Trolling for trolls: the pitfalls of the emerging market competition requirement for permanent injunctions in patent cases post-eBay.

• Author: Diessel, Benjamin H.

In eBay v. MercExchange, a unanimous Supreme Court announced that a new four-factor test should be employed by district courts in determining whether to award an injunction or damages to an aggrieved party whose intellectual property has been infringed. In the context of permanent injunctions in patent cases, district courts have distorted the four-factor test resulting in a "market competition requirement." Under the new market competition requirement, success at obtaining an injunction is contingent upon a party demonstrating that it is a market competitor. After consistent application in the first twenty-five district court cases post-eBay, the market competition requirement is becoming an entrenched doctrine. However, the divergent legal standards used by district courts turning on market competition contravenes the Supreme Court's homing that courts should not apply the four-factor test in a manner that makes the injunctive remedy unavailable based on broad classifications. The market competition requirement may solve some of the problems resulting from holdup by so-called "patent trolls," but at a cost potentially too high to bear. The market competition requirement may insulate inefficient markets from meaningful competition and decrease incentives to innovate for individual self-made inventors, who drive a large segment of patenting activity. Because the market competition requirement is without foundational support from eBay and is of questionable utility in incentivizing innovation, its continued use is a cause for serious concern.

TABLE OF CONTENTS INTRODUCTION I. SURVEY OF POST-EBAY DISTRICT COURT CASES: THE EMERGING "MARKET COMPETITION REQUIREMENT" A. Inventive Area B. Jurisdiction C. Willfulness D. Market Competition and Licensing 1. Plaintiffs Denied Injunctions Are Not Market Competitors and Are Willing Licensors 2. Plaintiffs Granted Injunctions Do Practice Their Patent and Are Market Competitors II. IS THE MARKET COMPETITION REQUIREMENT CONSISTENT WITH EBAY? A. The Market Competition Requirement Employs "Broad Classifications": Different Implicit Standards of Review Under the Four-Factor Test Result in a Bar to Injunctions for Non-Practicing and Non-Competing Plaintiffs 1. An Impossible Standard: Courts Use Different Standards Based on Plaintiffs' Market Presence, Resulting in a Per Se Denial of Injunctions to Non-Market Competitors. 2. Courts Selectively Apply Chief Justice Roberts's Principle that Loss of Right to Exclude can be Irreparable, Resulting in Inconsistent Irreparable Injury Analysis B. District Courts are "Trolling for Trolls" but Are Ignoring Equitable Considerations C. The Market Competition Requirement as Causation III. IS THE MARKET COMPETITION REQUIREMENT DESIRABLE? A. The Market Competition Requirement Reduces the Holdup Problem, but Poses Additional Problems that May Prevent Ex Post Allocative Efficiency 1. The Holdup Problem in Patent Law 2. The Market Competition Requirement Addresses the Holdup Problem and Eliminates Some of the Problems Associated with Holdup 3. Overinclusiveness of the Market Competition Requirement and Effects on Competition May Offset Some of the Ex Post Gains Achieved by Reducing the Holdup Problem B. The Market Competition Requirement Endangers Ex Ante Productive Efficiency and Diminishes Incentives to Innovate CONCLUSION INTRODUCTION

In response to the perceived "holdup problem" (1) created by the threat of injunction in patent litigation brought by patent trolls, (2) the availability of the injunctive remedy in patent law has recently been increasingly scrutinized. (3) Just as legislative reform of the injunctive remedy in patent law was gaining steam, (4) the Supreme Court addressed the issue head on in eBay v. MercExchange. (5) The Court, in a unanimous eight-justice (6) opinion authored by Justice Thomas, overruled the Federal Circuit's application of a sui generis "general rule" for patent law that an injunction will issue upon a showing of patent validity and infringement absent "exceptional circumstances." (7) The central holding reads as follows:

According to well-established principles of equity, a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. (8) The Court was clear that neither the district court's nor the Federal Circuit's approach to injunctions was appropriate. The district court's application of its newly created four-factor test in denying MercExchange an injunction was flawed because it allowed the decision to turn on plaintiff's "willingness to license its patents" and "lack of commercial activity in practicing the patents." (9) The Federal Circuit's general rule of awarding an injunction, reversing the district court, was also flawed. (10) The short, unanimous opinion, however, gave no bright-line rules and few guideposts to district judges. It emphasized instead that awarding injunctions was up to the discretion of trial courts, subject to the ground-rule that discretion be "exercised consistent with traditional principles of equity." (11)

But while the Supreme Court unanimously agreed that equity demanded vesting discretion in district judges, the justices split on how the four-factor test should be applied. (12) Chief Justice Roberts, joined by Justices Scalia and Ginsburg, argued that application of the four-factor test by district judges should be informed by substantial Federal Circuit precedent regarding injunctions, (13) and that the bounds of discretion should be circumscribed by reference to the principle of store decisis. (14) Chief Justice Roberts's concurrence showed that at least three of the seven concurring Justices thought courts should apply the four-factor test in a manner more in keeping with the Federal Circuit's general rule that injunctions should issue absent exceptional circumstances. (15)

Justice Kennedy, joined by Justices Stevens, Souter, and Breyer, argued that the historical granting of injunctions should only bear on modern decisions to the extent that the modern and historical cases were factually similar. (16) Justice Kennedy urged that the business model of firms licensing patents, rather than practicing their inventions, is a modern phenomenon that justifies a change in how readily district judges grant injunctions. (17) He cautioned courts that damages might be the preferred remedy when plaintiffs sought injunctions simply to extract negotiating advantages or if the patent covers only a small piece of the accused invention. (18)

Judges will be forced to seek guidance in the two concurring opinions in order to make up for the unanimous holding's failure to deal extensively with how to apply the four-factor test. But in seeking guidance, judges should not rely too heavily on either standard. (19) The two concurring opinions advocate for very different standards, making it possible that two district courts faced with the same factual circumstances could reach different conclusions regarding the awarding of injunctions depending on whether they lean on the standard proposed by Chief Justice Roberts or Justice Kennedy. Indeed, a wide span of district court judicial conduct could be legitimized as falling between the bookends of the concurring opinions' different standards. A hidden danger of giving the concurring opinions too much weight is that narrow factual distinctions could form the basis for choosing between the competing legal standards, in essence stampeding the four-factor test and replacing it with a binary inquiry--alignment or divergence with the distinct fact.

This Note analyzes the use by district courts of such a binary inquiry--a "market competition requirement" for obtaining a permanent injunction in patent cases after eBay--and concludes that this market competition requirement runs contrary to the eBay decision, is unsound policy, and should therefore be abandoned. Part I examines all patent cases applying the four-factor test in the context of permanent injunctions post-eBay, and confirms that district courts have continued to make commercializing and competing in the market with a patented invention a necessary precondition to gaining an injunction. (20) Part I concludes that district judges have created and employed a "market competition requirement," or phrased more colloquially, district judges are essentially "trolling for trolls." Part II explores whether one can reconcile district courts' adoption of a market competition requirement with the Supreme Court's unanimous opinion, but ultimately finds a lack of support for the market competition requirement in eBay. Part III analyzes the utility of the market competition requirement as a tool for combating ex post losses due to holdup by patent trolls, and argues that use of the market competition requirement may itself cause losses in allocative efficiency due to overinclusiveness and reduced competition. Part III argues further that the market competition requirement threatens to harm incentives to innovate, especially for small-scale inventors. This Note concludes that courts should dismantle the market competition requirement as lacking persuasive jurisprudential or economic support.

1. SURVEY OF POST-EBAY DISTRICT COURT CASES: THE EMERGING "MARKET COMPETITION REQUIREMENT"

   Practitioners and commentators have suggested, based on the early round of district court cases, that direct competition is the key to obtaining an injunction. Texas practitioners Robert J. Garrey and John M. Jackson initially analyzed the first four Eastern District of Texas cases applying the...