Patents are like other property
The U.S. Supreme Court rendered its much-anticipated ruling in Ebay v. Merchexchange and the U.S. remains safe for property rights, although more complex. The Court held that injunctions are an appropriate remedy for infringing a patent, but not in all cases.
The Court unanimously ruled that a traditional four-factor test for a permanent injunction, after a trial finds that the defendant infringed, applies in patent cases as it does in other cases. That result, while not surprising since it puts patent cases in line with other cases, creates the potentially unfortunate result that an owner of property who proves a defendant is infringing might not receive judicial assistance in ordering the defendant to stop. This does not mean that the defendant gets a license to continue infringing; it simply means that the patent owner's remedies might not include a permanent injunction unless the traditional test is met.
This might be a distinction without a difference given that if the same infringing conduct continues, that infringement is also actionable, And in the subsequent action, trebled damages might be allowed and the issue of whether infringement is present may be a slam dunk (i.e., already foreclosed by the first ruling).
In any event, the Court laid to rest two extreme theories about IP remedies, but did not announce any striking change in IP law. One theory was what Ebay and its amici (an organization comprised of Microsoft, Intel, and Micron, among others) described as "automatic injunction"- permanent injunctions automatically issue on a finding of infringement except in unusual cases. Justice Thomas writing for the Court rejected the automatic injunction rule because it they ignores the traditional four-part test which demands an equity analysis to determine if damages alone are an adequate remedy or whether equity requires an injunction too. The "automatic injunction" approach treated patents differently from other property. Justice Thomas found no support for that in the statute. This gave a partial win to anti-rights proponents, while not rejecting the idea that a typical outcome is to enjoin future infringement. Nicely done!
The other rejected theory used in the District Court, categorically precluded injunction in many cases, including where the patent owner does not itself exploit the patent (such as by bringing to market a product utilizing the patent) but simply seeks to license it for royalties. Merchexchange had no business other than licensing its patents. The Supreme Court unanimously rejected the district Court approach. Justice Thomas said:
"[The] District Court [held] that a "plaintiff's willingness to license its patents" and "its lack of commercial activity in practicing the patents" [established] that the patent holder would not suffer irreparable harm if an injunction did not issue. But traditional equitable principles do not permit such broad classifications. [Some] patent holders ... might reasonably prefer to license their patents, rather than ... to bring their works to market themselves. [We] see no basis for categorically denying them the opportunity to [satisfy the traditional test]."
Indeed, persons who infringe instead of obtaining a license, are disrupting the patent owner's right to choose the licensees and the rates at which it will license its property. The trial court was captured by a notion that property rights should be restricted if not used commercially. This would be like saying that, because I offer to rent my building, but leave it unoccupied if no one agrees to the rent, I am not harmed if a squatter takes over the building and pays damages. I have a right to control my own property and make decisions about it, including allowing it not to be used. A rule that permits squatters use of intellectual property creates a compulsory license, which Congress has repeatedly refused to do, except in narrow cases.
Some rights owners feared that Ebay would enforce the trial court's approach, but the Court rejected it. This was a win for, and a reaffirmation of, property rights.
So, what now?
The "four part test." To obtain an injunction, a plaintiff must demonstrate: (1) that it suffered or will suffer 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.
How does that test work if the defendant infringed the property right and is likely to continue to do so? In most cases, the balance favors an injunction because mere monetary damages are unlikely to remedy the harm of having a squatter continuously infringe the property rights. Just because the patent owner is willing to license the patent does not mean that a stranger can force a license to the stranger by infringing and paying damages.
What of the case where the patent covers only a tiny part of a much larger process or product? Ebay and its supporters argued that no automatic rule should apply because the balance of hardships weighs in favor of allowing the innovative technology or product to continue to be sold. Arguably, that now becomes an issue.
What if a court does not grant an injunction? Can the defendant safely continue to use the patented property (i.e., can a defendant infringe forever as long as he pays simple damages)?
Not at all.
Damages do not buy a license to infringe in the future. Indeed, a subsequent lawsuit for subsequent infringement should be a simple one - unless the defendant's conduct changed, the prior ruling resolves that the conduct infringes. Indeed, damages may be enhanced or an injunction deemed proper because the defendant knew it was infringing because of the prior court decision.
So, what happened here? Very little. In my view, the most important result is that the Court affirmed the right of a property owner to prevent use of its property in most cases. The risk avoided by the Court was that this case would be a vehicle to diminish the strength of patents and copyrights as property. The Supreme Court got it right by rejecting that result.
A further interesting thing about this unanimous ruling is that seven (of nine) justices also signed onto two concurring opinions. Chief Justice Roberts, joined by Scalia and Ginsburg, suggested that, consistent with historical practice, courts should still issue injunctions in most cases. Justice Kennedy, joined by Stevens, Souter, and Breyer, suggested that courts should consider "rapid technological and legal developments in the patent system" and specifically argued that three factors might alter the four-factor test: (1) the patent holder uses its patents "primarily for obtaining licensing fees"; (2) the patent covers only a small part of the infringer's product and the threat of injunction is "simply for undue leverage in negotiations"; and (3) the patent is a business method patent that is vague or of "suspect validity." Justice Kennedy, thus, confused this case with issues about preliminary injunctions. A finding of infringement, in most cases, is a finding that the patent is valid. Continued use of a patent in even a small part of a product is still infringement, subject to treble damages.
But under all three opinions, injunctions will continue to be a common remedy for infringement.
I think eBAY signals a shift in the timing of injunctive relief, but nothing major. Where an injunction is initially denied per the four-prong test, consider what will likely happen if the infringer continues its activities after judgment:
1. A new patent infringement suit will be filed. All of the merits defenses (invalidity, unenforceability, noninfringement, will be issue-precluded or claim-precluded this time. Summary judgment for the patentee will likely be granted.
2. The remedies package in the second case will very likely be: treble damages due to willfulness; attorneys' fees due to exceptional case; and, this time, to prevent repetitive litigation, an injunction if the patent is still unexpired.
3. There are only two ways to avoid this late-onset injunction: (a) design around the patent claims; (b) acquire a license.
The posture of the infringer will thus not be very different from what it is under the prior "automatic" practice. The hammer will fall somewhat later. There are a few other subtle differences: Non-parties acting in concert with the infringer would have been subject to contempt sanctions, but might not be bound by issue preclusions in the follow-on lawsuit. And contempt proceedings tend to move much faster than disposing of a new lawsuit, even with preclusions.
I am not a lawyer so this question will undoubtedly show my ignorance. I have for a while now argued with friends about the downloading of music. My friends pose the question about why it is any different than when we used to record songs off the radio in the 80s. My guess is that practice was also likely to be infringment. Is this correct?