eBay Decision Stomps on Patent Trolls

Terry Wright

The term “Patent Troll” has recently been used to describe a patent owner, often a small company, that enforces its patent rights against infringers, but does not itself manufacture products or supply services based on the patent it owns.  Thus, Patent Trolls occupy a unique position.  A position in which they are able to negotiate licensing fees that are often grossly out of proportion with the contribution they have made to particular products or services.  Yet, while the vast majority of patent literature seems to abhor Patent Trolls, there is also a small set of commentators that defend the actions of Patent Trolls and typify them as a Robin Hood of sorts, defending small business interests against the growing enterprise of big business.  However, regardless of how you view Patent Trolls, the recent U.S. Supreme Court Decision in eBay v. MercExchange has dramatically limited the leverage they may exert against alleged infringers.

In the case of eBay v. MercExchange, 126 S.Ct. 1837 (2006), MercExchange, a small Virginia based patent holding company, had won millions of dollars in damages at the lower federal courts after it sued eBay for violating one of its patents related to the fixed-price auction feature that makes up an integral part of eBay’s popular “Buy It Now” section of its Web site.   eBay, however, was successful in its petition to the Supreme Court, where it asked the Court to review the longstanding federal circuit practice of automatically issuing an injunction whenever an infringement was found.  For several decades the U.S. Court of Appeals for the Federal Circuit had been issuing injunctions as a matter of course in patent infringement cases whenever an infringement was found in almost all but the most exceptional of circumstances.  However, when the Supreme Court handed down its decision in eBay v. MercExchange on May 16, 2006, this longtime Federal Circuit precedent was put to rest.  The Supreme Court ruled that “traditional principles of equity,” such as whether the patent holder has suffered irreparable damage or whether monetary awards might be enough to compensate for the harm done to the patent holder, should be considered before such a drastic sanction is imposed.  Moreover, the Supreme Court held that the standard for granting injunctions in patent cases should be the same as in other cases, with the injunction being awarded only if the plaintiff in the case is able to satisfy the traditional four-part test: (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 the 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.

Even though this case for now has been sent back to the District Court where it originated, it has, without a doubt, dealt a major blow to Patent Trolls everywhere.  Patent Trolls, who have recently been notorious for using the threat of a permanent injunction to demand large fees in licensing negotiations and to demand huge settlements in infringement cases (See the Brand’s report on the Blackberry Settlement, “Blackberries are in Season again”), now seem to have had their power ebbed, at least for the time being.  District Courts are now faced with using their discretion in granting patent related injunctions and are, so far, only guided by equitable principles that have been used in entirely different contexts. One can only imagine where these cases will go, but the Brand will be sure to follow these stories as they arise.