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eBay Inc. v. MercExchange - An Analysis by Theodore C. McCullough, Esq.
Tuesday, May 16 2006 @ 12:20 PM EDT

Theodore C. McCullough, the patent attorney who earlier provided a primer on finding prior art, "Prior Art and Its Uses: A Primer" for Groklaw, has agreed to explain to us today what yesterday's US Supreme Court decision in eBay Inc., et al. v. MercExchange L.L.C. means, analyzing it from the standpoint of the numerous friend of the court briefs submitted. He also explains the opening words of the decision by Justice Clarence Thomas:
Ordinarily, a federal court considering whether to award permanent injunctive relief to a prevailing plaintiff applies the four-factor test historically employed by courts of equity. Petitioners eBay Inc. and Half.com, Inc., argue that this traditional test applies to disputes arising under the Patent Act. We agree and, accordingly, vacate the judgment of the Court of Appeals.

I really enjoy being able to understand these things, and I thank him very much for this article, and I know you join me. If there are other attorneys out there who would like to explain an area of IP law in the context of a case in the news, please feel free to contact me any time. Just click on the little yellow envelope on the left of the page. We have a large audience very eager to understand.

**********************************

eBay Inc., et al. v. MercExchange L.L.C. - An Analysis
~ by Theodore C. McCullough*

Copyright © 2006 Theodore C. McCullough

Licensed under a
Creative Commons Attribution-ShareAlike 2.5 License
This article is also available as a PDF.


Overview

What is interesting about reading Supreme Court opinions is learning not only what the Supreme Court has to say, but understanding what the Supreme Court is saying taken within the context of the various Amicus Briefs (i.e., “Friend of the Court” briefs) provided to the Supreme Court by interested third-parties. eBay Inc., et al. v. MercExchange L.L.C. reflects this point. Among other things, what yesterday's decision by the Supreme Court in the eBay case indicates is that the Supreme Court understands our patent system has changed since the days of the Founding Fathers, and one way that it has changed is the rise of patent holding companies, what some refer to as patent trolls.

Synopsis of the Case

In this case MercExchange L.L.C. (“MercExchange”) owned United States Patent No. 5,845,265 (“the '265 Patent”) titled “Consignment Nodes” that covered, among others things, the ability to offer goods for sale over a wide-area network, or, put another way, the selling of things over the Internet. After a number of failed attempts to negotiate a license, MercExchange sued eBay Inc. (“eBay”) for infringing the '265 Patent. Eventually the trial court awarded MercExchange $29.5 million dollars in damages, an amount later reduced to $5.5 million by the trial court. The trial judge, however, refused to enter a permanent injunction against eBay.

The Court of Appeals for the Federal Circuit reversed the trial court on the issue of the permanent injunction reasoning that “We therefore see no reason to depart from the general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” (See MercExchange, L.L.C. V. eBay Inc., et al. www.fedcir.gov/opinions/03-1600.pdf at pg. 29.) On appeal to the Supreme Court, one of the two questions presented was whether the Federal Circuit erred by applying an automatic rule requiring a permanent injunction to issue upon a finding of patent infringement? The Supreme Court held:

“...that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.” (Thomas, J.).

(See eBay Inc., et al. v. MercExchange.)

The upshot of this case is that injunctions in patent cases are to be treated like injunctions in most any other case (e.g., copyright) and hence a court is to weight the equities such that 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 dis-served by a permanent injunction.

In short, this case reins in the ability of a patent holder to always use the threat of injunction at trial or when negotiating a license.

The Supreme Court's Reflection on Patent Holding Companies

A number of amicus briefs were filed in this case. Parties supporting MercExchange included: The United States, Intellectual Ventures and Inventors, GE, L&E Professor's, BIO, PhRMA, 3M, Du Pont, J&J, Qualcomm, Rembrandt IP Management, P&G, University of California and other Research Universities, AAU, United Inventors, American Bar Association (ABA), Franklin Pierce Law Professors, and Hoffberg.

Parties supporting eBay included: Yahoo!, Micron, the Electronic Frontier Foundation, Professors Pollack & Reynolds, Oracle, Computer & Communications Industry Association (CCIA), Intel, Microsoft, Securities Industry, Research-In-Motion, Nokia, Bar of the City of New York, Business Software Alliance (BSA), and Time Warner, et al. (See generally, http://patentlaw.typepad.com/patent/2006/03/ebay_v_mercexch.html.).

What is interesting about these various friends of the court is that they did not break down neatly into your typical groups. For example, GE, 3M, and Intellectual Ventures were on one side of the debate, while Microsoft, Intel and RIM were on the other side of the debate. Some of this divide could be attributed to whether a particular company had been on the losing side of patent infringement litigation against a company that merely holds patents without putting the patented idea into production (i.e., a patent holding company). (See e.g., Eolas Techs., Inc. v. Microsoft Corp [PDF].)

With regard to patent holding companies, Justice Kennedy's comments are interesting:

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. See FTC, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, ch. 3, pp. 38–39 (Oct. 2003), available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf (as visited May 11, 2006, and available in Clerk of Court’s case file). 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. See ibid. 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.” (See www.law.cornell.edu/supct/html/05-130.ZC1.html (Kennedy, J. concurring.).)

Justice Kennedy's comments are interesting because they seem to say that companies that only use patents to obtain licensing fees would be potentially less entitled to injunctive relief, where they attempt to use the threat of injunction as a bargaining chip. Indeed, Kennedy's comments seem geared towards patent-holding companies, given the fact that the amicus briefs of companies such as Intellectual Ventures, a patent-holding company, attempted to draw a relationship between their activities and those of early inventors in U.S. History. (See AmiciCuriae-Intellectual Ventures.)

More to the point, Justice Kennedy's concurrence seems to be saying that the case of the patent holding company seeking to enforce its patent(s) is different than the historical example of the small inventor seeking to protect his invention.

Bottom line: the patent system has changed, and Justice Kennedy's concurrence leads one to believe that the Supreme Court is becoming aware of this fact.

* Author: Theodore C. McCullough, Registered Patent Attorney, tmccullough at lpatent.com.


  


eBay Inc. v. MercExchange - An Analysis by Theodore C. McCullough, Esq. | 276 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
Corrections here
Authored by: MathFox on Tuesday, May 16 2006 @ 12:32 PM EDT
For Theodore this time ;-)

P.S. thanks for your views.

---
If an axiomatic system can be proven to be consistent and complete from within
itself, then it is inconsistent.

[ Reply to This | # ]

OT, other links here, please.
Authored by: jbeadle on Tuesday, May 16 2006 @ 12:35 PM EDT
Clicky links are most welcome.

Thanks,
-jb

[ Reply to This | # ]

eBay Inc. v. MercExchange - An Analysis by Theodore C. McCullough, Esq.
Authored by: Anonymous on Tuesday, May 16 2006 @ 12:46 PM EDT
Assuming the best of the ABA, I am curious why the
ABA would side with MercExchange?

[ Reply to This | # ]

eBay Inc. v. MercExchange - An Analysis by Theodore C. McCullough, Esq.
Authored by: MattZN on Tuesday, May 16 2006 @ 01:03 PM EDT
For those of us who write software for a living, the chance of infringing on
somebody's patent somewhere, even with the smallest bit of code we write, is
100%. Why? Because the patent office grants patents that a 5-year old could
think up and which unscrupulous companies and lawyers DO think up, and because
the court system doesn't seem to have a problem giving these patent holders
ridiculous amounts of leverage in their extortion schemes.

The RIM case is a shining example. The device is nothing more then a hand-held
computer which happens to use a network to communicate over instead of a
hardline. This distinction is apparently sufficient enough to the courts that
the most basic operations one does on a computer connected to the internet over
a landline somehow magically warrent patent protection if the computer's network
happens to run over the airwaves instead. The level of idiocy surpasses even my
imagination.

These patent holding companies are engaged in nothing more then legalized
extortion. The patent office, having created this mess, has not lifted one
finger to put a stop to it. They seem more interested in their application fees
then in actually weeding out the bad patents.

The supreme court decision is a small step in the right direction, but only a
small step. The real problem is the patent system itself and, more
specifically, the patent office and congress. I frankly do not understand why
something so obviously inequitable has not been acted upon by congress, nor why
the patent office can't seem to be bothered with at least backing out of models
that have proven to be so costly to legitimate American businesses. Oh yah...
those application fees. Maybe the Patent Office is just too greedy to care.

-Matt

[ Reply to This | # ]

I think the conclusion is off point.
Authored by: Anonymous on Tuesday, May 16 2006 @ 01:10 PM EDT
"Bottom line: the patent system has changed, and Justice Kennedy's
concurrence leads one to believe that the Supreme Court is becoming aware of
this fact."

The patent system hasn't changed, the law is the same, it's just being applied
for different purposes than it was originally intended. To my mind, that makes
it a legislative concern, not a judicial one and not something that the court
has any business meddling in.

[ Reply to This | # ]

Court of Appeals for the Federal Circuit
Authored by: Carlo Graziani on Tuesday, May 16 2006 @ 01:16 PM EDT
My understanding from casual reading is that the Court of Appeals for the
Federal Circuit is to some degree the root cause of the mess that the patent
system is in today. In essence, the argument I've seen is that the creation of
this court and its acquisition of jurisdiction over patent lawsuits is what led
to the acceptance of business-method and software patents.

At the same casual-reading level, I have the impression that the CAFC has not
had its work supervised very closely by the Supreme Court in the past, leaving
it free to write its own ticket --- which is to say, to conduct a vast and
destructive economic experiment with its free-wheeling interpretations of patent
law.

So, I'm curious about how patent-law pros view this take on matters.
Stipulating that the CAFCs legal initiatives are a source of patent-law madness,
could we be seeing the beginning of an era in which that court is finally reined
in?

[ Reply to This | # ]

Not just license vs. application
Authored by: rgmoore on Tuesday, May 16 2006 @ 01:43 PM EDT
Justice Kennedy's comments are interesting because they seem to say that companies that only use patents to obtain licensing fees would be potentially less entitled to injunctive relief, where they attempt to use the threat of injunction as a bargaining chip.

I don't think that's the main thrust of Justice Kennedy's comments. I think that the key reasoning is:

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.

I think that what he's saying is that the real damage is from the threat of injunction from every single patent holder. An automatic injunction for any infringement, even in something peripheral to the main function of the product, gives patent holders too much leverage. Holders of patents to something central to a product may still be able to get injunctions, but there are likely to be at most a few patents in that category for any given product. Equally important, the end of automatic injunctions will reduce the threat of product holdups and consequently patent holders' leverage in negotiations.

---
Behind every sleazy lawyer, there's a sleazy client.

[ Reply to This | # ]

Differing Views
Authored by: tuxi on Tuesday, May 16 2006 @ 01:52 PM EDT

SCOTUS Blog has posted two differing views on the ruling here and here.

Upon reading both these views, I'm not so sure this ruling is much more than a reprimand for sloppiness on the part of the appeals court. Of course, IANAL.

---
tuxi
(looking for a better sig;))

[ Reply to This | # ]

eBay Inc. v. MercExchange - An Analysis by Theodore C. McCullough, Esq.
Authored by: stutchbury on Tuesday, May 16 2006 @ 02:10 PM EDT
I was just reading the following:

. . .
(1) that it has suffered an irreparable injury;
. . .
when it struck me: How can patent holding companies (patent trolls) suffer *any*
irreparable injury if they have never made something with (or made use of) their
patent?

i.e. Before sueing someone, had *they* made any money from a product based upon
their patent? If not, then what injury has been done? They were making no money
from their alleged IP before the plaintiff started using the alleged IP, and
they're still not making any. Status Quo. No injury.

Philip

[ Reply to This | # ]

Thomas using Precident
Authored by: maco on Tuesday, May 16 2006 @ 03:26 PM EDT
Thomas comments caught me off guard - he is by far the least likely to use res
judicata in his arguments.

[ Reply to This | # ]

eBay Inc. v. MercExchange - An Analysis by Theodore C. McCullough, Esq.
Authored by: Anonymous on Tuesday, May 16 2006 @ 03:27 PM EDT
"For example, some patent holders, such as university researchers or
self-made inventors, might reasonably prefer to license their patents, rather
than undertake efforts to secure the financing necessary to bring their works to
market themselves.

Such patent holders may be able to satisfy the traditional four-factor test, and
we see no basis for categorically denying them the opportunity to do so."

I for one see a whole lot of problems with this remark. One of the existing
problems with the US patent system is that of patent trolls.

At what point does it become unreasonable not to practice one's patent? There
are a lot of grounds for disputes here.

This also might put a limit to some of the cross licening schemes. Companies now
file 'defensive' patents. But if they dont practice them and they do have
sufficient funds to do so then what will happen to them? Are they automatically
void?

Anyone here have an opinion?

--

MadScientist

[ Reply to This | # ]

Accountability
Authored by: mobrien_12 on Wednesday, May 17 2006 @ 02:49 PM EDT
Why is the USPTO not held accountable for issuing bad patents?

Seems to me that someone who has to fight a bad patent, wins against the bad
patent, and incurrs alot of expenses due to the fight, has a heck of a lawsuit
against the USPTO for negligence.

[ Reply to This | # ]

Define WAN, I may be splitting hairs...
Authored by: HockeyPuck on Wednesday, May 17 2006 @ 04:23 PM EDT
The article indicated WAN as the same as the Internet. I don't know if this was
a personal definition or a general assumption or something in the patent office.
But WAN, in my book, is very different from the Internet. A WAN is a privatized
network within a single company and/or between one or more companies. The
Internet is not, it is public highway. You simply need an on ramp to connect to
it. Where you go and what you do is up to the individual. A WAN is controlled by
a single company. Now you may say an ISP controls the Internet and they are a
single company. But the ISP does not say where you can go (to most degrees).
They simply give you the on ramp. From there you are on your own. A WAN on the
other hand, is setup so one company controls the traffic on the WAN and it is
not public. An ISP can be a LEC, CLEC; but they also rely on them. A WAN can be
a dedicated circuit or ride inside a public network (virtual private network).
The point is it is still controlled at the end points with the purpose of
connecting specific entities (not anyone who wants to connect).

Perhaps this is splitting hairs, but WANs have existed longer than the Internet
and should be defined differently. There is a huge difference if they thought a
WAN was a business to business system versus a business to anyone who can access
it.

[ Reply to This | # ]
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