The U.S. Supreme Court created new hurdles for patent holders seeking to enjoin their competition in a closely watched decision decided recently.

In a unanimous opinion authored by Justice Clarence Thomas, the court in eBay, Inc. v. MercExchange (No. 05-130) said patent holders must be treated the same way as every other plaintiff seeking injunctive relief. Instead of automatically issuing an injunction, trial courts should apply the traditional four-factor test used by courts of equity.

Boston attorney Tony Fitzpatrick, a patent litigator and co-chair of the intellectual property litigation practice group at Duane Morris, said the decision was one of the most important IP cases in half a century.

“The decision is couched as essentially clarifying the law, or telling lower courts that they perhaps were not applying the correct law – but in practical effect this is a change in the law in patent cases,” he said.

Sharon Barner, chair of the intellectual property group at Foley & Lardner in Chicago, agreed.

In 25 years as a patent litigator, she has never had to put in evidence to support a request for an injunction.

“Both parties always expected that an injunction would be issued. But now, people are really going to have to focus on what evidence they are going to put in to demonstrate why they are entitled to that injunction,” she said.

The decision will lead to more complex and expensive patent litigation, Fitzpatrick added.

“It raises a number of complex issues that are really going to take a while to play out,” he said.

Jason Schultz, a staff attorney at the Electronic Frontier Foundation in San Francisco, said the decision offers increased protection for free speech. The EFF filed an amicus brief advocating for the four-part balancing test.

“Our main concern was that more and more patents are being issued on communications technologies involving the Internet and software,” he said, from tools for blogging to Internet phone technology patents. In a hypothetical battle over Internet patents, a political blogger might be stopped from posting.

“An injunction would kill that blog and thousands of others,” Schultz said.

He sees the decision as positive for the patent community.

“People’s confidence in the patent system has been plummeting. I think this decision will help because it gives trial judges the power to rein in the bad patents and push the good ones.”

‘Buy it now’

In 2003, a U.S. District Court ruled that 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 Virginia company.

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

On appeal, the Federal Circuit ruled that the trial judge should have automatically issued an injunction against eBay and its subsidiary, Half.com.

But the U.S. Supreme Court disagreed.

“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. A plaintiff must demonstrate: (1) that it has suffered 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,” Thomas wrote.

The court rejected the Federal Circuit’s “general rule” in patent disputes that a permanent injunction should be granted whenever a patent is infringed. Granting an injunction should be a discretionary decision by a trial judge, the court indicated.

To enjoin or not to enjoin?

In two concurring decisions, some of the justices disagreed about the practical effect of the decision.

Chief Justice John Roberts, joined by Justices Antonin Scalia and Ruth Bader Ginsburg, emphasized the “historical practice” of granting injunctions, implying that despite the majority opinion, in most cases courts would issue injunctions as they had before.

“A page of history is worth a volume of logic,” he wrote.

On the other hand, Justice Anthony Kennedy warned trial courts to beware of so-called “patent trolls” – patent holders who use their patents “not as a basis for producing and selling goods, but instead, primarily for obtaining licensing fees.”

Joined by Justices John Paul Stevens, David Souter and Stephen Breyer, Kennedy wrote that when “the threat of an in junction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.”

In Fitzpatrick’s view, “there are pretty strong signals from this opinion that would lead courts to say plaintiffs who don’t actually practice their invention, or who are not competing with the defendant, won’t get injunctions.”

But Schultz said injunctions will still be issued in most patent cases.

“The vast majority of courts are routinely going to find that it’s appropriate under their discretion to issue an injunction,” he predicted. “But I think this will force some of the more abusive plaintiffs to think twice about bringing cases.”

Patent attorneys will now need to consider the evidence necessary to support or fight an injunction, Barner said.

“Lawyers now need to focus on the injunction issue,” she said, and look to copyright and trademark cases to see what types of evidence the parties rely on to get injunctive relief.

She also noted the potential for forum shopping, as plaintiffs try to find a judge more likely to grant an injunction.

Fitzpatrick agreed.

“Anyone who is going to file a major patent case nowadays is making a careful study of the potential forums before he files, and this will be a factor to weigh in the balance,” he said.

A U-turn

Schultz cautioned attorneys to continue watching the case on remand.

“Remember, the judge denied the injunction before,” he said, which was highly unusual. “But since then, MercExchange has purchased another company that in fact does auctions similar to eBay – meaning they are now a competitor” and more likely to be granted an injunction this time.

And in the meantime, eBay has challenged the validity of MercExchange’s patent, seeking its revocation in the U.S. Patent Office, a parallel proceeding that typically takes several years to complete.

“It will be really interesting to see what ends up happening,” Schultz said. “So often, the Supreme Court is the end of the road, but in this case it’s just a U-turn.”

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