Availability of Injunctive Relief in Patent Cases: eBay, Inc. v. MercExchange, L.L.C.

Order Code RS22435

May 2, 2006

CRS Report for Congress

Received through the CRS Web

Availability of Injunctive Relief in Patent

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

Brian T. Yeh

Legislative Attorney

American Law Division

Summary

The most significant legal right that patent law confers on the patent holder is “the

right to exclude others” from making, using, or selling the patented invention.

Injunctive relief is the usual remedy that courts authorize to prevent violation of this

patent right. However, as the recent BlackBerry patent infringement litigation

demonstrated, the desirability of an injunction in patent cases could be questioned in

certain circumstances, such as when an injunction’s disruptive effects to the public may

outweigh the interest in enforcing the intellectual property rights of the patent holder.

In another closely watched case concerning injunctive relief for patent

infringement, eBay was accused of patent infringement for its website’s “Buy It Now”

fixed-price purchase feature. Although a jury found eBay liable for willful infringement,

the district court refused to issue a permanent injunction order against eBay because it

had determined that the principles of equity favored such a decision. The Court of

Appeals for the Federal Circuit, however, reversed the denial, as it was unpersuaded by

the district court’s reasons for not giving injunctive relief to the patent holder.

According to the appellate court, the “general rule” is that courts must issue permanent

injunctions against patent infringement, absent exceptional circumstances. The United

States Supreme Court granted certiorari in the case to consider two questions: (1)

whether the Federal Circuit erred in setting forth its general rule and (2) whether the

Supreme Court should reconsider its precedents on when it is appropriate to grant an

injunction against a patent infringer. On March 29, 2006, the U.S. Supreme Court heard

oral argument in the case of eBay, Inc. v. MercExchange, L.L.C.

This report will be updated after the Supreme Court issues its decision.

Introduction

One of the primary purposes of patent law is to provide individuals and institutions

with economic incentives to engage in research and development that lead to new

products or processes. The U.S. Constitution empowers Congress to confer on “inventors

Congressional Research Service ˜ The Library of Congress

CRS-2

the exclusive right to their ... discoveries.”1 By enjoying this limited monopoly2 over their

inventions, patent holders may be able to receive a return on investment from their

creations. Without such patent protection, competitors could “free ride” on the inventor’s

research and development efforts and easily duplicate or otherwise practice the new

inventions without having incurred the costs to develop them.3

Under U.S. patent laws, patents have the attributes of personal property.4 A patent

holder has the right to exclude others from making, using, offering for sale, or selling the

invention throughout the United States, or importing the protected invention into the

United States.5 Whoever performs any one of these five acts during the term of the

invention’s patent, without the patent holder’s authorization, is liable for infringement.6

To prevent the violation of any right secured by a patent, the Patent Act provides that a

federal court “may grant injunctions in accordance with the principles of equity.”7

Without this power to order injunctive relief, “the right to exclude granted to the patentee

would have only a fraction of the value it was intended to have, and would no longer be

as great an incentive to engage in the toils of scientific and technological research.”8

Each application for a patent consists of two primary parts: (1) a “specification,”

which is a written description of the invention enabling those skilled in the art to practice

the invention, and (2) one or more claims that define the scope of the subject matter which

the applicant regards as his invention.9 Therefore, these claims define the scope of the

patentee’s rights under the patent.10 Careful scrutiny of the claims is crucial to any

infringement lawsuit, as patent infringement will not be adjudged unless the alleged

infringer’s actions have been determined to fall within the patent claims. Every patent

infringement case thus involves a “two-step” analysis11 of each asserted patent claim: first,

an interpretation and construction of the patent claim, which is a matter of law within the

province of the court,12 and second, whether the claimed invention is being made, used,

offered for sale, sold, or imported by the alleged infringer, which is a question of fact.13

1

U.S. CONST. art. I, §8, cl. 8.

2

This time period is generally 20 years from the date of filing the patent application for most

inventions. 35 U.S.C. § 154(a)(2).

3

ROGER SCHECHTER & JOHN THOMAS, PRINCIPLES OF PATENT LAW 9-13 (2d ed. 2004).

4

35 U.S.C. § 261.

5

35 U.S.C. § 154(a)(1). However, there is no statutory requirement that a patentee make, use,

or sell its invention. Rite-Hite Corp. v. Kelley Co., Inc., 56 F.3d 1538, 1547 (Fed. Cir. 1995).

6

35 U.S.C. § 271(a).

7

35 U.S.C. § 283.

8

Smith Int’l, Inc. v. Hughes Tool Co., 718 F.2d 1573, 1578 (Fed. Cir. 1983) (citation omitted).

9

35 U.S.C. § 112.

10

3-8 DONALD S. CHISUM, CHISUM ON PATENTS § 8.01 (2006).

11

Std. Oil Co. v. Am. Cyanamid Co., 774 F.2d 448, 452 (Fed. Cir. 1985).

12

Markman v. Westview Instruments, 517 U.S. 370 (1996).

13

Bai v. L&L Wings, Inc., 160 F.3d 1350, 1353 (Fed. Cir. 1998).

CRS-3

The BlackBerry Litigation

On March 3, 2006, Research In Motion, Ltd. (RIM) and New Technologies Products,

Inc. (NTP), reached a settlement that ended a contentious legal dispute that had endured

for more than four years and sparked considerable public attention.14 At issue was RIM’s

BlackBerry service, a popular communication service that enables users to wirelessly

receive and transmit electronic mail (e-mail) through radio frequencies rather than through

a traditional landline Internet connection. A jury had found RIM guilty of willful

infringement of NTP’s patents concerning wireless e-mail communication services, a

judgment affirmed by the U.S. district court15 and U.S. Court of Appeals for the Federal

Circuit.16 Once the U.S. Supreme Court declined to grant RIM’s petition for writ of

certiorari in late January 2006,17 many BlackBerry subscribers faced the unsettling

prospect of an imminent cessation of service pursuant to a court-ordered injunction to

enforce NTP’s patent rights. However, prior to the district court’s decision on issuing a

permanent injunction, NTP and RIM signed a $612.5 million licensing and settlement

agreement, leading to the court’s dismissal of the litigation and ensuring uninterrupted

operation of the BlackBerry service.18 Although RIM avoided an injunction by reaching

this agreement with the patent holder, its strength in the settlement negotiations was

potentially compromised by the Federal Circuit’s “general rule” that courts are obliged

to follow in patent infringement cases: upon a finding of infringement, a permanent

injunction will issue, except in rare instances when an important public need is involved.19

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

The patent at issue before the Supreme Court in the eBay case “pertains to a system

for selling goods through an ‘electronic network of consignment stores.’”20 According

to the district court, the holder of the patent, MercExchange, L.L.C., is an entity that “does

not practice its inventions and exists merely to license its patented technology to others.”21

However, a patent holder that licenses its invention is still entitled to relief for

infringement under federal law.22 The defendant eBay operates a website that allows

sellers to list products for sale and buyers to purchase those goods either through an

auction system or at a fixed price. MercExchange alleged that eBay’s “Buy It Now”

14

See, e.g., Jane Spencer & Jessica E. Vascallaro, Imagining a Day Without BlackBerrys, WALL

ST. JOURNAL, Jan. 25, 2006, at D1.

15

NTP, Inc. v. Research In Motion, Ltd., 261 F. Supp. 2d 423 (E.D. Va. 2002).

16

NTP, Inc. v. Research In Motion, Ltd., 418 F.3d 1282 (Fed. Cir. 2005).

17

Research In Motion, Ltd. v. NTP, Ltd., 126 S. Ct. 1174, 2006 U.S. LEXIS 1053 (2006).

18

Research In Motion, BlackBerry Press Releases, Research In Motion and NTP Sign Definitive

Settlement Agreement to End Litigation, available on Apr. 26, 2006 at

[http://www.blackberry.com/news/press/2006/pr-03_03_2006-01.shtml].

19

MercExchange, L.L.C. v. eBay, Inc., 401 F.3d 1323, 1338 (Fed. Cir. 2005).

20

Id. at 1327. The patent is U.S. Patent No. 5,845,265 (“the ‘265 patent”).

21

MercExchange, L.L.C. v. eBay, Inc., 275 F. Supp. 2d 695, 712 (E.D. Va .2003).

22

35 U.S.C. § 271(d).

CRS-4

functionality on its website, which permits users to buy items at fixed prices rather than

bid for them, comes within the claims of its patent, and filed a lawsuit in September 2001.

The District Court’s Opinion. On May 27, 2003, a jury returned a verdict

finding that eBay had willfully infringed MercExchange’s patent and holding eBay liable

for $10.5 million in damages.23 The district court reduced the damage amount to $5.5

million but upheld the jury’s finding of willful infringement. However, the court refused

to issue an injunction against the Internet auctioneer.24 In making this decision, the

district court considered the four equitable factors that traditionally govern the

appropriateness of injunctive relief: (1) whether the plaintiff will suffer irreparable harm

if an injunction does not issue, (2) whether the plaintiff has an adequate remedy at law,

(3) whether the balance of hardships tips in the plaintiff’s favor, and (4) whether an

injunction is in the public interest.25 First, the court believed that MercExchange would

not be irreparably harmed in the absence of an injunction because the plaintiff was willing

to license its patent, and because the plaintiff had made several comments to the media

that it desired to obtain damages rather than an injunction. Second, the court noted that

there was an adequate remedy at law (monetary damages) because MercExchange had

indicated its willingness to license the patents to eBay in this case. Third, the balance of

hardships tipped “slightly” in eBay’s favor because, in part, “the plaintiff exists solely to

license its patents or sue to enforce its patents, and not to develop or commercialize them.

Any harm suffered by the plaintiff by the defendant[’s] infringement of the patents can

be recovered by way of damages.”26 The court also noted that since eBay would probably

attempt to “design around” the patents, any injunction would “be opening a Pandora’s box

of new problems” at considerable litigation cost to the parties, as well as a strain on

judicial resources. Finally, the court stated that the public interest factor equally supports

both parties. The court identified “a growing concern over the issuance of businessmethod patents” within the Congress and the U.S. Patent and Trademark Office that have

called into question the validity of such patents. Although the court acknowledged that

this fourth factor usually favors the patentee out of a public interest in maintaining the

integrity of the patent system, this public interest would not necessarily be furthered in

this case, “where the patentee does not practice its patents.”27

The Federal Circuit Court’s Opinion. On appeal and cross-appeal of the case,

the U.S. Court of Appeals for the Federal Circuit unanimously affirmed the jury’s verdict

on the patent’s validity and the finding of infringement.28 However, the appellate court

ruled that the patent holder was entitled to an injunction to prevent further infringement

by eBay, finding inadequate the district court’s reasons for refusing to issue an

injunction.29 The Federal Circuit court stated, “Because the right to exclude recognized

in a patent is but the essence of the concept of property, the general rule is that a

23

eBay, 275 F. Supp. 2d at 698.

24

Id. at 715.

25

Weinberger v. Romero-Barcelo, 456 U.S. 305, 312 (1982).

26

eBay, 275 F. Supp. 2d at 714.

27

Id.

28

MercExchange, L.L.C. v. eBay, Inc., 401 F.3d 1323, 1329 (Fed. Cir. 2005).

29

Id. at 1339.

CRS-5

permanent injunction will issue once infringement and validity have been adjudged.”30

Although the court recognized a rare exception to that “general rule,” such as “when a

patentee’s failure to practice the patented invention frustrates an important public need

for the invention,”31 it concluded that the district court had failed to offer “any persuasive

reason to believe this case is sufficiently exceptional to justify the denial of a permanent

injunction.”32 The Federal Circuit deemed irrelevant the district court’s general concern

for the validity of business-method patents or the likelihood of continuing litigation in this

case. The court of appeal also viewed as inappropriate the district court’s numerous

references to MercExchange as an entity that only exists to license its patents, because

such a business strategy does not diminish the plaintiff’s patent rights: “Injunctions are

not reserved for patentees who intend to practice their patents, as opposed to those who

choose to license. The statutory right to exclude is equally available to both groups, and

the right to an adequate remedy to enforce that right should be equally available to both

as well.”33 The Federal Circuit held that the case lacked “exceptional circumstances,” and

thus “the general rule” should apply in favor of an injunction.

Arguments Before the U.S. Supreme Court. The U.S. Supreme Court granted

certiorari to review the case, on two related questions: (1) whether the Federal Circuit

erred in setting forth its “general rule” and (2) whether the Supreme Court should

reconsider its precedents on when it is appropriate to grant an injunction against a patent

infringer.34 In oral arguments held on March 29, 2006, the petitioner in the case (eBay)

argued that courts should have the ability to apply the traditional four-factor equitable

factor test in deciding whether to grant injunctive relief. In eBay’s opinion, the Federal

Circuit’s “general rule” amounts to a “near-automatic injunction rule” that deprives courts

of the express discretion conferred on the courts by statute (35 U.S.C. § 283).35 As to the

second question before the Court, eBay favored the overruling of an earlier Supreme

Court case, Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908),

which may have suggested a near-automatic injunction rule in patent cases. This

precedent, eBay argued, cannot be upheld in the face of the plain language of § 283 and

intervening developments of the law and case law; furthermore, “patent injunctions have

vastly different, injurious consequences to the economy that did not exist in 1908.”36

The respondent MercExchange countered that the Federal Circuit’s “general rule”

is not accurately called an “automatic” or “near-automatic” rule, because courts still retain

30

Id. at 1338 (citation and internal quotations omitted).

31

Although courts usually grant injunctions against patent infringers, one noted exception is the

1934 decision of City of Milwaukee v. Activated Sludge, 69 F.2d 577 (7th Cir. 1934). The court

in this case refused to issue an injunction against the city of Milwaukee for its infringement of

a patented method for sewage treatment. Had injunctive relief been granted, Milwaukee would

have been forced to dump raw sewage into Lake Michigan, thereby potentially endangering “the

health and the lives of more than half a million people.” Id. at 593.

32

eBay, 401 F.3d at 1338-39.

33

Id. at 1339.

34

eBay, Inc. v. MercExchange, L.L.C., 26 S. Ct. 733, 2005 U.S. LEXIS 8572 (2005).

35

Brief of Petitioners, at 14, eBay, Inc. v. MercExchange, L.L.C., No. 05-130 (January 2006).

36

Id. at 16.

CRS-6

discretion to deny injunctions. Instead, the respondent argued that the rule is “fully

consistent” with traditional principles of equity and the “long history of robust

enforcement of statutory rights to exclude” in patent cases, including Continental Bag.37

Furthermore, the respondent argued, the Federal Circuit correctly ruled that the district

court had abused its discretion in denying the injunction. The patent holder’s willingness

to license its invention is not an indication that money damages are an adequate remedy

at law, the respondent asserted. MercExchange also objected to characterizations that the

patent owner “does not practice its patents,” noting that licensing, for all relevant

purposes, constitutes “use.”38 Finally, MercExchange rejected the suggestion that the

concern over business method patents was a legitimate consideration for the district court,

and instead offered that the validity of such patents is a matter for Congress to address.39

A decision in the case is expected by the end of the Court’s term in June 2006.

The Patent Reform Act of 2005 (H.R. 2795)

35 U.S.C. § 283 permits a court to “grant injunctions in accordance with the

principles of equity to prevent the violation of any right secured by patent, on such terms

as the court deems reasonable.” The Patent Reform Act of 2005 (H.R. 2795), currently

being considered by the House Subcommittee on Courts, the Internet, and Intellectual

Property, would, among other matters,40 amend this injunction provision to require that

a court, in determining equity, “consider the fairness of the remedy in light of all the facts

and the relevant interests of the parties associated with the invention.” Although such

express language is supported by the information technology industry, the pharmaceutical

industry favors the status quo.41 Pharmaceutical companies consider injunctions to be

critical to stopping infringement and encouraging investment in new drug research and

development. However, typically only one or two patents cover a drug, whereas a

computer chip or other advanced technology products often incorporate hundreds or

thousands of patented inventions. A technological product in which one “relatively

insignificant component” is found to be infringing on a patent may be withdrawn from the

market, or the company that supports the product may be compelled to pay an expensive

settlement to preserve its business.42 During any legislative consideration of H.R. 2795,

Congress may face these divergent opinions over injunctive relief held by interested

parties in different sectors of the economy.

37

Brief of Respondent, at 15-34, eBay, Inc. v. MercExchange, L.L.C., No. 05-130 (March 2006).

38

Id. at 40.

39

Id. at 39.

40

For a detailed analysis of many of the reforms proposed by H.R. 2795, see CRS Report

RL32996, Patent Reform: Innovation Issues, by Wendy H. Schacht and John R. Thomas.

41

For a comparison of patent protection in the these two industries, see CRS Report RL33367,

Patent Reform: Issues in the Biomedical and Software Industries, by Wendy H. Schacht.

42

Brief of Business Software Alliance et al., at 4, eBay, Inc. v. MercExchange, L.L.C., No. 05130 (January 2006).