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

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9) : FILED

No. 05-130 MAR 1 0 2006

au The

Supreme Court of the Anited 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 VARIOUS LAW & ECONOMICS

PROFESSORS AS AMICI CURIAE

IN SUPPORT OF RESPONDENT

_ ®

RICHARD A. EPSTEIN F. Scott KIEFF

1111 East 60th Street Counsel of Record

Chicago, IL 60637 One Brookings Drive, CB 1120

(773) 702-9563 St. Louis, MO 63130

(314) 985-5052

R. POLK WAGNER ar

3400 Chestnut Street Counsel for Amici Curiae

Philadelphia, PA 19104

(215) 898-4356

March 10, 2006

COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-283!

TABLE OF CONTENTS

. Page

INTEREST OF AMICI CURIAE ..................cccceeeeeeee 1

TTT dcthnsicssssncniaedesh idcepsbdtakindiceaettdadteninsaditenabaiis 2

I. The Federal Circuit’s Case Law Rightly

II.

Establishes a Rule that Injunctions Should

Generally Issue Except in those Unusual

Cases in which Good Cause is Shown for De-

nying that Form of Relief............................0

The Federal Circuit’s Good Cause Require-

ment Does Not Require An Injunction to Is-

sue in All Cases But Avoids The Dangerous

Risk of Ad Hoc Determinations that Invite

Unnecessary Legal Uncertainty. .....................

A. The Current Decisions of the Federal

Circuit Strike the Right Balance between

Excessive Rigidity on the One Hand and

Unnecessary Confusion on the Other.......

B. Precedents on Injunctive Relief Drawn

from the Law of Real and Personal Prop-

erty Do Not Support Loose Standards of

Discretion on the Question of Equitable

STROSS, Sieh ne Ce RY

C. The Proper Principles of Injunctive Re-

lief Preclude an Unstructured Case-by-

I iienissiccciciscccanisinbineiannidsdsamstcntbeics

D. The Possibility of Patent Holdups is

Generally Not a Justification for Deny-

RN III BIOS wv icidtnsintoncviscscccsciggtnnses

E. The Possibility of Patent “Trolls” Does

Not Generally Justify the Denial of In-

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TABLE OF CONTENTS - Continued

In the Instant Case the Federal Circuit was

Right to Hold that the Record Showed No

Extraordinary Circumstances Sufficient to

Deny an Injunction. .............:ceeceseeeeseeeees

III. A Sound Public Policy Strongly Favors the

Categorical Approach of the Federal Circuit .......

The Parties, Not the Courts, Should

Make the Key Decisions on Patent De-

III cscsdnculiersanisiviniebinbcunisidbalisdindimmenmantbanids

Limiting the-Application of Permanent

Injunctions Is a Poor Tool with which to

Address Patent Quality Concerns............

Denying an Injunction on the Basis of a

Patentee’s Negotiating Approach Is Per-

The Patentee’s Business Model Should

Be Wholly Irrelevant to the Choice of

Remedy in Infringement Cases........... Nios

Denying an Injunction on the Basis of

. the Type of a Patent or Its Perceived

Scope Is Impermissible as well as Un-

It Is Irrelevant Whether a Patentee Has

Sought a Preliminary Injunction .............

I dsihenisciipecdelyiinninsniscititnccandipilpuictininbinnianiiiatt

APPENDIX — LIST OF AMICI*

PPP Pee ee eee eee eee eee eee eee eee eee

Page

ill

TABLE OF AUTHORITIES

Page

CASES:

Amazon.com, Inc. v. Barnesandnoble.com, Inc., 239

ee CI GN TED nintictccccccscevecccnsescsstcensoniccncntoreds 3

Brooke Group Ltd. v. Brown & Williamson Tobacco

I es Ce Ce Rica cbecneicctccicscnseesepsenseoenetsssonnses 21

Continental Bag Co. v. Eastern Bag Co., 210 U.S. 7

ERASE IT of Face ane ee Benen eT TO 2,14

De Forest Radio Tel. Co. v. United States, 273 U.S.

a cain eeicsicilaniinceniaeleedcbbinijulliactuicnaeiiadannniiiden 9

Fuji Photo Film Co., Ltd. v. Jazz Photo Corp., 394

eo Bt) | Be & er eeeorenne 4,6, 7,8

Geragosian v. Union Realty Co., 193 N.E. 726

SAREE STAR ESP Oew a oan we oa ae 16, 17

Holbrook v. Taylor, 532 S.2d 763 (Ky. 1976)...............0..6. 10

Lermer Germany GmbH v. Lermer Corp., 94 F.3d

SR I I ict ies rasa teictaneepdiemmlinaneanenintets 30

Matsushita Elec. Indus. v. Zenith Radio Corp., 475

IE iste ci acankih ahcinos nip ineet ieaddiieeisinemhoidaiaenagiiaboaiih 21

- Mayor of New York v. Lord, 18 Wend. 126 (N.Y.

RAED Sa AN eae N ae eave ear oc ene co NER OeN OCR E 11

MercExchange, LLC v. eBay, Inc., 401 F.3d 1323

Sy MITTIN diss hinbdnienhinsneccasdshpicinchersnetdiihichiaiten 3, 12, 22, 27, 29

Mouse’s Case, 66 Eng. Rep. 1341 (K.B. 1609)................... 11

Odetics, Inc. v. Storage Tech Corp., 185 F.3d 1259

IS, I i aia ci nh ielstadcalcanincananiienn 6, 8,9

Ploof v. Putnam, 71 A. 188 (Vt. 1908).................. ee eeee eee 11

TABLE OF AUTHORITIES — Continued

Page

Initial Decision, Jn the Matter of Rambus, Inc., FTC

Docket No. 9302, Findings of Fact Nos. 502,

1546, 1558 (Feb. 23, 2004)...0..........ccceecceseesseeeeceeeeeeeeseees 18

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

Es & ——_—— RNR CEERI LURE TINE TD) \ SENNA SE 2

Rite-Hite Corp. v. Kelley, Inc., 56 F.3d 1538 (Fed.

SR FEO detacdtvicitscridecntaneciocsshibedricceipharenmemenaenns 2,3

Schneider (Europe) AG~v. SciMed Life Systems,

Inc., 852 F.Supp. 813 (D.Minn. 1994)................0004 12,15

State Street Bank & Trust Co. v. Signature Finan-

cial Group, 149 F.3d 1368 (Fed. Cir. 1998) .................. 29

Vincent v. Lake Erie Transp. Co., 124 N.W. 221

CITRIIEA, TIPU scaseccscncscinccineytininiscvencensstnbtamnimmaieniaaaiania 11

Wang Labs. v. Mitsubishi Elecs., 103 F.3d 1571

CP, SR: BG cccinscenncckocnstvertssctdescensahunscidninaiaiaaieeas 9, 10

Weinberger v. Romero-Varcelo, 456 U.S. 305 (1982) .. 5, 6, 7, 8

STATUTES:

BD VARIED, © Bae cee cencesnescicnensccecoesistscedereicdebvinbaseiaaanieneiineanil 5

SS EB, BT viwestestctcrsionscininmninadietvinnininael 1,5

ead, GR, GI TR GRID vcccccnccecee-“ctccesesseeneveipitambiiuaniaiaamas 7

OTHER AUTHORITIES:

Brief Amici Curiae of 52 Intellectual Property

Professors in Support of Petitioners ...................... passim

Michael A. Carrier, Cabining Intellectual Property

Through a Property Paradigm, 54 Duke LJ. 1

CIID scsicnssciserncsincstuenenintadubncbinaniiniaintadadélma ann 10

TABLE OF AUTHORITIES -— Continued

Ronald Coase, The Nature of the Firm, 4 Economica

PEI aiticideinideadintcinniibdaiiitaireneveninnnicdvonanditennnnnociniete

Richard A. Epstein, A Clear View of The Cathedral:

The Dominance of Property Rules, 106 Yale L.J.

TPT sgteilinietusdabsnehseattunsecesatierestenensqeenticcenecenion

Mark Heinzl & Amol Sharma, RIM to Pay NTP

$612.5 Million to Settle Blackberry Patent Suit,

ee, a spsduonedabicosons

Mark A. Lemley, Intellectual Property Rights and

Standard-Setting Organizations, 90 Cal. L. Rev.

SETI hiaridisdnitinisindvcniabtedibinecinnibcninrecenestenpoonsepieres

Robert P. Merges, Of Property Rules, Coase, and

Intellectual Property, 94 Colum. L. Rev. 2655

Si chbidddattipidnatpenidiibnéianaupeniertessiintersoncmientesieorte

Mark R. Patterson, Jnventions, Industry Standards,

and Intellectual Property, 17 Berkeley Tech. L. J.

ST ishiditiiceinhdinansdemtnonsinbeibasssonieereabasoreineotitessi

Maggie Sheils, Technology Industry Hits out at

Patent Trolls, June 2, 2004, at http://news.bbc.co.

uk/I/hi/business/3722509. stm ......0..0..00..ccceccceceeeeeeees

Henry E. Smith, Property and Property Rules, 79

FY Ge BENUE PREP CRIED ccccccsssovecssccescescsccsseeoesnoese

J.P. Walsh et al., Working Through the Patent

Problem, 299 Science 1021 (2003)........0..........cccceeee.

J.P. Walsh et al., View from the Bench: Patents and

Material Transfers, 309 Science 2002 (2005)...........

Oliver E. Williamson, The Economic Institutions of

A ea a aE ee

INTEREST OF AMICI CURIAE

Amici are scholars at American law and business

schools interested in patents, property, and the theory of

the firm. Amici have no other stake in the outcome of this

case, but are interested in ensuring that patent law

develops in a way that best promotes innovation. A full list

of amici is appended to the signature page. Both petitioner

and respondent have consented to the filing of this brief.

SUMMARY OF ARGUMENT

Under well-established patent law, the usual rule is

that whenever a plaintiff shows that a defendant has

infringed a valid patent, an injunction should issue in the

absence of special circumstances. This rule is in fact

consistent with the statutory requirement under Section

283 of the Patent Act that requires Courts to apply princi-

ples of equity to these cases. Those principles of equity

always include some measure of judicial discretion, so that

the key question is always how it should be implemented.

The preferred approach is to require a defendant to articu-

late some discrete category of cases into which the in-

fringer’s case falls and within which a grant of injunctive

relief would be inappropriate, rather than undertaking a

costly and uncertain fact-specific inquiry that simply asks

in general terms whether the issuance of an injunction is

appropriate on a balancing of the equities or in the overall

public interest.

This categorical approach is well reflected in the

decided cases. Courts should stand ready to use their

discretion to admit further (categorical) exceptions to the

general rule. Yet it would be most unwise to deny an

injunction because the court does not think that a pat-

entee has practiced the invention with sufficient vigor,

because of some alleged holdup, or holdout, problem, or

because a judge thinks that the patent is of the wrong

type. Introducing discretion into these areas makes the

' Pursuant to Sup. Ct. R. 37.6, the amici represent that no person

or entity other than the signatories has authored or paid for any part of

this brief or its submission.

. 2

courts arbiters not of the patents but of industrial policy,

on which they have little competence. The rule in Conti-

nental Bag Co. v. Eastern Bag Co., 210 U.S. 405 (1908) has

stood the test of time and should be reaffirmed.

ARGUMENT

The firmly-settled jurisprudence of the United States

Court of Appeals for the Federal Circuit — that a perma-

nent injunction should presumptively issue to enforce a

patent adjudged to be valid and infringed — comports well

with both statutory command and sound public policy.

This Court should reject calls for a radical reconsideration

of the Federal Circuit’s case law in this area on two

grounds. First, they misconstrue the relevant precedents

of the Federal Circuit. Second they offer prescriptions for

reform would be unwise as a matter of sound patent policy.

We hope to illustrate the soundness of these propositions

with reference to the decided cases, as well as to the Amici

Curiae brief submitted by 52 Professors of Intellectual

Property [hereinafter 52 IP Professors]. Their brief con-

fuses the issues and muddies the waters in ways that

weaken the structure of exclusive patent rights on which

today’s elaborate system of licenses and other voluntary

agreements rest.

I. The Federal Circuit’s Case Law Rightly Estab-

lishes a Rule that Injunctions Should Generally Is-

sue Except in those Unusual Cases in which Good

Cause is Shown for Denying that Form of Relief

The position of the Federal Circuit under review in

this case reads as follows:

Because the “right to exclude recognized in a

patent is but the essence of the concept of prop-

erty,” the general rule is that a permanent in-

junction will issue once infringement and validity

have been adjudged. Richardson v. Suzuki Motor

Co., 868 F.2d 1226, 1246-47 (Fed. Cir. 1989). To

be sure, “courts have in rare instances exercised

their discretion to deny injunctive relief in order

to protect the public interest.” Rite-Hite Corp. v.

Kelley, Inc., 56 F.3d 1538, 1547 (Fed. Cir. 1995);

... Thus, we have stated that a court may de-

cline to enter an injunction when “a patentee’s fail-

ure 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. Rite-Hite Corp., 56 F.3d at 1547.

MercExchange, LLC v. eBay, Inc., 401 F.3d 1323, 1338

(Fed. Cir. 2005).

In order to frame this dispute, it is necessary to set

this principle in its proper context.

First, the question of permanent injunctive relief only

comes up after the twin questions of validity and in-

fringement have been resolved in the patentee’s favor. On

this appeal, we take no view on any of the underlying factual

disputes between the parties on any other aspects of this

case. Instead, we approach this dispute over injunctive relief

on the premise that the parties have received a full and

fair litigation on those underlying issues. Relitigation of

those basic issues is accordingly precluded by well re-

hearsed concerns for finality of judgment that are in no

way unique to patent law. In contexts in which validity

and infringement have not been adequately demonstrated,

as in the preliminary injunction setting for an untested

patent, the Federal Circuit readily sets aside the prelimi-

nary injunction if entered by a district court. See, e.g.,

Amazon.com, Inc. v. Barnesandnoble.com, Inc., 239 F.3d

1342, 1366 (Fed. Cir. 2001) (vacating and remanding

because of “substantial questions as to the validity of the

[one-click shopping] patent”).

Second, the Federal Circuit rule quoted above is

correct insofar as both willful and innocent infringements

should be routinely enjoined. If the opposite result were

true, then any party that did not use due diligence to find

out whether its conduct constituted infringement would be

in the advantageous position of using its own neglect to

undermine the legal protection otherwise available to a

patentee. Potential infringers would have a palpable

incentive to decrease inquiry into existing patent rights,

which in turn would increase the number of infringement

disputes. In all cases an infringer necessarily receives

actual notice that his conduct has infringed from a cease

and desist letter from the patentee, or from a lawsuit. In

those circumstances, the defendant’s actual notice of the

existence of the patents imposes on the defendant an obliga-

tion of due diligence. Fuji Photo Film Co., Ltd. v. Jazz Photo

Corp., 394 F.3d 1368, 1379 (Fed. Cir. 2005). The ongoing

dispute itself makes all infringements willful at the conclu-

sion of litigation, even if they were not when the defendant

first engaged in its infringing conduct. Of course, the distinc-

tion between innocent and willful infringes still remains

relevant to the issue of enhanced damages and any overall

assessment of the balance of hardships In these contexts

willfulness bears the same meaning it has in other tort

contexts, by covering cases where a defendant knowingly

and deliberately decides to infringe another’s patent.

Third, the basic rule awarding permanent injunctive

relief should not be displaced solely because the U.S.

Patent and Trademark Office (PTO) has ordered, or might

order, a reexamination of the same patent. An order of a

reexamination in no way guarantees that a claim of

invalidity will be upheld by the PTO or confirmed by

subsequent judicial review; denying an injunction solely

on that basis will create a moral hazard prompting in-

fringers to routinely seek reexamination in order to

remain in business notwithstanding their infringement.

The precise treatment of this question involves fact-

driven, complex trade-offs. But there is no reason to

explore those troubled waters here in advance of an actual

controversy.

Fourth, the use of injunctive relief always raises ticklish

questions whenever two courts have reached inconsistent

judgments about the validity or infringement of particular

patents. In such circumstances, the problem of fashioning

proper relief is not restricted to the injunctive portion of the

case. It is equally odd for damages to be awarded in one

lawsuit when they are denied in another. We offer no general

solution as to how inconsistent judgments should be treated,

but we note that such considerations are not present in the

current lawsuit, and we suggest that if this problem arises

with any frequency, Congress should create some forum for

the reconciliation of inconsistent judgments.

II. The Federal Circuit’s Good Cause Require-

ment Does Not Require An Injunction to Issue

in All Cases But Avoids The Dangerous Risk

of Ad Hoc Determinations that Invite Unnec-

essary Legal Uncertainty

A. The Current Decisions of the Federal Cir-

cuit Strike the Right Balance between

Excessive Rigidity on the One Hand and

Unnecessary Confusion on the Other

All parties to this case agree, by the merits stage, that

the basic rule on injunctions in the Federal Circuit is a

“general” rule, and not_a universal, mandatory one. The

key point that separates the two sides in this case is a

dispute over the scope of the possible exceptions and the

legal standards that should determine them.

In contrast to the tight rule with narrow exceptions

established by the Federal Circuit, the 52 IP Professors

urge that the traditional principles of equity should be

used on a case-by-case basis to determine when an injunc-

tion should be withheld. In addition, they insist that the

recent decisions of that court have strayed from the

appropriate statutory mandate, which provides, as they

note, “that courts ‘may’ grant injunctions once infringe-

ment is found, but only ‘in accordance with the principles

of equity’ and ‘on such terms as they deem reasonable.’ 35

U.S.C. § 283.” 52 IP Professors, at 1. In their view, the

basic standards that carry out this statutory mandate

follow the equitable standard of relief announced in this

Court’s decision in Weinberger v. Romero-Varcelo, 456 U.S.

305 (1982), a suit brought under the Federal Water Pollu-

tion Control Act, 33 U.S.C. § 1351 et seq., to prevent the

United States Navy from discharging its ordnance into the

navigable waters of the United States. :

Their position misunderstands how the traditional

rules of equity operate, by failing to acknowledge the rule-

based nature of equitable principles. In addition, nothing

in Weinberger undermines the rule announced by the

Federal Circuit in the case below; nor does it show that

they have disregarded the statutory mandate, on which

the Federal Circuit has properly relied in numerous cases.

See, e.g., Odetics, Inc. v. Storage Tech Corp., 185 F.3d 1259,

1272 (Fed. Cir. 1999) (citing and applying § 283).

In approaching the case, the 52 IP Professors distill

Weinberger to say that the four equitable factors that

‘should be taken into account in determining equitable

relief are “(i) whether the plaintiff would face irreparable

injury if the injunction did not issue; (ii) whether the

plaintiff has an adequate remedy at law; (iii) whether

granting the injunction is in the public interest; and (iv)

whether the balance of hardship tips in the plaintiff’s

favor.” 52 IP Professors, at 1-2.

It is critical to understand, however, that the particu-

lar reasons offered in Weinberger for denying the injunc-

tion shed light on how these general principles should be

construed. Most conspicuously, on the facts of that case,

the plaintiffs had not shown that the defendant's dis-

charges of naval ordnance had polluted the navigable

waters of the United States. Given that key circumstance,

therefore, the Supreme Court held that it was appropriate

to order the Navy to apply for a permit under the Act, and

to temporarily decline to issue the injunction until that

process had run its course. Jd. at 314-315.

The particular use of equitable principles in this case

must be understood against the backdrop of Weinberger’s

internal reasoning, which looks very similar to the general

patent rule that is chary of awarding preliminary injunc-

tions before a clear invasion of right is proved. In addition,

any differences between the two cases are explained in

large measure by the fact that the Water Pollution Act is

an elaborate administrative statute that contains a per-

mitting process that is not present in the patent context.

The closest analogy to this situation is one that would

deny a patentee an injunction against acts that had not

been shown to infringe, in order to allow the parties to

negotiate any voluntary license if necessary. As such the

reasoning in Weinberger does not show any tendency

whatsoever to deny what the Federal Circuit has affirmed

— namely, that injunctions generally issue as of course

when both validity and infringement have been shown.

The recent decision of the Federal Circuit in Fuji

Photo Film Co., referred to above, is also consistent with

the general approach in Weinberger. In addition, it shows

the careful way in which the Federal Circuit cabins

discretion in injunctive relief cases. Fuji involved a com-

plex overlap between an international trade dispute and a

patent dispute. Fuji’s patent claim was that Jazz had

engaged in direct infringement of its patent when it

imported from China into the United States certain types

of disposable cameras, known in the trade as “lens fitted

film packages (LFFPs).” One key issue was whether Jazz

had taken certain discarded Fuji LFFPs and had repaired

or refurbished them (which is permissible under the

patent law), or whether it had reconstructed them (which

is not permissible under the patent law). The trial judge,

while “walking an evidentiary tight rope,” Fujt, 394 F.3d,

at 1375, found that 90 percent of Jazz’s LFFPs were in fact

illegally reconstructed and ordered damages in the form of

a reasonable royalty on them. But the district court, in a

move approved by the Federal Circuit, denied the injunc-

tion, for a number of reasons that do nothing to undermine

the general rule. Its reasons give a good sense of the

general approach in the Federal Circuit:

The district court determined that Fuji’s pro-

posed injunction lacked specificity and reason-

able detail as required by Fed. R. Civ. P. 65(d).

Moreover, the district court held that even if

Fuji’s proposed injunctive language were more

narrowly tailored it would still deny relief on

three grounds: 1) the parties’ discovery stipula-

tion precluded injunctive relief for infringing ac-

tivity after August 21, 2001; 2) the issues of proof

would not necessarily adhere in a damages

analysis for infringement after August 21, 2001;

and 3) the ITC’s [International Trade Court] in-

junctive relief, although not co-extensive with

that of the district court, subsumed the relief

that Fuji sought from the district court.

Id.

The decision in Fuji thus falsifies the blanket factual

assertion of the 52 IP Professors that “[I]n no case in the

last twenty years has the Federal Circuit permitted a

district court to apply its equitable powers to refuse a

permanent injunction after a finding of infringement.” 52

IP Professors at 2. (Their note 2, at 2 duly notes the

differential treatment of preliminary injunctions.) More

importantly, the approach followed in Fuji shows that a

narrowly cabined form of discretion does nothing to

undermine the security of exchange that depends on the

strong protection of intellectual property. See supra at 7.

No court should issue an injunction unless it is possible for

the enjoined party to know what conduct is prohibited and

what is not. Overbroad injunctions improperly curtail the

defendant’s right to conduct its own business as it sees fit,

so any system of discretion must necessarily see that the

remedy in question is tailored to the underlying wrong. In

addition, parties seeking injunctive relief always have it

within their power to avoid stipulations in discovery that

preclude injunctive relief. Likewise, case-specific time

limitations agreed to in one case have-no precedential value

in dealing with the next. And finally, the overlap between

two distinct systems of relief (damages and injunctions)

requires as much caution here, as the overlap between the

general statute and the permitting process did in the clean

water context in Weinberger. In short, the current practice of

the Federal Circuit suffers neither from excessive rigidity on

the one hand nor from incurable vagueness on the other.

Nor is there any reason to exclude from consideration

alternative grounds for denying an injunction, none of

which work to create further instability in property rights.

The traditional equitable doctrines of laches and estoppel

provide examples of how this can be done on a categorical

basis. For example, in Odetics, Inc., supra, the defendants

were found to infringe plaintiff’s patents for robotic tape

storage systems, whose primary function is to store,

organize, and retrieve videotapes or computer data tapes.

The District Court judge first held that the plaintiff’s

tardy action in bringing suit constituted laches.

On apreal, one question before the Federal] Circuit in

Odetics was whether a permanent injunction should prohibit

the further use of the covered equipment that was made and

distributed during the pre-complaint laches period. The

Federal Circuit denied the injunction. In so doing, it showed

a sophisticated awareness of the interaction between

injunctive relief and damages. The patentee’s laches

barred its action for damages. Yet an award of an injunc-

tion would require users who were protected against

damage suits to buy back the use of their own products.

The only way to make good on the laches defense was to

ban both remedies for that period, which the Federal

Circuit did. Odetics, Inc., 185 F.3d at 1273-74. The key

point to note is that this exercise of discretion in no way

threatens the stability of the underlying property rights in

question. All that a patentee need do to obtain an injunc-

tion under the reasoning in Odetics is to bring a timely

action, so that the power to receive the full protection of its

property rights always lies in its own hands.

A similar analysis applies to the issue of estoppel,

where the equitable principles are strong enough to deny

the holder of a valid patent both damages and injunctions

if the patent holder has engaged in improper conduct. The

principle of estoppel operates in those cases in which the

active conduct of a patentee leads some other party to

believe that it has a right to practice the patented inven-

tion. These situations go beyond the narrower principles of

legal estoppel in which a defendant seeks to derogate from

its own valid license or assignment.

For example, the Federal Circuit held in Wang Labs.

v. Mitsubishi Elecs., 103 F.3d 1571 (Fed. Cir. 1997) that

the infringer had properly inferred consent based on

substantial affirmative acts by the patentee. The court

further noted that although such estoppel is rare, it may

be shown by sufficient proof based on the “entire course of

conduct.” Jd., at 1580-82 (relying on De Forest Radio Tel.

Co. v. United States, 273 U.S. 236, 241 (1927)).

That these situations are rare is not a reason to doubt

the sense of the legal rule from Wang Labs. It is a reflec-

tion of the sensible fact that in most high value deals the

parties will negotiate adequate legal agreements, for the

benefit of all. Yet Wang Labs shows that the principles of

equity will work as an important barrier against sharp

conduct. -

As with cases of laches, the particular applications of

the principle of equitable estoppel are likely to be fact-

intensive, and their proper resolution necessarily requires

the use of judicial discretion of the sort that the Federal

Circuit applied in Wang Labs. But three points are worthy

of notice. First, the use of the principles of discretion did

not necessarily require a jury trial. Some cases within the

category are clear enough for judgments as a matter of

law. Second, the application of estoppel principles in no

way upsets the balance of strong property rights needed

for commercialization, as the patentee has it always

within its power to avoid the conduct that, depending on

the scope of the estoppel, leads to the loss of past damages,

injunctive relief, or both. Third, in some cases the extent of

the reliance and the nature of the course of dealing could

justify protection against injunctive relief - an issue not

explicitly addressed in Wang Labs. For prospective relief

by estoppel with real estate, see Holbrook v. Taylor, 532

S.2d 763 (Ky. 1976). In sum, it is possible to identify

sensible categories of cases to which the principles of

equity apply without resorting to case-by-case judgments

of the social desirability of patents where none of the

traditional grounds for equitable intervention is present.

B. Precedents on Injunctive Relief Drawn from

the Law of Real and Personal Property Do

Not Support Loose Standards of Discretion

on the Question of Equitable Relief

The 52 IP Professors not only misunderstand the role

of injunctive relief in intellectual property cases, they also

overread the case law that governs the use of injunctions

for trespass to chattels and to real property. In dealing

with these materials, they claim that the “traditional

principles of equity” invite the court to “consider such

factors as adequate remedy at law, the balance of hard-

ships to the parties, and the public interest in deciding

whether to grant the injunction.” 52 IP Professors at 4. The

clear import of this statement is that “Courts regularly

award damages rather than injunctive relief against

invasion of real property when circumstances warrant.” Jd.

Yet the authority on which the 52 IP Professors rely is

in fact consistent with the Federal Circuit’s categorical

approach, and not with their ad hoc one. In particular,

they cite Michael A. Carrier, Cabining Intellectual Prop-

erty Through a Property Paradigm, 54 Duke L.J. 1, 66-68

(2004), which offers these examples to explain why an

automatic injunction rule is inappropriate — “averting a

disaster, fleeing from an animal, reclaiming or removing a

chattel, executing a court order, putting out a fire, making

an arrest, and exercising free speech rights.” All these,

with the possible exception of the last, do not rely on any

individual judgment that seeks to decide on a case-by-case

basis when the injunction should issue and when not.

Quite the contrary, they identify narrow categories of well-

defined cases, far removed from the usual commercial

dispute, in which it is appropriate to deny the injunction.

The common thread throughout these cases is that

they all require the suspension of exclusive rights in land

in order to deal with some disaster or calamity, or with the

exercise of sovereign power. As such, these examples are

simply application of the time-honored principle that the

exclusive rights of private ownership must give way in

narrow circumstances of necessity. Thus Ploof v. Putnam,

71 A. 188 (Vt. 1908) held there was a privilege to enter

someone else’s property in order to remove a private neces-

sity but there is generally a duty to provide compensation.

And Vincent v. Lake Erie Transp. Co., 124 N.W. 221 (Minn.

1910) held that the rules on public necessity also allow the

infringement of property rights, but normally dispense

with any requirement of compensation.

Again, the categorical rule is very old. For example,

Mouse’s Case, 66 Eng. Rep. 1341 (K.B. 1609), held “that in

a case of necessity, for the saving of the lives of the pas-

sengers, it was lawful for the defendant, being a passen-

ger, to cast the casket of the plaintiff out of the barge, with

other things in it.” Likewise, Mayor of New York v. Lord,

18 Wend. 126, 129 (N.Y. 1837), held that it was “well

settled” that the privilege was absolute “in cases of actual

necessity, to prevent the spreading of a fire, the ravages of

a pestilence, the advance of a hostile army, or any other

great public calamity.”

As these precedents indicate, the 52 IP Professors rely

on cases that illustrate the ancient and general principle

that ordinary property rights are suspended under condi-

tions of necessity. To be sure, the likelihood that these

necessities will arise in the context of intellectual property

is lower than it is with respect to tangible property, for it is

highly unlikely that persons will need to infringe patents

in order to escape with their lives. But the class of cases in

which this issue is raised is not empty. Indeed, it is just

those cases that are tracked by the Federal Circuit below

when it references “public health” dangers as a category of

reasons that could lead to a suspension of patent property

rights. See MercExchange, 401 F.3d at 1338; see also,

Schneider (Europe) AG v. SciMed Life Systems, Inc., 852

F.Supp. 813, 861-62 (D.Minn. 1994) (acting in response to

public health concerns to delay entry of injunction by a

year to allow a transition period for doctors to changeover

to non-infringing products).

C. The Proper Principles of Injunctive Relief Pre-

clude an Unstructured Case-by-Case Review

With these principles firmly in mind, it is now possible

to state with some clarity the differences that separate the

methodology of the 52 IP Professors from our own (and

that of the Federal Circuit). They are content, at least as a

first approximation, with using the loose standard of

discretion that allows a court to do some kind of a case-by-

case analysis on whether injunctions will issue. In con-

trast, the Federal Circuit rightly refuses to analyze the

problem one case at a time, and instead seeks to examine

cases by category in order to develop a consistent but

dynamic body of law to see when injunctions are allowed.

We recognize that all cases cannot be put into a single

category. The necessity cases necessarily involve different

principles from cases where plaintiff loses the right to any

injunction by waiver or laches. And these in turn differ

from cases that reveal some uncertainty in the factual

record, the interplay of multiple statutory regimes that

could caution against injunctive relief, or a possible

reexamination of patent validity in the PTO.

That said, it should be clear that the broad celebration

of trial court discretion, on which the 52 IP Professors rely,

should be understood not as the definitive analysis, but only

as a preliminary exercise that precedes the more systematic

effort to flesh out the loose standard of “when circum-

stances warrant.” That shift to narrow and precise catego-

ries makes all the difference in judicial administration. If

the discretion afforded to a district court is as open-ended

as the phrase “as circumstances warrant,” then, regretta-

bly every case becomes a crapshoot, so much so that there

is no longer any general rule, let alone a universal one.

Put differently, the standard for granting injunctions

should never allow one court, but not a second, to say that

it chooses to deny the injunction because on a balance of

convenience the social welfare is better served by allowing

the invention to be practiced upon the payment of a

judicially determined royalty.

In this context, the 52 IP Professors are not faithful to

their major premise, for they rightly backtrack from the

social chaos that would ensue by rejecting any firm protec-

tion of property rights. See 52 IP Professors at 7. And they

are rightly motivated to take the further step of insisting

that their proposal to vest discretion in District Courts

“does not amount te a Compulsory License.” /d. at 9.

Unfortunately, at the same time they adopt these

sensible categorical propositions, they cloud the remedial

question in unnecessary obscurity. Their broad discretion-

ary approach invites “fact-specific, case-specific applica-

tions of the principles of equity” to solve the problem on a

retail level. Jd. at 9. No dice. This fuzzy paean to individu-

alized justice shows scant appreciation of the huge admin-

istrative cost and unpredictability that this open-ended

inquiry would create, and offers no assurance whatsoever

that dozens of District Court judges will exercise their

supposed discretion in anything approaching a coherent

and consistent fashion.

Recognizing, perhaps, how their muddy articulation

opens up the dangerous possibility of routine compulsory

licenses, the 52 IP Professors switch grounds by announc-

ing that they would routinely grant injunctive relief “to

patent owners who participate in the market, whether by

selling the patented invention, exclusively licensing it to

someone else who sells it, or selling a product not covered

by the patent but which competes with the infringing

product.” Jd. at 9. They also take a similar view that

injunctive relief should routinely be given “against those

who copy the invention from the patentee.” Jd.

There is evident tension between these categorical

statements and their earlier insistence that sound judicial

discretion requires that four general factors be at play in

every case. Jd. at 1-2, noted supra at 6. Yet the 52 IP

Professors do not explain how the two portions of their

program mesh with each other; nor do they supply any

example that allows anyone else to discern when the per

se rule is available and when the facts and circumstances

inquiry is appropriate.

D. The Possibility of Patent Holdups is Gen-

erally Not a Justification for Denying In-

junctive Relief

Fortunately, however, their brief goes out of its way to

reaffirm in unqualified terms the soundness of the holding

in Continental Bag. 52 IP Professors, at 5, note 4. That

case stands for the proposition that the right to exclude

inherent in a patent does not create a duty to use, any

more than the ownership of land requires an owner to

farm or build it. The 52 IP Professors argue, however, that

the principle of Continental Bag is not applicable in those

cases that pose special risk of holdups. See 52 IP Profes-

sors at 6. More precisely, they worry about the possibility

of patentees who “can obtain revenue in excess of the

value of the technology by threatening to enjoin products

that are predominantly no infringing and in which the

defendant has already made significant irreversible

investments.”

As a general matter, this proposition is surely over-

broad, and threatens to undo the stability that the Conti-

nental Bag decision has long brought to this area. There is

nothing more common than the designer of a technology

incorporating other technologies acquired by license or

other arrangement from an array of sources. If injunctive

relief may well be refused whenever a defendant incorpo-

rates the plaintiff’s patent into his own larger assembly,

then we have an exception that is large enough to eviscer-

ate the basic rule.

Second, the argument of the 52 IP Professors rests on

an overconfident judgment that it is possible to determine

the value of each component to a process that requires

many separate components to succeed. In fact, standard

economic theory yields no unique estimate of the value of

the different components that go into a common project,

and thus does not afford any ready base on which to

calculate the relative values of the various inputs. The

entry of injunctive relief avoids that valuation nightmare.

In addition, there are affirmative reasons why injunc-

tive relief is generally appropriate in this area. The first

point is that the problem is in a real sense self-limiting. If

the “predominant” value in any assembly lies in the

noninfringing portions, then it should be relatively easy to

work around the one or two elements that lies within the

exclusive control of the patentee. And if there is no close

substitute, then there is little or no reason to think that

this key component does not deserve a large valuation in

any proceeding, which in turn bolsters the case for injunc-

tive relief. Nor is there any reason to worry about the

occasional case in which successful work-arounds are not

immediately available. In most cases, the potential in-

fringer has notice of its exposure to liability when the suit

is filed, so can seek to develop, license, or buy substitute

technologies before final verdict. And in those cases where

the time it takes for the lawsuit itself is not sufficient

delay, the traditional understanding of equitable jurisdic-

tion has always allowed courts to further delay the onset

of an injunction in appropriate cases to ease the pain of a

sudden or major transition. See, e.g., Schneider. It would

be most unwise and unfair to penalize the patentee be-

cause the infringer has not taken full advantage of the

grace period that effectively is created by these two delays.

This problem has often been advertised in more

general form on the guise that the need to assemble

multiple patents creates an unfortunate “anticommons,”

which makes it impossible for an entrepreneur to assem-

ble all the pieces needed to complete some complex project.

Yet the empirical evidence suggests a different conclusion.

Far from being subject to endless holdups and blockades,

in both industry and universities, researchers have beaten

the supposed problem by adopting strategies of “licensing,

inventing around patents, going offshore, the development

and use of public databases and research tools, court

challenges and simply using the technology without a

license (i.e., infringement)” to achieve their particular

goals. J.P. Walsh et al., Working Through the Patent Problem,

299 Science 1021 (2003). Put simply, there is no empirical

evidence at present that supports creating a giant exception

to the standard rule of injunctive relief to deal with the

product assembly problem. See J.P. Walsh et al., View from

the Bench: Patents and Material Transfers, 309 Science 2002

(2005) (reporting empirical results demonstrating that

“access to patents on knowledge inputs rarely imposes a

significant burden on academic biomedical research.”).

In addition, injunctive relief in these settings has real

benefits that the 52 IP Professors ignore in their brief. One

key advantage of injunctive relief is that it reduces the

likelihood of infringing conduct in the first place. If the

developer of an assembled product knows that it may be

shut down or held up, it should take additional precautions —

greater patent searches, more inclusive licensing, new

inventions of its own — to obviate. In addition, in cases in

which the patent infringement comes as a genuine surprise,

a court could use its discretion to delay the enforcement of

the injunction in order to facilitate the transition.

The conclusion on this point is not unique to the patent

law but applies to areas of land law including nuisance and

encroachment. In these cases, the use of injunctions is in

general more common than is sometimes supposed in aca-

demic debates. See generally, Henry E. Smith, Property and

Property Rules, 79 N.Y.U. L. Rev. 1719 (2004). The caselaw

offers this example on encroachment: one landowner builds a

large structure whose foundation is a short distance over the

boundary line. One possible remedy is to allow the forced

purchase whereby the encroaching owner pays his neighbor

the fair market value of the small strip of land taken. That

approach is generally rejected and the landowner is usually

allowed to require the removal of the structure, even at

high positive cost. See Geragosian v. Union Realty Co., 193

N.E. 726 (Mass. 1935). In that case the Court proceeded

just as did the Federal Circuit below, by identifying the

reasons that either fail or suffice in justifying the injunc-

tion:

The facts that the aggrieved owner suffers little or

no damage from the trespass, that the wrongdoer

acted in good faith and would be put to dispropor-

tionate expense by removal of the trespassing

structures, and that neighborly conduct as well as

business judgment would require acceptance of

compensation in money for the land appropriated

are ordinarily no reasons for denying an injunction.

Rights in real property cannot ordinarily be taken

from the owner at a valuation, except under the

power of eminent domain. Only when there is some

estoppel or laches on the part of the plaintiff or a

refusal on his part to consent to acts necessary to

the removal or abatement which he demands will

an injunction ordinarily be refused.

Id. at 728 (citations omitted).

Oftentimes the doctrinal explanation for this result is

that the right in land is a right to exclude, period. But the

functional explanation is that being tough in a small

number of cases may cause needless disruption in them —

but at the same time it produces a long-term systematic

gain because it reduces the number of infringements that

take place. There is, at the edge of this doctrine, some

small degree of discretion, which is not exercised in cases

of deliberate trespass but may be exercised in cases of

innocent trespass (i.e. those discovered only after comple-

tion). But the overall tenor of these cases indicates that

the common law decisions on this matter do not display

the flexibility that the 52 IP Professors attribute to them.

In addition to this general claim about the overall risk

of holdups, the 52 IP Professors advance the more specific

claim that the royalty rates may depend on whether a

patent is incorporated into a standard. “For example, one

patent owner charges a 0.75% royalty for patents that

don’t cover industry standards, and 3.5% for patents that

do cover industry standards. Mark R. Patterson, Jnven-

tions, Industry Standards, and Intellectual Property, 17

Berkeley Tech. L. J. 1043, 1059 n. 61 (2002).” 52 IP Profes-

sors at 6. But this claim in the Patterson article, which is

supported only by citation to news stories for factual

support, is in fact false. The patented technology in that

case was incorporated into two standards adopted by a

standards setting organization. The patentee subsequently

successfully sought royalties of 0.75% for one of the stan-

dardized products and 3.5% for the other. The difference in

rates between these two standardized products turned on

the fact the latter incorporated more of the patented

technology. The patentee also licensed its patents for an

unstandardized product at 2%. See Initial Decision, Jn the

Matter of Rambus, Inc., FTC Docket No. 9302, Findings of

Fact Nos. 502, 1546, 1558 (Feb. 23, 2004).

In addition, what is missing from their conclusion is

an institutional understanding as to how this problem

arises and how it may be avoided. The moment that the

technology embedded in a particular patent is incorporated

into a standard, by definition, the opportunities to invent

around, or to substitute in alternative technology are effec-

tively scotched, so that the reactive patterns noted in the

works by Walsh et al., supra, are much less available. In

order to deal with this predictable and regular risk, some

standard-setting organizations by contract require their

members to disclose any issued patents they have that relate

to the standard, and some impose limitations, ex ante, on the

royalties that can be charged. See, e.g., Mark A. Lemley,

Intellectual Property Rights and Standard-Setting Organiza-

tions, 90 Cal. L. Rev. 1889, 1904-07 (2002) (reviewing data

on existing practices). The early warning system knocks

out the holdup problem before it arises.

There are breakdowns in this system, but these tend

to arise when a patent holder is able to improperly avoid

its obligations under the rules of the standard setting

organizations in which it participates. The solution to this

problem (if it arises) lies in the drafting of clear rules

regarding participants’ obligations, and in the use of

traditional principles of tort and contract law to sanction

improper behavior. It does not lie in the alteration of the

settled law on injunctive relief for patent infringement.

E. The Possibility of Patent “Trolls” Does Not

Generally Justify the Denial of Injunctive

Relief

The holdup question to one side, the question remains

whether it is possible to advance some other reason to

reject the Federal Circuit’s approach to injunctive relief.

Although the 52 IP Professors offer no other explicit

rationale, they appear to fear that the decision below

allows patentee holders to behave like a “patent troll” — a

common phrase that is, however, not used in their brief.

The source of this anxiety is that “patent trolls” hold their

patents neither for development nor for prospective

licenses, but solely to holdup others who accidentally

stumble in their path.’

As an initial matter, it is difficult to make any sensi-

ble estimation of the size and scope of the “patent troll”

problem, due in no small part to the various and shifting

definitions of what constitutes “troll” behavior. The discus-

sion reflects ambivalence about early inventors in new

technologies, who are on the one hand often said to de-

serve broad protection for their pioneer patents, and on

the other are often accused of being “trolls” by lying in

wait without actually taking steps to commercialize their

technology. Alternatively, the concern about “trolls” might

reflect anxiety about the uncertainty of the scope and

validity of patents, as well as the high cost of patent

litigation — both of which provide potential opportunities

for “trolls” to exploit even weak or low-value patents. In all

* One popular account of patent trolls runs as follows.

These are lawyers and investors who buy cheaply or assume

control over paper patents, mistakenly granted largely to

failed companies, explains David Simon, computer firm In-

tel’s chief patent counsel.

The trolls can use these patents to threaten to shut down the

entire computing industry with a court ordered injunction, no

matter how minor the feature that has been patented is.

Mr. Simon cites one case where a patent troll claimed a pat-

ent they had bought for about $50,000 was infringed by all

of Intel’s microprocessors from the Pentium II onwards and

that they were seeking $7 billion in damages.

In the end, the case was thrown out by the court, but it still

cost Intel $3m to fight it, Mr. Simon says.

Maggie Sheils, Technology Industry Hits out at Patent Trolls, June 2,

2004, available at http://news.bbc.co.uk/1/hi/business/3722509 stm.

Note that this definition focuses on weak patent claims and

damage actions. It does not speak to the choice between damages and

injunctive relief.

cases, the question relevant to the inquiry in this case is

whether injunctive relief can be fashioned in such a way

that it maintains the expectations of all patentees without

giving an undue benefit to patent trolls.

The first question here requires a real estimation of

the seriousness of the problem. The price society pays by

looking for the “troll” depends heavily on the likelihood

that they will be found. If that is infrequent at best, then

the cost here is that any weakening of injunctive relief has

the unhappy consequence of undoing the system of volun-

tary licensing for valid patents that lies at the core of

industrial commercialization in thousands of instances.

But the identification of “trolls” is sure to be a chancy

business at best — more like looking for a needle in a

haystack. That search will become even harder, for once a

definition is put into effect, then the formerly-passive

“trolls” will have an incentive to engage in modest, argua-

bly inefficient, licensing efforts to preserve their blocking

position, assuming it was important in the first place.

Indeed, finding the “trolls” will become ever harder once

the law tries to carve out a special rule to deal with them.

In any event, this case is a bad vehicle through which to

launch a new investigation at the Supreme Court level.

In addition, denying injunctive relief (for reasons that

go beyond the traditional cases like estoppel, laches,

definiteness and the like) does not solve the problem if the

troll is still entitled to actual, and even enhanced dam-

ages, for what is, after all, a willful infringement of a valid

patent. Those other remedies are potent enough to offer

real inducements to any “trolls,” however identified.

Indeed to the extent that enhanced damages might be

increased if injunctions are denied — which cannot be ruled

out a priori - little of value may be done to combat the

problem.

The case for creating any anti-troll rule, moreover,

does not seem all that strong because any party that is -

intent in playing the role of a patent troll has to pay a

steep price of admission to join this club in any event. All

patents are wasting assets, with less than a 20 year life,

and subject-to the defenses based on laches and estoppel.

Second, any party that forgoes the decision to develop or

commercialize loses income today that has to be recouped

tomorrow. The situation here is eerily reminiscent of the

situation with predation — whereby it is said to be an

antitrust offense to sell today at below cost, in the hope

(often vain) to recoup those costs in some future period

when there is little or no reason to be confident that the

initial predator will be able to succeed. See Matsushita

Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574, 588-594

(1986). See also, Brooke Group Ltd. v. Brown & Williamson

Tobacco Corp., 509 U.S. 209 (1993). We think that there is a

very low probability that this will occur, and think further

that there is no reason to explore what might be done with

“trolls” in the context of a case that does not raise the

problem. It is conceded on all sides that it is rational to

avoid using one patented technology in order to develop

another. Just as no landowner is under a duty to plant

crops, so no patent holder is under a duty to exploit its

patent.

We can push the land analogy one step further. Just

as a fallow plot of land may attract offers for development,

so a patent posted on the PTO web page and searchable

for free, as all are, provides sufficient information to

attract anyone seriously interested in practicing the

covered technology. A patentee who is not looking to sell or

license is not beyond reach of those who wish to buy or

license.

In addition, the financial risks of seeking an injunc-

tion do not fall solely on the infringer but also on the

patentee, who knows that if he exercises the option to hold

out entirely he has to forego the substantial sums of

revenue that he otherwise could receive under a licensing

agreement. Those economic forces on both parties help

explain why, once the court made clear an injunction was

imminent, even the infamously bitter litigation over the

Blackberry service settled before any disruption of service

took place. What is more, the settlement price in that case

is both significantly below independent estimates that

reflect the holdout risk, and even more significantly below

the licensee’s reserves of cash and cash equivalents. See,

Mark Heinzl & Amol Sharma, RIM to Pay NTP $612.5

Million to Settle Blackberry Patent Suit, Wall St. J., March

4, 2006, at Al (noting that settlement estimates ranged to

above $1 billion and that infringer’s reserves of cash and

cash equivalents were about $1.8 billion).

In any event, denying an injunction whenever there

are adequate opportunities for the infringer to license, buy,

or challenge the patent would create perverse incentives.

What is more, finding the cases of “trolls” may turn out to

be looking for a needle in the haystack. But there is no

need to explore or resolve these numerous, fact-driven,

complex trade-offs in advance of an actual controversy.

Finally, there does remain some question about what

kinds of practices might count as abuses that should draw

judicial attention. Without any reference to the particulars

of this case, we can think of two such circumstances

wherein a party enters into sham licenses with a related

party in order to, one, create the appearance of patent

validity, or, two, to establish an incorrect value for the

patent for use in other damage actions against strangers.

But we think that the usual rules against fraudulent

transactions would allow a defendant in an infringement

case to dispute the bona fides of the license in the first

setting and the designated valuation in the second. There

is no evident reason why the general rules of patent

remedies should be shifted for this reason.

F. In the Instant Case the Federal Circuit was

Right to Hold that the Record Showed No

Extraordinary Circumstances Sufficient to

Deny an Injunction

In light of the forgoing analysis, it should be clear that

the Federal Circuit was right to think that this case offered

no grounds for denying the injunction. See MercExchange,

401 F.3d at 1338-39. The argument that a growing concern

with business method patents should call for a different

standard is a proposition that invites chaos in this area. See

infra at 29. It almost goes without saying that a court should

never deny an injunction because a case is hotly disputed,

unless it wishes to ask parties to take extreme positions to

avoid equitable relief. See infra at 26-27. Similarly, it would

be unwise to deny an injunction simply because there is risk

of continuing dispute triggering the need for contempt

proceedings. See infra at 29. There is no reason as a matter

of public policy for any court to act as an industrial czar by

denying injunctive relief to parties who choose to license, not

practice their patents. See infra at 27-28. Finally, it is irrele-

vant whether a patentee has sought a preliminary injunc-

tion. See infra at 30.

In sum, this case does not present any circumstance

that remotely resembles those in which a court in its

sound discretion should refuse to issue an injunction. As

this brief has shown, the Federal Circuit has done an

admirable job in deciding when and why a permanent

injunction should be awarded. In fact, its decisions have

examined the various arguments urged to deny injunctive

relief one by one, and have across the board been able to

separate the wheat from the chaff. The point here is not

only true as a matter of precedent, but as we show in our

next section, as a matter of sound public policy as well.

III. A Sound Public Policy Strongly Favors the

Categorical Approach of the Federal Circuit

A. The Parties, Not the Courts, Should Make

the Key Decisions on Patent Deployment

There are important reasons for leaving negotiations

over patents to the parties, not the courts. In particular,

the current regime on injunctive relief enhances certainty,

improves predictability, encourages timely resolution of

disputes, and conserves judicial resources.

First, by limiting the circumstances under which an

adjudged infringer can reasonably expect to escape injunc-

tive relief, the Federal Circuit’s approach provides much-

needed certainty and transparency to the process of patent

enforcement. The law has consistently held that patents

are “rights against the world” because predictability

stemming from that view of the world is valuable not only

to parties to live disputes, but also for all actors who werk

and trade in the relevant marketplace. This property

rights regime helps build the stable investments and

relationships needed to get inventions commercialized.

Such predictability also helps encourage private resolution

via licensing or assignment for whatever disputes do arise.

Second, the current regime favoring permanent

injunctive relief encourages parties to patent disputes to

resolve differences at earlier stages of the litigation, by

removing most of the uncertainty related to the remedies

that will follow a finding of infringement. This is espe-

cially true in contrast to the ad hoc, open-ended analysis

urged by the 52 IP Professors, which places the question of

granting permanent injunctive relief (which comes at the

end of the proceedings) as a major decisional point in

patent litigation, thereby increasing the likelihood that

parties will litigate to that point.

Third, by carefully limiting the circumstances under

which the district courts must engage in a full-blown cost/

benefit analysis of a permanent injunction, the present

approach conserves judicial resources. More specifically,

the strong default rule discharges a valuable gate-keeping

function — ensuring that only those cases where serious

public policy concerns arise are afforded a difficult and

intensely-fact driven analysis concerning an injunction.

Fourth, the strong property rule aids in the successful

commercialization of patented products. That elaborate

process of bringing new products to market inevitably

requires deals to be made at all stages of development. We

can therefore expect as a matter of course that-disputes

will occur both early and late in the commercialization

process. At all stages, however, the deals that get struck

around patents are complex. Setting the right price alone

requires an immense amount of information that already

is in the hands of the parties themselves. It is for this

reason that commentators have expressed concern that

courts will err by setting the price either too low or too

high. The former will lead to a rush to overuse the prod-

uct. The latter will block its deployment unless the parties

bargain around the judicial price. But either way the error

and administrative costs, will be far higher than for

voluntary exchanges.”

* See Richard-A. Epstein, A Clear View of The Cathedral: The

Dominance of Property Rules, 106 Yale L.J. 2091 (1997) (noting the

general under compensation problem associated with allowing courts to

(Continued on following page)

Often price is not the only important term in these

deals and courts are woefully inadequate compared to the

marketplace for determining and enforcing these other

terms. While private ordering among parties can lead to

textured contracts having many terms including price but

also including a host of seemingly esoteric and unique

provisions — such as technical support, field-of-use or

territory limitations, grant-backs, cross-licenses, payment

schedules, most-favored-nation provisions, etc. — a court

imposed damage award is in all but the rarest of cases

reduced to a simple monetary amount. Insofar as permanent

injunctions only enforce patent rights, they set the stage for

voluntary transactions by way of license or assignment. As

noted earlier, there is no consistent fear of holdups that

justifies weakening the rules of injunctive relief.

B. Limiting the Application of Permanent In-

junctions Is a Poor Tool with which to

Address Patent Quality Concerns

By all accounts, the oft-expressed concerns about the

quality of issued patents is an important public policy

issue facing the patent system today. Nonetheless manipu-

lating the standard for granting permanent injunctions

offers an exceedingly poor vehicle to respond to that issue.

First, a question of whether to award a permanent

injunction arises only after a patent has been adjudged

valid and infringed. Thus, among all issued patents, those

patents that become the basis of a permanent injunction

have survived the rigors of litigation, and thus are ones

about which there should be the greatest confidence

regarding validity rather than the least. Penalizing the

holders of relatively high-quality patents (those adjudged

to be both valid and infringed) as a mechanism to defeat

the effect of low-quality patents is more than deeply ironic. It

also illuminates the attenuated link between the remedies

set a price for infringement rather than enforcing a property right with

an injunction). See also Robert P. Merges, Of Property Rules, Coase, and

Intellectual Property, 94 Colum. L. Rev. 2655, 2664 (1994) (noting that

injunctions generally make sense because private parties have a

comparative advantage over courts in valuing patents).

offered to valid and infringed patents and the marketplace

effects of issued-but-invalid patents.

Any rule that greatly diminished the likelihood for a

permanent injunction is unlikely to be beneficial on net.

First, any social gains accruing from reducing the power

(the expected value of the results of litigation) of low-

quality patents would be offset by the social losses result-

ing from reducing the power of valid patents. Second, since

the courts are far less likely than the parties to correctly

set the terms of licenses to valid and infringed patents, the

real effects of such a rule are wildly unpredictable.

Finally, if low-quality patents increase the level of

marketplace uncertaint:, then it only makes matters

worse, not better, to inject an additional layer of profound

unpredictability into the patent enforcement process. That

uncertainty at the remedial stage will reflect itself in the

reduction in investment in innovation, which in turn could

give low value patents a larger role in the marketplace

than they now have. The direct attack on patent quality is

far superior to altering the rules on remedies, where the

new uncertainty falls on high and low-quality patents alike.

C. Denying an Injunction on the Basis of a Pat-

entee’s Negotiating Approach Is Perverse

The Federal Circuit has rightly resisted the sugges-

tion that any decision to treat a case as exceptional should

turn on whether attempted negotiations have broken down

because the patentee improperly decides to holdout. In

principle, it is far from clear-cut whether a refusal to deal

is inefficient. For example, the patentee may not want to

offer a license to the infringer because the patentee wants

to facilitate its own commercialization efforts. Or the

patentee may choose to license a different party on an

exclusive basis. Or a patentee may holdout because it

wants to cross-license other patents, not merely to receive

a royalty. Frequently, both parties actually are holding out

when the deal breaks down. It is therefore dangerous at

the remedial stage of a trial to act as though only the

patentee has engaged in holdout behavior, without knowl-

edge of the full pattern of business negotiations.

What is more, this proposed test suffers from a fun-

damental circularity that would create perverse, harmful

incentives. If the ability to avoid the injunction hinged upon

the failure of a deal getting done, then there would be a

markedly increased incentive for those wanting to obtain use

through court-ordered terms to resist striking licensing

deals. A legal test that rewards a failure to cooperate would

lead to a decrease in cooperation, not an increase.

D. The Patentee’s Business Model Should Be

Wholly Irrelevant to the Choice of Rem-

edy in Infringement Cases

First, as a fundamental matter, the federal courts

simply should not be evaluating the appropriateness of

patentees’ business models. It would be profoundly impru-

dent to base the test for an exceptional case on whether

the patentee is “practicing the patent.” The only way a

patentee extracts economic value from a patent is if the

patentee or its licensee practices a technology that is

covered by the patent or in competition with a covered

technology. It is difficult to imagine a rational actor who

will first spend the significant costs to obtain a patent and

then defend it in litigation, without seeking to extract

economic value from its investment.

Second, many patentees’ entire business models are tied

to their expertise in inventing and developing technologies,

but not manufacturing them. Other patentees may have

exited an entire line of business for which they have devel-

oped a large portfolio of patents. In either case, such patent-

ees may need to engage in hard bargaining with parties that

own the complementary assets it must use to commercialize

its own invention. It takes time to develop large facilities-for

manufacturing, distributing, and marketing, and to find the

right business partners for these tasks. Hinging the right to

a permanent injunction on whether patentees already are

“practicing” the patent puts them in an intolerable posi-

tion. Either they accept terms offered by an earlier comer

or risk losing their exclusive position.

Third, the use of a permanent injunction may facili-

tate cooperative bargaining, not frustrate it, - forcing

outsiders to license technologies they wish to use. See

MercExchange, 401 F.3d at 1339. Awarding the permanent

injunction_allows agreement on terms acceptable to the

patentee, which has the salutary effect of forcing an actual

or would-be infringer to the bargaining table. A patentee

has strong economic incentives to license in such cases, so

as to gain ongoing value from its innovation, precisely

because the patentee is non practicing. It would be par-

ticularly destructive to deny the permanent injunction to a

patentee who had tried to commercialize but failed be-

cause it could not raise sufficient funds. The supposed

“patent troll” may actually be a small entrepreneur trying

desperately to negotiate with large infringers.

Absent the availability of such a business model,

society would be forced to rely solely on large, vertically

integrated firms for basic research and development. The

literature on the theory of the firm generally recognizes

the inherent tension between controlling transaction costs

when working together in an open market on the one

hand, and solving problems of agency costs, asset specific-

ity, and opportunism when working together within the

hierarchy of a firm on the other hand.* While no single

balance works to reconcile these two concerns in all cases,

any rule that makes access to an injunction contingent on

whether a patentee is practicing the invention would

provide an incentive inefficiently to shift industrial or-

ganization too far in the direction of integration and

hierarchy. The greater the number of available business

models the better. There is nothing that says that techni-

cal innovators and business managers necessarily belong

in the same firm. Separating the research from the devel-

opment business may allow for an efficient division of

labor between innovation and production.

* See, e.g., Ronald Coase, The Nature of the Firm, 4 Economica 390

(1937); Oliver E. Williamson, The Economic Institutions of Capitalism,

20-21 (1985). Agency costs refer to the conflict of interest between a

principal and agent, which could lead to underinvestment by the agent;

asset specificity refers to the bargaining risks that arise when one party

invents an asset that is used only in a particular business. Opportun-

ism refers to any situation where a party backs out on a promise after

the other side has committed its resources.

E. Denying an Injunction on the Basis of the

Type of a Patent or Its Perceived Scope Is

Impermissible as well as Unwise

Last, it is a mistake to let the validity of a patent, or

the choice of remedy, turn on whether the litigation

involves a “business method” patent instead of a more

traditional industrial invention. First, that test would

impose an additional definitional burden, for the distinc-

tion between business patents methods and, say, software

patents, will prove far from elear in many cases. The problem

is likely to become quite acute in patent filings that contain

multiple related claims. For example, these line drawing

problems had proved so famously problematic in the courts,

that the Federal Circuit concluded it made no sense under

existing law to adopt some special rule for business method

patents. See State Street Bank & Trust Co. v. Signature

Financial Group, 149 F.3d 1368 (Fed. Cir. 1998). Any public

policy concerns with business method patents should be

addressed at the legislative level.

In a similar fashion it would be most unwise to allow

the choice of remedy in infringement cases turn on decid-

ing whether other parties might be able to design around

the patent. That: approach raises unnecessary problems of

line drawing and efficiency. As the Federal Circuit noted,

“A continuing dispute of that sort is not unusual in a

patent case, and even absent an injunction, such a dispute

would be likely to continue in the form of successive in-

fringement actions if the patentee believed the defendants’

conduct continued to violate its rights.” MercExchange, 401

F.3d at 1339. Indeed, it may be less expensive to resolve

such disputes in the context of contempt proceedings to

enforce the injunction than injecting them into full blown

infringement litigation. Worse still, any inquiry into

designing around creates an unhappy form of circularity. If

parties know that they must design around a patent, they

are more likely to do so. If they think that they can, by not

designing around, force the license from the patent owner,

they will be less likely to do so. That level of effort will in

turn act as a self-fulfilling prophecy. If people are told that

they do not have to design around, then they will report

that they have not been able to do so. Put differently, they

will then have the incentive to expend ingenuity in litiga-

tion, not on innovation.

F. It Is Irrelevant Whether a Patentee Has

Sought a Preliminary Injunction

Finally, letting the test for a permanent injunction turn

on whether the plaintiff sought a preliminary injunction

misunderstands the goals of the two types of injunctions, and

the relationship between them. As the Federal Circuit

correctly pointed out: “A preliminary injunction is extraordi-

nary relief that is available only on a special showing of need

for relief pendente lite; a preliminary injunction and a

permanent injunction ‘are distinct forms of equitable relief

that have different prerequisites and serve entirely different

purposes.’ Jd. (quoting Lermer Germany GmbH v. Lermer

Corp., 94 F.3d 1575, 1577 (Fed. Cir. 1996)). And as with the

other proposed tests, the incentives created by this test

would be perverse. If the test for a permanent injunction

hinged on whether the patentee had sought a preliminary

injunction then patentees would have inappropriately

increased incentives to seek preliminary injunctions before

the validity and infringement of their patents had been

tested, simply to preserve their ability to obtain a perma-

nent injunction if and when they prevail on the merits.

CONCLUSION

Amici respectfully urge this Court to affirm the

Federal Circuit’s decision and confirm the court’s long-

standing rule that absent exceptional circumstances a

permanent injunction should issue to enforce a patent

adjudged to be valid and infringed.

Respectfully submitted,

RICHARD A. EPSTEIN F. Scott KIEFF

1111 East 60th Street Counsel of Record

Chicago, IL 60637 One Brookings Drive, CB 1120

(773) 702-9563 St. Louis, MO 63130

R. POLK WAGNER (314) 935-5052

3400 Chestnut Street Counsel for Amici Curiae

Philadelphia, PA 19104

(215) 898-4356

March 10, 2006

APPENDIX - LIST OF AMICI*

Professor Andrew Beckerman-Rodau

Professor of Law and Co-Director Intellectual Property

Law Concentration

Suffolk University Law School

Professor Steve Calandrillo

Professor of Law and Washington Law School

Foundation Scholar

University of Washington School of Law

Professor Richard A. Epstein

James Parker Hall Distinguished Service

Professor of Law

University of Chicago

Peter and Kirsten Bedford Senior Fellow

Hoover Institution, Stanford University

Professor Gerald Faulhaber

Professor of Business and Public Policy

Wharton School, University of Pennsylvania

Professor of Law

University of Pennsylvania Law School

Professor Thomas G. Field, Jr.

Professor of Law

Franklin Pierce Law Center

Professor Craig Steven Jepson

Professor of Law

Franklin Pierce Law Center

* Representative organizational affiliations of all signatories are

provided for identification purposes only. Some amici have additional of

counsel, consulting, or other relationships with law firms, corporations,

or other organizations. In no case do the undersigned purport to speak

for any organization and the views expressed here should not be

attributed to any organization. The views expressed here are the

personal views of the amici.

Professor F. Scott Kieff

Associate Professor of Law

Washington University in St. Louis, School of Law

Research Fellow, Hoover Institution, Stanford University

Professor David J. Teece

Mitsubishi Bank Professor of International Business and

Finance Director, Institute of Management, Innovation,

and Organization

Haas School of Business, University of California, Berkeley

Professor R. Polk Wagner

Professor of Law

University of Pennsylvania Law School

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.