Supreme Court Watch:
eBay, Inc. v. MercExchange LLC

By Marvin N. Benn

On May 15, 2006, the United States Supreme Court rendered its decision in eBay, Inc. v. MercExchange LLC, essentially changing the landscape of patent enforcement actions. Holding that a patentee is no longer automatically entitled to a permanent injunction against an infringer (even when the patent is found to be valid and infringed), the ruling limits the ability of a patent holder to compel an infringer into a licensing arrangement.

How is an injunction evaluated by the courts? Generally speaking, injunctions are an exercise of the court's equitable powers, or what the court believes is fair. Although each judicial circuit may develop its own factors for consideration, the following four-prong test generally applies to all requests for an injunction:

1. the likelihood of success on the merits; 
2. the existence of irreparable harm in the absence of a grant; 
3. the balancing of the hardships between the parties; and 
4. the public interest.

The Background

MercExchange LLC owned a patent covering the functionality behind the "Buy It Now" online auction capability, which allows buyers to avoid the standard bidding process and go directly to the seller. Without a license from the patent holder, eBay was utilizing the "Buy It Now" feature as an integral and profitable element of its popular online auction site. Although MercExchange did not manufacture or use the patented method, the company had offered to license it to others, including eBay. When the parties failed to reach an acceptable licensing agreement, they went to trial. The federal district court found that the MercExchange patent was indeed valid and infringed, but denied injunctive relief based on four factors:

1. a general concern regarding business method patents;
2. a concern that issuance of injunctive relief would lead to multiple contempt hearings as the proven infringer attempts to design around the patent claims in issue;
3. MercExchange's statements of willingness to license its patents; and
4. MercExchange's failure to move for a preliminary injunction.

On appeal, the federal appellate court found in favor of MercExchange, explaining that because the patent was valid and infringed, automatic injunctive relief was warranted. Basing its decision, in part, on the 1989 case of Richardson v. Suzuki Motor Co., the court held that "because the 'right to exclude recognized in a patent is but the essence of the concept of property,' the general rule is that a permanent injunction will issue once infringement and validity have been adjudged." The Federal Circuit went on to state that the factors considered by the district court in denying injunctive relief did not sufficiently raise the "public interest" or "balancing of the hardships" issues necessary to justify an exception to the general rule supported by Richardson v. Suzuki Motor Co.

Ramifications of the Ruling

In eBay, Inc. v. MercExchange LLC, the Supreme Court chose to void the appellate court's decision and remand to the district court's ruling, with direction to apply the four-prong test to the injunction request. In effect, the decision holds that an automatic permanent injunction is no longer the rule in cases where patent infringement and the validity of the claims have been established.

With the threat of a permanent injunction significantly reduced, patentees may discover that large and sophisticated corporations are no longer compelled to enter into licensing agreements for patents they are infringing, assuming the patent owner will be unable to bear the exorbitant cost of litigation. Patentees may find themselves at a further disadvantage if they only license the invention, rather than actually manufacturing or selling it. Furthermore, even if the patent owner can afford litigation to successfully prove the infringement and the validity of the patent, damages will likely be limited to a reasonable royalty (often the same fee that the infringing company would have paid if it had chosen to license the patent in the first place).

In light of the Supreme Court's decision, future patent enforcement will likely be limited to disputes where large corporations are fighting over market share and to the exceptional case involving smaller patentees. Particularly for companies that only license their inventions, the landscape appears to have changed dramatically, as these entities can no longer rely on the threat of a permanent injunction to compel infringers to accept licensing agreements favorable to the patent holder.

If you have questions concerning eBay, Inc. v. MercExchange LLC and its impact on your business, please contact Marvin N. Benn or your Much Shelist attorney.

Marvin N. Benn, Chair of the firm's Intellectual Property practice group, handles all types of IP litigation and protection. He has a broad consulting and license-drafting practice with an emphasis on matters related to patents, trademarks, and computer hardware and software. Marvin can be reached at 312.521.2770 or mbenn@muchshelist.com.

This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances.

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