Just about a year ago, the Supreme Court in Grokster modified a decades-old ruling in the “Sony Betamax” case to remove the insulation automatically given to Internet service providers and hosting services when it can be shown that even with a substantial non-infringing use, a service condoned and encouraged (and made money) through illegal sharing of copyrighted materials. This month, a unanimous U.S. Supreme Court decided a case in favor of eBay which overturns decades of legal precedent favoring the issuance of injunctions as an automatic right granted to plaintiffs for patent infringement. The case involved eBay’s “buy-it-now” feature that permitted customers to buy items “now” without being involved in the auction process. Although the Supreme Court sent the case back to the lower court to ultimately determine if an injunction was or was not appropriate, the significance of the decision cannot be underestimated.
By way of background, when a lower court first held that eBay’s “buy-it-now” feature infringed two patents owned by Tom Woolston (founder of MercExchange), the court ordered eBay to pay damages (approximately $25 million), but did not issue an injunction. That court reasoned that since MercExchange was apparently willing to license its patents, an injunction was neither necessary nor appropriate. Unfortunately, the next court on the ladder upwards, the U.S. Appeals Court for the Federal Circuit, reversed that decision stating the “general rule” that injunctions must follow all infringement findings unless “exceptional circumstances” exist. Since an appeal was pending to the Supreme Court, the court held the injunction in abeyance awaiting the Supreme Court’s decision.
The Supreme Court, in a unanimous decision, held the lower courts did not properly evaluate the case under federal requirements. More importantly, language in the concurring opinion written by Justice Kennedy and signed by Justices Stevens, Souter and Breyer noted that courts must consider the broader implications of using injunctions because 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,” and in those instances, “legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.”
This language in the Supreme Court’s decision could deal a serious blow to companies that exist solely to engage in patent infringement litigation (so-called “patent trolls”) and who use the U.S. patent system to coerce lucrative settlements from companies who previously faced injunctions that threatened to shut down entire businesses. Hearken back to the RIM “Blackberry” litigation which recently settled. If the schedule had been a few months earlier, RIM could certainly have been much better positioned before choosing to settle for more than $600 million rather than face the possibility of an injunction shutting down (or certainly making life exceedingly difficult with work-arounds) an entire business.
The Supreme Court’s decision in the eBay case could lead to a higher threshold for injunctions, now that money damages are not automatically precluded (nor injunctions automatically issued) in adjudicating patent infringement cases. Some critics complain that the ruling creates the possibility that courts can become the arbiters of a damage-based compulsory licensing system, while advocates say the ruling will prevent companies from buying up patents and exploiting their litigation value, rather than the underlying invention itself—the basis for patent protection in the first place. Most analysts, however, agree on one thing—the likelihood that products subject to patent infringement actions will be threatened with automatic shut downs will start to decrease, increasing the leverage defendants have in any patent infringement suit to settle cases.