E-Commerce Law: Supreme Court Rules in eBay Case, Justice Kennedy Takes Shot at Patent Trolls

Today, the United States Supreme Court handed down its ruling in eBay, Inc. v. MercExchange, L.L.C., 547 U.S. ____ (2006), holding that federal courts considering whether to award permanent injunctive relief to a prevailing plaintiff in an action brought under the Patent Act must apply the same four-factor test historically employed by courts of equity. The Court vacated the judgment of the Court of Appeals, which reversed the District Court’s denial of the permanent injunction sought by MercExchange.

The Court’s approach in eBay was entirely predictable, as it is founded upon well-established equitable principles and the four-factor test familiar to any attorney who has sought a permanent injunction in federal court. As the Court noted,

"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."

In reversing the decision of the Court of Appeals, the Court criticized the lower court’s application of a "general rule," unique to patent disputes, which departed from these traditional equitable principles. The eBay decision confirms that, like those sought under the Copyright Act, permanent injunctions sought under the Patent Act are subject to the same scrutiny applied to other injunctions.

Though the majority opinion is very short and fairly unremarkable, Justice Kennedy’s concurring opinion makes a surprising reference to the negative effects of "patent trolling":

"In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. . . . For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. . . . When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest."

The concurring opinion, in which Justices Stevens, Souter, and Breyer joined, demonstrates the Court’s recognition that the conduct of patent trolls often stifles innovation and unreasonably harms well-meaning infringers. In the future, this opinion may lead lower courts to deny injunctions sought by patent holding companies on the grounds that the granting of an injunction would not serve the public interest.

For news articles on the decision, see Supreme Court Orders New Hearing for eBay on washingtonpost.com; Supreme Court rules in favor of eBay on CNET News; and Supreme Court rules on eBay patent infringement, business tax incentive cases on JURIST.