United States: U.S. Supreme Court Discards the "General Rule" in Patent Cases

A unanimous U.S. Supreme Court reversed the U.S. Court of Appeals for the Federal Circuit’s long-standing "general rule" that "a permanent injunction will issue once [patent] infringement and validity have been adjudged." In eBay, Inc. v. MercExchange, the Supreme Court held that "the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts." In exercising that discretion, the district courts have been instructed to apply the "traditional principals of equity" that govern the award of injunctive relief.

MercExchange sued eBay and Half.com (collectively "eBay") alleging that websites belonging to eBay infringed MercExchange’s business method patent. A jury found that MercExchange’s patent was valid and that eBay infringed the patent. The jury awarded damages for past infringement. Following the jury’s verdict, MercExchange moved for permanent injunctive relief. The district court denied MercExchange’s motion and concluded a "plaintiff’s willingness to license its patents" and "its lack of commercial activity in practicing the patents" would be sufficient to establish that the patent holder would not suffer irreparable harm if an injunction did not issue. eBay appealed the jury verdict MercExchange cross-appealed, among other things, the district court’s denial of MercExchange’s motion for a permanent injunction.

On review, the Federal Circuit reversed the district court, applying its deep-seated "general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances." The Federal Circuit reasoned that "the ‘right to exclude recognized in a patent is but the essence of the concept of property,’" and thus injunctive relief is warranted against the infringer. eBay petitioned the Supreme Court for certiorari, arguing that the Federal Circuit’s "general rule" was inappropriate and counter to the patent law.

According to the Supreme Court, section 283 of the patent statute "expressly provides that injunctions ‘may’ issue ‘in accordance with the principles of equity,’" which trumps the personal property attribute of patents and the exclusionary right grant. The Court noted the Federal Circuit and the district court erred in failing to apply traditional equitable principles to the permanent injunction motion, albeit from opposite sides of the application of discretion spectrum.

On the one hand, the district court, only looking at the patent owners willingness to license and lack of commercial activity, held that patent owners falling into such a category would not be irreparably harmed if no injunction issued. The Supreme Court found such broad classifications were counter to traditional equitable principles and noted that a university researcher or independent inventor might reasonably prefer to license, rather than self-commercialize, an invention and still meet the traditional four-factor test. On the other hand, the Court found error in the "general rule" as articulated by the Federal Circuit, i.e., that injunctions should only be denied "under exceptional circumstances" as an unduly broad categorical grant of such relief.

Rather, the Supreme Court instructed that traditional principles of equity "apply with equal force to disputes arising under the Patent Act and that a major departure from the long tradition of equity practice should not be lightly applied." In analogizing the right to exclude in a copyright case with a patent case, the Supreme Court stated that it has "consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a copyright has been infringed." The Court held that according to "well established principles of equity, a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief."

In a concurring opinion, Justice Kennedy took aim at the "industry" that has developed based on use of patents to extract license fees and their use of injunctions "as a bargaining tool to charge exorbitant fees." He found these practices especially objectionable in cases where "the patented invention is but a small component of the [accused] product." In such cases, Justice Kennedy opined that "legal damages may well be sufficient to compensate for infringement and an injunction may not serve the public interest." Justice Kennedy went on to take specific aim at business method patents, noting that the "potential vagueness and suspect validity of these patents may affect the calculus under the four-factor test."

The dynamic in district court patent cases has changed dramatically. No longer will the 900-pound gorilla of a permanent injunction threat have a permanent seat at the settlement table. Henceforth, in considering whether to award permanent injunctive relief to a prevailing patent owner, district courts are instructed to apply traditional equitable principles on a case-by-case basis with the decision being reviewable on an abuse of discretion standard.

We expect that in the future, many patent owners will consider section 337 actions before the International trade Commission, where exclusion orders and cease and desist orders (the functional equivalent of an injunction) are available essentially as a matter of right to a prevailing petitioner.

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