Supreme Court Sends Signal to "Patent Trolls"
Author: Steve Elleman
September 2007
The emergence of so-called "patent trolls" has caught the attention of the patent bar, as well as many media outlets. Although there is no universal definition, a patent troll is typically described as a holding company that owns a portfolio of patents and exists primarily to sue under those patents and collect licensing fees. Classic patent trolls do not sell products or own significant tangible assets.
Patent trolls often target large corporations, and some have argued that patent trolls have an unfair advantage in their litigation against such large corporations. For example, when a defendant is sued for patent infringement, it is common for the defendant to scour its patent portfolio and file a countersuit against the plaintiff for negotiating leverage. Since patent trolls do not sell any products, they are immune from this defensive maneuver. In addition, some believe that patent trolls may be able to utilize the "nuisance value" of their suit to leverage favorable settlements from large companies.
If a patent troll (or other patent owner) successfully sues an infringer, besides awarding damages, the presiding court may also issue a permanent injunction. A permanent injunction is a form of "equitable" relief and is essentially an order from the court to the infringer to cease further infringing activities. The issue of permanent injunctions in patent cases was recently addressed by the U.S. Supreme Court in the case of eBay, Inc. v. MercExchange, L.L.C. The Supreme Court also tangentially addressed how permanent injunctions may apply in cases involving patent trolls.
In the eBay case, MercExchange sued eBay and Half.com for patent infringement under MercExchange's patent relating to an electronic network of consignment stores. A jury found that eBay infringed the patent and awarded damages to MercExchange, but the Court denied MercExchange's request for a permanent injunction.
MercExhange then appealed to the Court of Appeals for Federal Circuit, which is the primary precedent-setting U.S. court for patent law. The Federal Circuit held that its body of case law mandated that a permanent injunction was to be automatically instituted against an infringing defendant except under "exceptional circumstances." Accordingly, in its review of the eBay case, the Federal Circuit reversed the District Court and instituted a permanent injunction against eBay. The Federal Circuit reasoned that there were no "exceptional circumstances" in this case, and that therefore a permanent injunction was appropriate.
eBay then appealed the Federal Circuit's decision to the U.S. Supreme Court. The Supreme Court overruled the Federal Circuit and held that the Federal Circuit was not applying the proper test. Instead of the "exceptional circumstances" test, which the Supreme Court deemed to be too simplistic, the Supreme Court held that the Federal Circuit should have applied the Supreme Court's traditional "four-factor test."
Under the four-factor test, in order to obtain a permanent injunction, a plaintiff must demonstrate that: 1) it has suffered an irreparable injury; 2) other remedies, such as monetary damages, are inadequate; 3) an injunction is warranted when considering the balance of hardships; and 4) the public interest is not harmed by a permanent injunction. The Supreme Court noted that this four factor test is well established and generally applies to all other areas of law, and there is no reason that the test should not also be applicable in patent cases. Thus the Supreme Court essentially sought to "rein in" the Federal Circuit and bring patent law in line with other areas of law on the issue of permanent injunctions.
Two concurring (non-majority) opinions were issued by the Supreme Court. The first concurring opinion was supported by three (out of nine) justices and agreed that the four-factor test was appropriate for determining permanent injunctions in patent disputes. However, that concurrence suggested that the Federal Circuit's rule was not too far out of line with the Supreme Court's rule. Noting that "a page of history is worth a volume of logic," this concurrence suggested that patentees should typically be entitled to an injunction, even under the four-factor test, given that a patent owner should inherently have the right to exclude others from using its invention. Thus, in the view of this concurrence, the Supreme Court's four-factor test would not provide significantly different results than the Federal Circuit's old "exceptional circumstances" rule.
However, a second concurring opinion, supported by four justices, took a different interpretation. This concurrence acknowledged that while historical practice is instructive, it may be less relevant in changing times. More particularly, this concurrence appears to target the relatively recent emergence of patent trolls.
While not specifically using the term "patent trolls," the second concurrence implies that such entities should have difficulty in obtaining injunctions. The concurrence suggests that patent trolls can (unfairly) leverage exorbitant fees from an infringer. For example, a patent troll's invention can, in some cases, be only a small component of the product sought to be shut down, and it may be unfair to force a defendant to stop selling an entire product line when only a small part of the product is covered by a patent (such as in the Blackberry patent infringement suit where the patentee sought to shut down Blackberries across the country). Thus, the concurrence implies patent trolls may face an uphill battle in obtaining injunctions.
This concurring opinion has generated great discussion throughout the patent bar. Judge Garjarsa, a justice of the Federal Circuit, spoke at the University of Dayton in late October 2006. Judge Garjarsa expressed his opinion that this concurring opinion, as it relates to patent trolls, may indeed carry the day. Thus, the Supreme Court appears to have signaled to the lower courts to examine patent troll cases carefully, and to deny a permanent injunction to the "trolls" if appropriate. However, given that the concurrence is not the majority opinion of the Court, it still remains to be seen how the lower courts will institute the Supreme Court's ruling, and whether patent trolls have indeed lost some of their clout.
