U.S.C. § 283 (emphasis added). Under section 283, the

remedy of an injunction is not absolute; the statute provides

that courts may grant injunctions by applying “principles of

equity.” Separate and apart from injunctive relief, the patentee

is in all events entitled to recover damages adequate to

compensate for the infringement. 35 U.S.C. § 284 (2005) (“the

court shall award . . . damages. . . .”) (emphasis added).

In sum, the history and development of the patent statute

confirms that sections 154 and 283 are separate statutory

provisions and that the right to exclude does not by itself confer

a basis for granting patent injunctions.

Il. THE “GENERAL RULE” CONCERNING PATENT

INJUNCTIONS IGNORES THE FULL SCOPE

OF EQUITABLE PRINCIPLES ANALYZED IN

CONTINENTAL PAPER BAG

Under the so-called “general rule” reiterated in the present

case, a permanent injunction will issue as a matter of course

once there is a judgment of infringement of a valid patent. The

only exception is limited to public interest needs, specifically

public health concerns:

“[CJourts have in rare instances exercised their

discretion to deny injunctive relief in order to protect

the public interest.” . . . Thus, we have stated that a

court may decline to enter an injunction when “a

patentee’s failure to practice the patented invention

frustrates an important public need for the

invention,” such as the need to use an invention to

protect public health. . . . [T]he district court did not

provide any persuasive reason to believe this case is

sufficiently exceptional to justify the denial of a

permanent injunction.

eBay, 401 F.3d at 1338-39 (citations omitted).

The failure to fully examine equitable considerations

under this “general rule” stands in marked contrast with the

scope of equitable considerations analyzed by this Court in

Continental Paper Bag, 210 U.S. at 422-24, 428-29.

_ Although the Continental Paper Bag opinion did not

explicitly enumerate the four factors commonly articulated

in making injunction determinations,® the Court’s analysis

shows it did consider each of those four factors in affirming

the patent injunction. For example, the Court considered the

irreparable injury factor, noting that “[the] inventor could

have kept his discovery to himself,” “the monopoly he

receives is only for a few years” and “even if the [patentee’s]

old machines could have been altered (in order to practice

the patented approach], the expense would have been

considerable.” 210 U.S. at 424, 429. The Court also

considered the adequacy of legal remedies, noting that “the

[patentee’s] remedy at law remains.” 210 U.S. at 423. With

respect to the public interest, the Court considered whether

the “conduct of the patentee [contravened] the supposed

public policy of the law” and the effect of an injunction on

“diminished supply or [] an increase in prices.” 210 U.S. at

422-24, 429. Finally, considering the balance of hardships,

the Court noted: “the defendant's machine has been an

assured commercial success for some years” and that the

patentee “had for its motive the saving of the [considerable]

expense that would have been involved by changing the

equipment of a factory from one set of machines to another.”

210 U.S. at 428-29.

In contrast to the robust equitable analysis performed in

Continental Paper Bag, the so-called “general rule” followed

—+ -

6. The well-accepted equitable factors applied to injunction

requests are: (1) irreparable injury to the plaintiff, (2) inadequacy of

legal remedies, (3) any adverse effects on the public interest and

(4) the balance of hardships to the parties. Weinberger v. Romero-

Barcelo, 456 U.S. 305. 312 (1982).

by the Federal Circuit ignores three of the four equitable

principles applied in injunction determinations and considers

a narrow range within the fourth equitable factor — only

whether there is a public health concern.

Consistent with the patent statute and Continental Paper

Bag, this Court should reaffirm that principles of equity must

be fully considered by the district courts in deciding upon

and fashioning patent injunctions.

Il. DEVELOPMENTS IN TECHNOLOGY AND

BUSINESS OPERATIONS REINFORCE THE

WISDOM OF THE STATUTORY REQUIREMENT

FOR APPLYING EQUITABLE PRINCIPLES

WHEN CONSIDERING PATENT INJUNCTIONS

Aside from ignoring the statutory mandate and this

Court’s precedent, wooden application of the “general rule”

of near-automatic patent injunctions divests district courts

of their inherent discretion to apply principles of equity that

may otherwise result in denial of a patent injunction in

appropriate cases. It also prevents courts from considering

factors that would aid in structuring or scoping an injunction,

inevitably leading to overly broad patent injunctions.

See, e.g., Metabolite Labs., Inc. v. Lab. Corp. uf Am., 370

F.3d 1354, 1371-72 (Fed. Cir. 2004) (patent claim limited to

homocysteine testing and correlating elevated homocysteine

levels with a vitamin B deficiency, infringer enjoined from

all homocysteine testing), cert. granted, 126 S. Ct. 601

(2005).

Patent laws exist to promote the progress of technology.

U.S. Const. art. I, § 8, cl. 8; Pfaff v. Wells Elec., Inc., 525

U.S. 55, 63 (1998) (patent system “encourages both the

creation and the public disclosure of new and useful advances

in technology”). During the 98 years since Continental Paper

Bag, technology has developed at a remarkable rate, literally

transforming the way businesses operate. The substantive

patent laws have, over this time, been amended and

interpreted to keep pace with these advances in technology

and business operations. As for injunctive relief, despite the

Statutory requirement to apply principles of equity, courts

have instead enforced a rigid rule leading to nearly automatic,

broadly-framed injunctions in all cases. This approach is

counter-intuitive because the principles of equity provide the

very flexibility that is needed to achieve just results in the

face of change. Applicability of equitable principles to patent

injunctions remains at least as important today as it was when

Continental Paper Bag was decided.

A. Except For The Remedy Of Injunctions, The

Patent Laws Have Adapted To Changes In

Technology And Business Operations

The substantive patent laws have adapted to accommodate

the dramatic changes in technology since Continental Paper

Bag. For example, the scope of patentable subject matter has

expanded and evolved both by statute and by court interpretation

to keep pace with new discoveries. See, e.g., 35 U.S.C. § 161

(1954) (plant patents); 35 U.S.C. § 105 (1990) (inventions in

outer space); Diamond v. Chakrabarty, 447 U.S. 303, 310 (1980)

(patentability of new life form); Diamond. v. Diehr, 450 U.S.

175, 191-92 (1981) (patentability of computer software).

Complementary new laws and rules relating to patent

infringement and validity have been enacted. See, e.g., 35 U.S.C.

§ 271(e) (1988) (infringement of biotechnology inventions);

35 U.S.C. § 103(b) (1995) (validity of biotechnology

inventions); 37 C.F.R. § 1.801 (1989) (biotechnology invention

disclosures).

Business Operations have changed dramatically in

paralle! with technological advances (see infra at pp. 11-15),

and the manner in which innovation has occurred has changed

as well. Modern innovation often involves collaborative

efforts among otherwise independent entities, across national

boundaries. The patent laws and their interpretations have

adapted to accommodate these changes, with enactment of

provisions covering foreign manufacturing and collaborative

invention. 35 U.S.C. § 271(f) (1984) (supply of components

of a patented invention from the United States for assembly

abroad); 35 U.S.C. § 271(g) (1988) (process inventions

performed abroad); 35 U.S.C. § 103(c) (1984 & 2004)

(collaboration under joint research agreements).’

While the patent laws and their interpretation have

responded flexibly to changes in technology, business and

commerce, the Federal Circuit’s approach to patent

injunctions has become rigid. Equitable considerations have

been supplanted by the so-called “general rule” of routinely

granting patent injunctions, absent exceptional public health

concerns. Consideration of the full complement of equitable

principles when fashioning patent injunctions will restore

flexibility to the process and allow that process to keep pace

with evolving technologies and businesses.

B. The “General Rule” Ignores Modern Business

Inter-dependency Whereby The Impact Of Patent

Injunctions Extends Far Beyond Litigants

Technological developments of the last two decades have

allowed and indeed forced separate business entities to

become interoperable — they now can, must and do interact

seamlessly across many points of contact as a means to

remain competitive in the face of relentless global pressure.

7. Whether or not one agrees with the ultimate results, these laws

are being interpreted to respond to the dynamic technological and

business environments. See, e.g., NTP, Inc. v. Research in Motion, Ltd.,

418 F.3d 1282, 1322-23 (Fed. Cir. 2005) (whether a United States patent

applies to a wireless email system including operations occurring abroad

under Section 271(f)), cert. denied, __. U.S. ___ (2006); Eolas Techs.

Inc. v. Microsoft Corp. 399 F.3d 1325, 1338-41 (Fed. Cir. 2005) (whether

software is a component of a patented product within the meaning of

section 271(f)); AT&T Corp. v. Microsoft Corp., 414 F.3d 1366, 1371

(Fed. Cir. 2005) (“whether software is sent abroad via electronic

transmission or shipped abroad on a ‘golden master’ disk is a distinction

without a difference for the purposes of § 271(f) liability”).

See National Innovation Initiative, Jnnovate America, National

Innovation Initiative Report, at 45 (Council on Competitiveness

2004), available at http://www.publicforum institute.org/nde/

sources/NII_Final_Report.pdf [hereinafter “NIT”’] (“However,

manufacturing no longer takes place in a single enterprise or

location. Increasingly, the successful 21st century manufacturer

is more of a system integrator, managing a supply chain or a

virtual network of business process suppliers not controlled by

the manufacturer itself.”). This interoperability allows a business

to rely on others to perform many functions that were previously

managed within a single, vertically-integrated company. Thus,

a business can focus on those operations that make it most

competitive. See THomas L. FrigepMan, THE Wor p ts Frat: A

Brier History OF THE Twenty-First Century, pp. 414 ef seq.

(Farrar, Straus & Giroux 2005) [hereinafter FriepmMan] (Dell

realizes a competitive advantage from strategically outsourcing

many aspects of its computer production).* As a result, the

market is now characterized by networks of inter-dependent

companies. See NII, at 45.

While these inter-dependent businesses are individually

more efficient, they must rely on each other to an

unprecedented level. As a result, an injunction against one

company will likely have a substantial “ripple effect” through

other inter-dependent businesses whether or not they infringe.

Federal courts have considered this “ripple effect” in

determining whether to grant a preliminary patent injunction.

See Litton Sys., Inc. v. Sundstrand Corp., 750 F.2d 952,

953-55 (Fed. Cir. 1984) (affirming denial of preliminary

injunction that would prevent defendant from servicing

_———

8. See Eric von Hivptet, Democratizinc INNovaTion 163-64 (The

MIT Press 2005) (advancements in tools allow businesses to design

products independent of the manufacturing process). These advances

have enabled the emergence of new business modcls, such as firms

that design, but do not fabricate, semiconductor chips (“fabless

semiconductor firms”). See http://www-tsa.org/assoctation/

milestones.asp (last visited Jan. 26, 2006) (as of 2004, the Fabless

Semiconductor Association (FSA) had 450 members).

13 .

potential and existing customers and communicating with

suppliers); Archive Corp. v. Cipher Data Prods., Inc., 12

USPQ2d 1464, 1469 (C.D. Cal. 1988) (denying preliminary

injunction that would leave third-party compute: manufacturers

without a source of supply, resulting in large financial losses).

This Court recognized a potential “ripple effect” in Continental

Paper Bag. 210 U.S. at 422-24, 429 (addressing effects of an

injunction on “diminished supply or [] an increase in prices”).

While the prospect of an injunction against one party affecting

others is not new, the modern business and technology landscape

makes it far more pronounced.’

The most fundamental technological developments

enabling interoperability of businesses and their products have

the advantages of being uniform, low-cost, widely adopted,

geographically independent and available from many sources. "°

These advantages allow companies to maximize access to

business partners without the expense of developing company-

specific skills or tools."’ In addition, these advantages make a

company’s products more attractive to customers by maximizing

compatibility with complementary products.'* To maximize

access to business partners and achieve optimal product

compatibility, companies collaborate to develop and adopt

9. See Eric Marks & Mark WeRRELL, Executive’s Guipe

TO Wes Services 181-82 (Wiley & Sons 2003) (describing seven

categories of software and hardware vendors providing nine tools

and applications residing in ten layers of system architecture, where

multiple vendors control “critical elements of a web services value

chain”).

10. See ASTM Handbook of Standardization, available at http:/

/www.astm.org/NEWS/handbook02/images/HandbookO2.pdf (last

visited Jan. 26, 2006) (American Society for Testing and Materials).

11. See FriepmMan, at 352-56.

12. See ASTM Handbook of Standardization.

industry standards.'* Thus, our economy is characterized by

networks of inter-dependent companies relying on such

standards to work together and ensure product compatibility.

Broad reliance on a standard makes not only those

implementing the standard vulnerable to a patent injunction

but may also significantly affect other companies doing

business.with them.'* The significant cumulative investment

associated with broad adoption of a standard makes even

the threat of an injunction against its practice particularly

acute.'* So profound is the impact of a patent injunction

against the practice of a broadly-adopted standard that

the mere possibility of patent coverage has led to the

abandonment of some standards development efforts.

See Anick Jesdanun, Patent Spat Kills Anti-Spam Plan,

— —- -—— -_ oe —

13. For example, each year in its Annual Book of ASTM Standards,

ASTM International publishes more than 12,000 standards related to

metals, paints, plastics, textiles, petroleum, construction, energy, the

environment, consumer products, medical services and devices,

electronics and many other areas. These standards and related

information are broadly used worldwide as the basis for purchasing

and other contracts, codes, laws and regulations. ASTM International,

2004 ASTM International Annual Report, Focus 2004, at 16 (2004),

available at hitp://www.astm.org/NEWS/2004AnnualReport.pdf. See

World Wide Web Consortium (“W3C”), at http://www.w3c.org (last

visited Jan. 26, 2006) (“The World Wide Web Consortium (W3C) ts an

international consortium where Member organizations, a full-time staff,

and the public work together to develop Web standards.”).

14. Reliance on a standard is intensified when a standard is adopted

by the government, or by formal industry mandate, see, e.g., Institute of

Electrical and Electronic Engineers, IEEE 802.11 (standard for wireless

communications), at hitp://grouper.ieec.org/groups/802/11 (last visited

Jan. 26, 2006), or informal industry mandate, see, e.g., eBay, 401 F.3d

at 1325 (fixed-price purchasing feature allowing customers to purchase

items for fixed, listed price).

15. See Cart Suapiro & Har R. Varian, INFORMATION RuLes 11-13

(Harvard Business School Press 1999) (“once you have chosen a

technology ... switching can be very expensive”).

CBS News, Sept. 28, 2004, ar http://www.cbsnews.com/

stories/2004/09/28/tech/main645915.shtml.

Application of the well-accepted equitable factors will

enable courts to evaluate not only the circumstances

pertaining to patentees but also those affecting the inter-

dependent enterprises that could be affected by an injunction

when addressing patent injunctions. As we describe hereafter,

application of equitable principles will restore needed

flexibility to the determination of injunctive relief in a highly

inter-dependent economy.

IV. THE UNIQUE NATURE OF PATENT CASES

WARRANTS CONSIDERATION OF EQUITABLE

PRINCIPLES IN GRANTING AND STRUCTURING

INJUNCTIONS

This Court has identified four factors relevant to

injunctive relief inquiries — irreparable injury to the plaintiff,

inadequacy of legal remedies, adverse effects on the pubtic

interest and the balance of hardships to the parties.

Weinberger, 456 U.S. at 312. In a patent case, those factors

can be summarized as the effects a patent injunction may

have on the patentee, on the infringer and on the public.

The focus of any equitable analysis is “to do equity.”

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

to do equity is especially relevant to injunctions where the

court must consider not only whether to grant or deny an

injunction but also how to structure the injunction properly.

Hecht, 321 U.S. at 329 (“The essence of equity jurisdiction

has been the power of the Chancellor to do equity and to

mould each decree to the necessities of the particular case.

Flexibility rather than rigidity has distinguished it.”); Friends

of the Earth, Inc. vy. Laidlaw Envtl. Servs., Inc., 528 U.S.

167, 193 (2000) (“federal courts should aim to ensure ‘the

framing of relief no broader than required by the precise

facts.””>).

Consistent with the command to do equity and within

the purview of the traditional equitable principles, there are

a variety of circumstances specific to patent cases, meriting

consideration in granting and structuring injunctive relief.

A. Consideration Of Irreparable Injury To The

Patentee Focuses On The Conduct And Needs Of

The Patentee

The so-called “general rule” presumes irreparable harm

to the patentee, and thus fails to apply the equitable principles

required by the patent statute. When properly analyzed, the

patentee’s conduct and needs may tend to show lack of

irreparable harm and may weigh against granting an

injunction or, if granted, may warrant appropriate moderation

of the injunction.

For example, a court should consider whether the

patentee has a legitimate economic interest in seeking an

injunction. Where a patentee is practicing the inve tion, the

ability to exclude its competitors remains the ultimate

statement of respect for the exclusive nature of the-patent

grant. In such instances, a complete examination of the well-

accepted equitable principles will undoubtedly result in a

broad injunction in favor of the patent holder. However, if a

legitimate economic interest in an injunction cannot be shown

beyond the motivation to maximize negotiating leverage in

settlement negotiations, this may be a factor weighing against

granting an injunction or in favor of limiting its scope.

In Continental Paper Bag, this Court did, in fact,

consider the patentee’s legitimate economic interests in

relation to the patent injunction. 210 U.S. at 429. There, a

dissenting judge on the court of appeals (Judge Aldrich)

would have denied an injunction if the patent was

“deliberately held in nonuse for a wrongful purpose.”

210 U.S. at 428. In analyzing the pertinent equities, this Court

looked beyond simple nonuse of the patent, and examined

whether or not the underlying reason for the nonuse was

reasonable:

[C]an it be said, as a matter of law, that a nonuse

was unreasonable which had for its motive the

saving of the [considerable] expense that would ~

have been involved by changing the equipment

of a factory from one set of machines to another?

210 U.S. at 429. In contrast, the Federal Circuit in eBay held

that the circumstances of MercExchange’s nonuse were

irrelevant to the grant of an injunction:

If the injunction gives the patentee additional

leverage in licensing, that is a natural consequence

of the right to exclude and not an inappropriate

reward to a party that does not intend to compete

in the marketplace with potential infringers.

eBay, 401 F.3d at 1339; cf. Foster v. Am. Mach. & Foundry

Co., 492 F.2d 1317, 1324 (2d Cir. 1974) (“An injunction to

protect a patent against infringement, like any other

injunction, is an equitable remedy to be determined by the

circumstances. It is not intended as a club to be wielded by a

patentee to enhance his negotiating stance.”) (citations

omitted).

Another indicia of legitimate economic interest is

whether the patentee and infringer are competitors in the

marketplace. See Continental Paper Bag, 210 U.S. at 428-

29. Competition between the patentee and the infringer in

the market for the patented product may indicate a need on

the part of the patentee to protect the market for its product

and consequently irreparable injury if that market is not

protected by an injunction. The patentee’s need to prevent

dilution of its market for a non-patented product may also

constitute a legitimate economic interest weighing in favor

of granting an injunction. See Continental Paper Bag, 210

U.S. at 428-29. On the other hand, a lack of legitimate

economic interest in seeking an injunction may be evidenced

by the patentee’s lack of a substantial business, or absence

of a plan to launch a business, other than patent enforcement.

Another pertinent factor is the patentee’s delay in

bringing suit, which may indicate a willingness to tolerate

the market effects of infringement or allow an infringer as

well as similarly-situated members of the public to become

committed to an infringing course of conduct. This may

weigh against a finding of irreparable injury. See High Tech

Med. Instrumentation, Inc. v. New Image Indus., Inc., 49 F.3d

1551, 1557 (Fed. Cir. 1995) (delay in seeking preliminary

injunctive relief showing lack of irreparable injury).

The patentee’s practices in the prosecution and

management of its patent portfolio may also be relevant to

the harm inquiry. For example, where the patentee engaged

in continuation practice, see 35 U.S.C. § 120, filing the patent

claim in suit after the defendant’s infringing activities became

public, it should be determined whether the claim was

obtained to protect a product of the patentee or simply to

Strengthen its negotiating position with the infringer.

The latter finding may suggest a lack of irreparable harm.

The patentee’s grant of exclusive licenses to third parties

may weigh in favor of a finding of irreparable harm. But, the

patentee’s grant of nonexclusive licenses to third parties or

offering of a license to the infringer prior to commencing

suit may weigh against such a finding. See T-J. Smith &

Nephew Ltd. v. Consolidated Med. Equip., Inc., 821 F.2d 646,

647-48 (Fed. Cir. 1987) (preliminary injunction denied in

part because of prior licenses to third parties).

These same types of considerations should motivate an

appropriate crafting of an injunction. For example, if the

patentee and infringer do business in generally separate

markets but compete in a specific product market, the

injunction may be structured only to exclude the infringer

from that market where they compete. Moreover, if the

patentee has only granted non-exclusive licenses in a

particular field of use, reserving other fields for itself, an

injunction may be structured to exclude the infringer from

the fields reserved by the patentee.

B. The Adequacy Of The Patentee’s Legal Remedies

Includes Consideration Of Patentee’s Damages

The adequacy of the patentee’s legal remedies is closely

related to the inquiry of irreparable injury. Where the patentee

is fully compensable at law (i.e., in money damages), it can

be said there is no irreparable injury. SmithKline Beecham

Corp. v. Apotex Corp., 247 F. Supp. 2d 1011, 1045 (N.D. Ill.

2003) (Posner, J., sitting by designation) (“The grant of an

injunction in the circumstances disclosed by the evidence in

this [patent infringement] case would be a travesty of equity.

An injunction is a substitute for an award of damages in

Situations in which damages are difficult to calculate or are

otherwise inadequate as a remedy for the wrong done by the

defendant to the plaintiff.”) (emphasis added), aff'd in part,

403 F.3d 1313 (Fed. Cir. 2005).

By statute, the patentee must receive full compensation

for damages it suffered as a result of infringement. 35 U.S.C.

§ 284; Gen. Motors Corp. v. Devex Corp., 461 U.S. 648,

654-55 (1983) (in enacting section 284, “Congress sought

to ensure that the patent owner would in fact receive full

compensation for ‘any damages’ he suffered as a result of

the infringement.”’). The Federal Circuit and the district courts

have constructed a highly-developed body of damages law

ensuring a patentee the full opportunity to establish its

damages. A patentee can prove damages as lost profits, where

the patentee and infringer are competitors. See State Indus.,

Inc. v. Mor-Flo Indus., Inc., 883 F.2d 1573, 1577-80 (Fed.

Cir. 1989). As part of a lost profits analysis, the patentee can

rely on theories of market share liability, price erosion and

convoyed sales to demonstrate the full scope of its damages.

See BIC Leisure Prods., Inc. v. Windsurfing Int'l, Inc., | F.3d

1214, 1219 (Fed. Cir. 1993) (market share liability); Ericsson,

Inc. v. Harris Corp., 352 F.3d 1369, 1378 (Fed. Cir. 2003)

(price erosion); Interactive Pictures, Corp. v. Infinite Pictures

Inc., 274 F.3d 1371, 1385-86 (Fed. Cir. 2001) (convoyed

sales). A patentee can also prove its damages as a “reasonable

royalty.” 35 U.S.C. § 284. See Rite-Hite Corp. v. Kelley Co.,

Inc., 56 F.3d 1538, 1554-55 (Fed. Cir. 1995) (computation

of reasonable royalty). The patentee can recover lost profits

or a “reasonable royalty” based on “‘the value of an entire

apparatus containing several features, even though only one

feature is patented.’ . . . when the patented feature is the basis

for customer demand.” Fonar Corp. v. Gen. Elec. Co., 107

F.3d 1543, 1552 (Fed. Cir. 1997) (“entire market value rule”)

(citation omitted). A patentee is also entitled to pre- and post-

judgment interest to ensure full compensation. Transmatic

Inc. v. Gulton Indus. Inc. , 180 F.3d 1343, 1347-49 (Fed. Cir.

1999) (pre- and post-judgment interest).

Evidence that the patentee’s damages can be readily

ascertained — whether a “reasonable royalty” or lost profits

— may show that the patentee has an adequate legal remedy.

For example, the patentee’s grant of licenses to third parties

or offering of a license to the infringer prior to commencing

suit tend to show its damages can be fully ascertained by a

reasonable royalty. See, e.g., Riles v. Shell Exploration

& Prod. Co., 298 F.3d 1302, 1312-13 (Fed. Cir. 2002)

(“patentee’s prior license agreements ‘should carry

considerable weight in calculating a reasonable royalty

rate.’”’). Likewise, the patentee’s profit margins and lost sales

to the infringer may constitute evidence of the patentee’s

damages calculated as lost profits. See, e.g., King Instrument

Corp. v. Otari Corp., 767 F.2d 853, 863-64 (Fed. Cir..1985).

There are many well-defined and comprehensive

damages theories upon which courts can draw to frame

adequate relief for past and/or continuing infringement of a

patent as part of the equitable analysis for determining

whether to grant a broad patent injunction.

C. The Public Interest Encompasses Consideration

Of The Overall Impact On The Public

The third well-accepted factor considered in granting

injunctions, the public interest, allows courts to consider the

effect of an injunction beyond the parties. See United States v.

Oakland Cannabis Buyers’ Coop., 532 U.S. 483, 496 (2001)

(“For ‘several hundred years,’ courts of equity have enjoyed

‘sound discretion’ to consider the ‘necessities of the public

interest’ when fashioning injunctive relief.”). However,

consideration of the public interest encompasses more than those

public health concerns which have characterized the Federal

Circuit’s limited analysis under its “general rule” over the past

twenty years. See supra at p. 7.

Courts should be empowered and encouraged to consider

whether the economic impact on the public weighs against

granting a broad injunction. For example, as already

explained supra at pp. 13-14, the Twentieth Century has seen

the proliferation of industry standards which allow for

significant efficiencies in the marketplace by enabling

interoperability of many products and components. A patent

may cover an industry standard so that, once the standard

has been adopted and incorporated into a variety of

interrelated products of various manufacturers, changing

to a non-infringing design is essentially impossible.

If businesses are forced to abandon a standard because of a

threatened injunction, the impact on the public can be

dramatic. See Paul Festa, Eolas Suit May Spark HTML

Changes, CNET News.com, Sept. 19, 2003, at http://

news.com.com/2 100-1023-5079580.html.

Given the trend of increasing numbers of patent suits

based on the practice of standards, an impact on the public

may be expected to follow.'® The impact of an injunction on

16. See, e.g., Dynacore Holdings Corp. v. U.S. Philips Corp.,

363 F.3d 1263, 1266-67 (Fed. Cir. 2004) (Dynacore asserted patent

(Cont'd)

implementation of a standard is felt broadly by companies

practicing the standard as well as their suppliers and

customers. See supra at pp. 12-14. Likewise, the practical

effect of an injunction against one of many inter-dependent

companies is ultimately borne by the public. See supra at

pp. 12-13.

‘When pervasive impact on the public is likely to result

from imposition of a broad injunction affecting an industry

standard, a court should be empowered and encouraged to

fashion an injunction to preserve implementation of the

standard, such as by enjoining only those infringements that

do not comply with the standard. See Cook Inc. v. Boston

Scientific Corp., 333 F.3d 737, 744 (7th Cir. 2003) (Posner,

J.) (“in determining the appropriate scope of [a contract]

injunction the judge must give due weight to the injunction’s

possible effect on innocent third parties.”). A patent may

include one claim which constitutes a “necessary claim” —

namely, a patent claim which cannot be avoided when

implementing the standard — and other claims which are

not “necessary claims”, but cover useful adaptations or

improvements. In that situation, a court could deny an

injunction as to the “necessary claim”, while granting it as

to the other claims.

In some cases, the patent may cover a product that is

well-established in the marketplace. A court should exercise

discretion in such cases in view of the public interest in

maintaining the product’s availability. It may be appropriate

in such cases to consider structuring the injunction to enjoin

only new generations of the infringing product. Moreover,

—_ —— ——— Oe —-

(Cont'd)

against devices conforming to IEEE Standard 1394 for “High

Performance Scrial Bus”); Complaint, QUALCOMM Ine. v. Nokia

Corp., No. 05-CV-2063 (S.D. Cal., Nov. 4, 2005) (QUALCOMM

sued Nokia for infringement of cleven patents directed to GSM,

GPRS and EDGE cellular standards and sought an injunction against

Nokia’s continuing sales of accused products).

the equities associated with such well-established products may

be more compelling if the patentee does not produce its own

products that will satisfy market demand in the absence of the

enjoined product.”

D. The Balance Of Hardships To The Parties Includes

Consideration Of Their Respective Business Models

And Commercial Needs

The fourth equitable factor — the balance of hardships to

the parties — enables courts to evaluate whether an injunction

would have a disproportionate impact on either party. See

Harrisonville v. W.S. Dickey Clay Mfg. Co., 289 U.S. 334, 338

(1933) (“Where substantia! redress can be afforded by the

payment of money and issuance of an injunction would subject

the defendant to grossly disproportionate hardship, equitable

relief may be denied although the nuisance is indisputable.”).

A disproportionate hardship may often be determined by

considering the patentee’s and infringer’s legitimate economic

interests in terms of their respective business models and

commercial needs. See supra at p. 16. In certain cases, an

injunction may result in a windfall for the patentee, out of

balance with the economic contribution of the patented

invention. For example, to comply with a broadly-drawn

injunction, the infringer may have to abandon significant

investment or incur significant additional costs by retooling a

manufacturing plant that was designed before the patent issued,

canceling purchase orders for raw materials destined for use in

manufacturing infringing products, destroying existing products

in inventory, remanufacturing previously sold products or

recalling products for their eventual destruction or

remanufacture. These transactional costs may have little or

nothing to do with the merits of the patented invention or the

infringement of the patent.

17. See Kurt M. Saunders, Patent Nonuse and the Role of Public

Interest as a Deterrent to Technology Suppression, 15 Harv. J.L. &

Tecn. 389, 392 (2002).

Similarly, the original decision of the infringer may have

been made without knowledge that it would result in patent

infringement, or without ascribing any particular advantage

to the later-found infringing approach. Nevertheless, years

later, with money, resources and facilities inalterably

committed, an unforeseen injunction may not be an equitable

solution. Cf. Continental Paper Bag, 210 U.S. at 428-29

(considering cost involved in “changing the equipment of a

factory from one set of machines to another”, albeit to

patentee, as a factor in equitable analysis).

Judge Posner has recognized that in these types of

circumstances, the balance of hardships should be considered

in denying an injunction:

We have several times seen property rights

distinguished from other sorts of legal interest in

terms of remedies, and the point has now to be

generalized: In conflicting-use situations in which

transaction costs are high, the allocation of

resources to their most valuable uses is facilitated

by denying owners of property injunctive remedy

against invasions of their rights instead limiting

them to a remedy of damages... .

RICHARD A. PosNER, ECONOMIC ANALYSIS OF LAW 77 (Aspen

Law & Business, 5th ed. 1998). In situations involving high

transaction costs such as those described above, an injunction

should be denied or appropriately tailored to avoid a “hold-

up” of the infringer and resulting windfall to the patentee.

Id. at 81 (discussing Boomer v. Atl. Cement Co., 26 N.Y.2d

219, 257 N.E.2d 870 (1970), where closing cement plant

would cost $45 million and cost of nuisance to plaintiffs was

only $185,000, denying injunction was appropriate because

plaintiffs could be adequately compensated with damages:

“The cost to the plaintiffs of the nuisance was only $185,000.

So any price for dissolving the injunction between $185,000

and $45 million would have made both sides better than if

the injunction were enforced. That is an enormous bargaining

range... .”); Walgreen Co. v. Sara Creek Prop. Co., 966 F.2d

273, 276-78 (7th Cir. 1992) (Posner, J.) (same).

Where an enjoined product contains many thousands of

technological elements, as is often the case in the information

technology industry, an injunction against a single element

can prevent the marketing of a much larger product, an entire

product line and/or interrelated products. This problem is

exacerbated by product inter-dependence and adoption

of industry standards, see supra at pp. 13-14, resulting in a

disproportionate impact on the infringer by imposing a

penalty that is far out of balance with the economic value of

the infringing element. In contrast, the patentee will receive

a windfall in that the effect of the injunction is far greater

than the value of the patented invention.

Certain acts by the patentee may show undue hardship

on the infringer. For example, if the patentee engaged in

continuation practice, see 35 U.S.C. § 120, simply to

strengthen its negotiating position with the infringer, that

may indicate disproportionate hardship on the infringer.

See supra at p. 18. On the other hand, certain acts by the

infringer may show lack of hardship, weighing in favor of a

broad injunction to ensure preservation of the patentee’s

rights. For example, where the infringer has notice of the

patent before commencing infringement, slavishly copies the

patented invention or does not undertake a good faith effort

to evaluate the issues of patent infringement or validity after

being made aware of the patent, the infringer may not be

able to establish a hardship. See Monsanto Co. v. Scruggs,

249 F. Supp. 2d 746, 759 (N.D. Miss. 2001) (preliminary

injunction granted where defendants used patented

technology with full knowledge and disregard of existence

of plaintiff's patent rights).

E. Balancing Of Equitable Principles Will Ensure

Flexibility In Considering Stays Of Patent

Injunctions Pending Appeal

The equitable factors traditionally considered when

granting and structuring injunctions should also be

considered in determining whether to stay an injunction

pending appeal in a patent case. See Standard Havens Prods.,

Inc. v. Gencor Indus., Inc. 897 F.2d 511, 512 (Fed. Cir. 1990);

E.I. du Pont de Nemours & Co. v. Phillips Petroleum Corp.,

835 F.2d 277, 278 (Fed. Cir. 1987). For example, the

economic harm resulting from enforcing an injunction

pending appeal has been recognized:

[T]he defendants [] had a large amount of money

invested in boring machines constructed mainly

under other patents but containing nevertheless the

invention of the patent in suit. These machines were,

and are, in various stages of completion. Their

“construction, use or sale” is now enjoined, and, in

consequence, they stand idle in the plant of the

defendants awaiting the outcome of this appeal.

an a

Not overlooking the complainant’s rights in the

monopoly which the law has giver him, it should

be observed that he is not manufacturing under this

patent nor, so far as we have been informed, has he

any licenses outstanding. In other words, he is not a

competitor of the defendants, nor are the defendants

competitors of his, in the manufacture of boring

machines. Therefore it would seem that enforcement

of the injunction would cause much greater injury

to the defendants than benefit to the complainant.

Landis Tool Co. v. Ingle, 286 F. 5, 6-7 (3d Cir. 1923) (citations

omitted). The threat of an injunction — even one that only

lasts between the initial judgment of the district court and

final judgment subsequent to appeal — is sufficiently

destructive to cause many infringers to undertake settlements

that are not otherwise economically justified simply to avoid

the costs associated with an interruption in business.

Considerations in addition to those set forth above, but

still within the purview of the traditional equitable principles,

may also bear on the determination of whether to stay an

injunction pending appeal. For example, the validity of the

asserted patent may be in question through reexamination,

see 35 U.S.C. §§ 302-05," or through a parallel proceeding

in another district court. Also, the patentee may not be

irreparably harmed until a particular event occurs, for

example, until the patentee actually begins manufacturing

the patented article. See, e.g., Landis Tool, 286 F. at 7;

Moxness Prods., Inc. v. Xomed, Inc., Civ. No. 86-100-CIV-

J-14, 1988 U.S. Dist. LEXIS 16060, at *10-11 (M.D. Fla.,

May 10, 1988) (preliminary injunction denied, patentee not

harmed because not currently practicing invention).

Denial of a stay pending appeal may serve little purpose

where the infringer is a solvent commercial entity and the

patentee has no compelling need for an immediate injunction.

See Barnard v. Gibson, 48 U.S. (7 How.) 650, 658 (1849)

(“unless the defendants below are in doubtful circumstances,

and cannot give bond to respond in damages for the use of

the machines, should the right of the plaintiff be finally

established, we suppose that the injunction will be suspended.

Such is a correct course of practice... .”).

Finally, the high reversal rate of district court decisions

by the Federal Circuit further counsels in favor of staying

injunctions pending appeal. “The reversal rate (rate at which

18. In 74% of reexamination proceedings filed from 1981-2003,

the claims were cither changed, i.e., narrowed, or cancelled. See

Paul Morgan & Bruce Stoner, Reexamination ys. Litigation — Making

Intelligent Decisions in Challenging Patent Validity, 86 J. Pat. &

TRADEMARK OFF. Soc’y 441, 460-63 (2004).

the Federal Circuit determined the claim construction was

wrong) for appealed claim terms from 1996, after Markman

was decided, through 2003 is 34.5%.” Kimberly A. Moore,

Markman Eight Years Later: Is Claim Construction More

Predictable ?, 9 Lewis & CiarK L. Rev. 231, 233, 239 (2005).

More specifically, the Federal Circuit claim construction

reversal rate in cases where the patentee won at the district

court is 32.3%. See id. at 241. Claim construction is crucial

to the ultimate determination of infringement and validity.

Granting a stay of an injunction is warranted given the

significant chance the infringer will prevail on appeal. A stay

can easily be lifted post-appeal, yet the negative impact on

the accused infringer of an ultimately inappropriate injunction

may never be overcome.

CONCLUSION

For the foregoing reasons, IBM respectfully requests that

this Court reaffirm its precedent in Continental Paper Bag

that the granting and structuring of injunctions in patent cases

requires consideration of the well-accepted equitable factors,

in accordance with 35 U.S.C. § 283.

Respectfully submitted,

Davip J. Kappos CHRISTOPHER A. HUGHES

Marc A. ExRLICH Counsel of Record

IBM Corporation Mark J. ABATE

One North Castle Drive MorGan & FINNEGAN, L.L.P.

Armonk, NY 10504 3 World Financial Center

(914) 765-4343 New York, NY 10281

(212) 415-8700

MariAN UNDERWEISER

IBM Corporation

Rte 134/1101 Kitchawan Rd

Yorktown Heights, NY 10598

(914) 945-2756

Counsel for Amicus Curiae

International Business Machines Corporation

January 26, 2006

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.