The future of patent enforcement after eBay v. MercExchange.

• Author: Tang, Yixin H.

TABLE OF CONTENTS I. INTRODUCTION II. FACTS OF THE CASE III. PROCEEDINGS IN THE LOWER COURTS IV. THE SUPREME COURT SPEAKS: NO CATEGORICAL RULES A. Finding Equity in the Statutes and Limiting Continental Paper Bag B. Patent Rights Do Not Include Any Property-like Rights Beyond the Provisions of the Federal Patent Statutes C. More Discretion for the District Courts, with Conflicting Directions V. ANALYSIS A. The Change in Law Disfavors Non-Practicing Patent Holders B. It Is No Longer Meaningful to Think of Patents as "Property" VI. THE POST-EBAY LEGAL LANDSCAPE A. z4 Technologies, Inc. v. Microsoft Corp B. Finisar Corp. v. DIRECTV Group, Inc. C. Why Finisar Is Much Worse Than z4 for Non-Practicing Patent Holders VII. IMPLICATIONS A. The eBay Ruling Benefits Large Corporations B. The Shift in the Patent Law Regime in Large Corporations' Favor Does Not Promote the Public Interest VIII. CONCLUSION I. INTRODUCTION

Since the creation of the United States Court of Appeals for the Federal Circuit in 1982, the Supreme Court has largely refrained from reviewing patent cases. (1) However, beginning last Term, the Court has shown renewed interest in patent cases, (2) perhaps motivated by several concerns. The Court may have noticed an increase in "intra-circuit splits" (3) in the Federal Circuit. The generalist Supreme Court may have wanted to keep the specialist Federal Circuit from "stray[ing]" too far afield. (4) The Court has also expressed concerns that the increasing prominence of business method patents might have created "too much patent protection," (5) especially for "firms [that] use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees." (6)

In eBay Inc. v. MercExchange, L.L.C., the last two factors may have motivated the Supreme Court's review. In an attempt to reduce patent protection for certain patents and certain patent holders, the Court effectively made it much harder for patent holders who do not practice their patented inventions to obtain a permanent injunction after a finding of infringement of their patents. The Court's approach in eBay led to the holding that traditional equitable principles apply in patent cases, which casts doubt on the conventional view of patent as a type of property.

2. FACTS OF THE CASE

   MercExchange, L.L.C., was founded by Thomas G. Woolston, an electrical engineer and lawyer by training. (7) In April 1995, Woolston invented "a method and apparatus for creating a computerized market for used and collectible goods," (8) and applied for patents. As his patent applications wound their way through the U.S. Patent and Trademark Office ("USPTO"), Woolston tried to raise money to build a functional website, but attracted little attention from venture capitalists. (9) In December 1998, MercExchange was granted the first of its three patents, U.S. Patent No. 5,845,265 ("'265 Patent"). Licensees and $10 million in venture capital soon followed. (10) However, by then the competition in online auction sites had intensified, and MercExchange's efforts to commercialize Woolston's invention failed within two years. (11)

   Before MercExchange's commercializing efforts failed, eBay expressed interest in buying its patent portfolio. According to Woolston, eBay sent litigators to look at MercExchange's patents and demanded to see MercExchange's confidential patent files. (12) After the negotiations broke down, eBay started offering the "Buy-It-Now" feature, which infringed the '265 patent. (13) MercExchange filed suit in September 2001. (14)

3. PROCEEDINGS IN THE LOWER COURTS

   After a five-week jury trial, during which the presiding judge's patience wore thin, (15) a jury in the Eastern District of Virginia found that eBay had willfully infringed MercExchange's patents. Nevertheless, the district court denied MercExchange's motion for a permanent injunction. (16)

   When considering the motion for permanent injunction, the district court first applied the presumption of irreparable harm (17) after the jury finding of patent infringement, but deemed the presumption rebutted in this case because of "the plaintiff's willingness to license its patents, its lack of commercial activity in practicing the patents, and its comments to the media as to its [willingness to license its patents to eBay]." (18) Moreover, the district court noted that MercExchange had not moved for a preliminary injunction, which, the court reasoned, showed that MercExchange did not think it would suffer irreparable harm. (19) These facts convinced the district court that monetary damages would be adequate in this "atypical case." (20)

   Next, the district court pointed to the "growing concern over the issuance of business-method patents" in finding that the public interest favored the infringers in this case. (21) The court stated that "[t]he public does not benefit from a patentee who obtains a patent yet declines to allow the public to benefit from the invention contained therein." (22)

   Finally, under the subheading "Balance of the Hardships," the judge predicted that, due to the highly contentious nature of this litigation, if an injunction were issued, there would be "contempt hearing after contempt hearing requiring the court to essentially conduct separate infringement trials to determine if the changes to the defendants' systems violates [sic] the injunction." (23)

   Both parties appealed to the Federal Circuit. (24) eBay also asked the USPTO to reexamine the '265 patent. (25) In reversing the district court's denial of a permanent injunction, the Federal Circuit reaffirmed "the general rule ... that a permanent injunction will issue once infringement and validity have been adjudged" because "the right to exclude recognized in a patent (26) is but the essence of the concept of property." (27) The Federal Circuit has recognized an exception to this rule only when the patentee's refusal to practice "frustrates an important public need" such as aiding public health. (28)

   The Federal Circuit addressed the district court's reasoning in rather summary fashion. (29) A general concern regarding the proliferation and quality of business-method patents did not amount to an "important public need." (30) The likelihood of continuing disputes was not "a sufficient basis for denying a permanent injunction." (31) MercExchange's willingness to grant licenses was irrelevant to its right to an injunction, (32) even if an injunction would have given it "additional leverage in licensing," because any added leverage "is a natural consequence of the right to exclude and not an inappropriate reward." (33) Failure to move for a preliminary injunction should not have been relevant to MercExchange's right to a permanent injunction, since a preliminary injunction and a permanent injunction "have different prerequisites and serve entirely different purposes." (34) In short, "the district court did not provide any persuasive reason to believe this case is sufficiently exceptional to justify the denial of a permanent injunction." (35)

4. THE SUPREME COURT SPEAKS: NO CATEGORICAL RULES

   eBay petitioned the Supreme Court for a writ of certiorari, presenting two questions for review: (1) whether the Federal Circuit erred in employing the general rule of issuing a permanent injunction after a finding of infringement, and (2) "whether this Court should reconsider its precedents, including Continental Paper Bag Co. v. Eastern Paper Bag Co.," which contained strong language upholding a patent holder's rights, and could have been viewed as requiring a "near automatic injunction rule." (36) The Supreme Court granted certiorari (37) and reversed the Federal Circuit decision that granted MercExchange a permanent injunction based solely on a finding of validity and infringement. (38)

   1. Finding Equity in the Statutes and Limiting Continental Paper Bag

      Justice Thomas wrote the opinion for a unanimous Court. The Court's analysis began with 35 U.S.C. § 283, which provides that courts "may grant injunctions in accordance with the principles of equity." (39) The Court interpreted the phrase "principles of equity" to mean the "well-established principles of equity" embodied in the traditional four-factor test for granting injunctions. (40) The Court's interpretation of the statute also meant that the district court's decision to grant or deny a permanent injunction should be reviewed "on appeal for abuse of discretion." (41) Justice Thomas found support for the holding in the Supreme Court's use of the "traditional equitable considerations" for injunctions under the Copyright Act. (42)

      eBay narrowed the holding of the influential 1908 case Continental Paper Bag Co. v. Eastern Paper Bag Co., in which the Court emphasized that a patent was the inventor's "absolute property" and gave her a "right to exclude others from its use." (43) eBay cited Continental Paper Bag approvingly, but only for the proposition that "a court of equity has ... jurisdiction to grant injunctive relief to a patent holder who has unreasonably declined to use the patent." (44) The opinion narrowed Continental Paper Bag's holding and did not directly address any of the dicta that supported the imposition of a permanent injunction as a remedy for the violation of a patentee's right to exclude. Instead, Justice Thomas stressed that "the creation of a right is distinct from the provision of remedies for violations of that right." (45)

   2. Patent Rights Do Not Include Any Property-like Rights Beyond the Provisions of the Federal Patent Statutes

      The Federal Circuit in its MercExchange opinion relied on the view that patents were a species of property. (46) eBay argued to the Supreme Court that "[t]he Patent Act states that 'patents shall have the attributes of personal property' [and a] personal property right has never been treated as a demand note for an injunction." (47) In response, MercExchange distinguished "fungible" personal property from...