Supreme Court Could Change Face of Patent Law

It appears that 2006 is shaping up to be the year of patent reform.

While Congress considers sweeping patent reform laws, the U.S. Supreme Court has decided to weigh in on a number of patent questions, including whether injunctions against patent infringers should be automatically granted.

“This year, for some reason, the court is reaching down and grabbing a whole bunch of patent cases,” said James Foster, a shareholder with Wolf Greenfield, an intellectual property firm in Boston. “It may be because patent legislation is pending in Congress and is getting more publicity.”

The high court recently agreed to hear Laboratory Corp. of America Holdings v. Metabolite Laboratories (No. 04-607), which could open the door to determining what constitutes patentable subject matter. And it’s still considering whether to hear KSR International v. Teleflex (No. 1350), which relates to the patentability standard.

The court recently heard oral arguments in Illinois Tool Works v. Independent Ink (No. 04-1329), a printer toner case that has broad ramifications for both antitrust and intellectual property law. The justices are considering the appropriate standard of proof for an antitrust case involving so-called “patent tying” where a patent holder conditions a patent license on the purchase of a non-patented good. (See related story on page 3.)

Most Noteworthy Case

But the case that’s getting the most attention is eBay v. MercExchange (No. 05-130). At the behest of the online auctioneer, the court this term will assess whether trial courts should automatically order injunctions against companies that infringe patents.

In 2003, a federal trial judge in Virginia ruled eBay’s “Buy it Now” feature – which allows users to purchase an item without having to bid on it – infringed on two patents owned by MercExchange, a small Virginia developer of e-commerce applications.

Although eBay was ordered to pay MercExchange $25 million in damages, the district court judge denied MercExchange’s request for an injunction.

The Federal Circuit ruled that the lower court should have automatically issued an injunction against eBay and its subsidiary Half.com for using ideas that infringed on MercExchange’s patents.

Patent holders usually get a permanent injunction if they can show that their patent has been infringed. However, the Federal Circuit granted a stay of that decision pending review by the nation’s highest court, which appears interested in the larger question of patent injunctions.

“This case really goes to the heart of what a patent grant is,” said Howard Susser, a partner with Burns & Levinson in Boston. “Some might say this is the most important decision on patent law in a century or more.”

Foster said he is telling clients “that the law may change, but you can’t count on it. I tell them that they have to assume that if they lose the case, they will be enjoined.”

In its request for cert, eBay said that Congress had explicitly let district courts grant injunctions on a case-by-case basis. “The Federal Circuit has decided to ignore this rule,” eBay wrote.

The Electronic Frontier Foundation, a California-based nonprofit advocacy group, in an amicus brief also argued against the automatic grant of injunctions.

It asserted that the Federal Circuit “tied the hands of federal judges around the nation [by] flagrantly rejecting the plain language of the United States Patent Code and the clear discretionary powers it grants, not to mention longstanding common-law remedies doctrines.”

Unusual Step

The court took the unusual step of ordering the parties to address, in addition to the question raised by eBay in the cert petition, whether it should reconsider its precedents, including Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908), on when it is appropriate to grant an injunction against a patent infringer.

In the Continental Paper Bag case, the patent holder, Eastern Paper, was not using nor was it profiting from the invention in question, a mechanism for folding paper bags. The Supreme Court essentially found that even though the technology was not being used, it was still the inventor’s property. Because property rights were absolute, the court reasoned that a patentee had an absolute right to exclude anyone who wanted to develop the invention.

“The patent at issue in the eBay case is a business method patent, which is a relatively new type of patent protection,” observed John B. Hardaway III of South Carolina-based Nexsen Pruet. “Business method patents have been subjected to a fair amount of criticism from industry and commentators.”

Hardaway continued: “Another current event is the concept of ‘patent trollers.’ Patent trollers, usually with business method patents, have been able to obtain large monetary settlements based upon a threat of obtaining a permanent injunction even when a plaintiff, just as in the Continental Paper Bag case, is not practicing the patented invention. It appears the court is looking for guidance as to whether business method patents are entitled to the same presumptions as traditional patents when a permanent injunction is sought.”

Various industries want injunctions to be harder to come by. Technology companies, for example, say injunctions hamstring their ability to innovate.

On the other hand, some of the most vigorous opposition to changing the standard for granting injunctions is expected to come from the pharmaceutical industry, noted Susser.

“Pharmaceutical companies spend $500 million in research and development to come up with a single drug,” Susser said. “The essence of the whole drive is exclusivity. If a pharmaceutical company can’t have exclusivity that changes the ultimate value [of the drug].”

‘Patent Trolls’

The ruling by the Supreme Court could have an enormous impact on how companies evaluate the risks of patent litigation and the value of patents. What it will mean for so-called “patent trolls” and their leveraging ability during litigation is a primary concern for patent lawyers.

The term “patent trolls” refers to those companies and individuals who obtain patents for the sole purpose of suing infringers or using the threat of an injunction to get infringers to pay them big bucks to use the technology.

“In situations where there are people collecting patents and not using them, but bringing lawsuits, the injunction is important in the leveraging process,” said Foster.

In its amicus brief, the Computer & Communications Industry Association, a Washington, D.C.-based trade association, asserted “the extraordinary leverage accorded by automatic injunctive relief enables the patentee to extract settlements that approach the costs of shutting down an entire product line, far in excess of what a reasonable royalty is likely to be.”

Foster said while clients are “outraged” when they receive letters from patent trolls “they will pay money because they don’t want to tell stockholders or directors that while it may be a silly suit, they may be out of business if they lose.”

But Jason Lindh, an associate with McKee, Vorhees & Sease in Des Moines, Iowa, believes patent trolls have some legitimacy.

“When you have small inventors working out of their garage, they don’t have the marketing muscle to promote the invention,” said Lindh. “You can see how it would be important to have a company step in and recognize the value of the invention and take the risk of insuring it’s used. Of course, they will also receive the benefit if (the invention) becomes an industry standard.”

How this will play out on Capitol Hill could hinge on what the Supreme Court does, suggested Brian Moriarty, a partner with the intellectual property firm Hamilton, Brook, Smith & Reynolds in Concord, Mass.

“If the Supreme Court comes out real harsh and says the court didn’t have any discretion except to issue an injunction, that may wind up being an invitation for Congress to do something,” said Moriarty. “If they say the federal court got it wrong, maybe Congress might say there is already discretion so why do we need to change the law.”