Supreme Court Swats "Patent Trolls"

by Lee Gesmer on May 16, 2006

Patents. “Patent trolls” or “patent litigation firms” — companies which buy patents not to produce a product or service, but solely to enforce them in the courts — must be quaking under their bridges this morning. In yesterday’s decision in eBay v. MercExchange the Supreme Court appears to have bought the anti-troll argument whole hog, giving the federal trial courts the discretion to enjoin a patent infringer, and to include in its decision factors such as whether a patent holder practices the patent, is a self-made inventor or university researcher (factors favoring an injunction) or instead has purchased the patent from the inventor to obtain license fees (a factor disfavoring an injunction).

Before this case there was a more-or-less presumptive rule that a patent owner successful in proving infringement was entitled to stop continued use by the defendant, regardless of the identity of the patent owner. The eBay decision abolishes that rule; instead, the courts have been instructed to apply the traditional four-factor test for permanent injunctions, which weighs various equitable factors.

This decision will make it much more difficult for a patent litigation firm to obtain a permanent injunction against an infringer, especially in cases where the threat of an injunction is used as a holdup device by patent holders who exploit the leverage they have when a patent covers only one component that is part of a multi-component product. As the concurring opinion by Justice Kennedy, Stevens, Souter and Breyer stated:

In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. . . . For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. . . . When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction 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.

Not only do these four justices accept the argument that patent litigation firms may be treated differently from “legitimate” inventors, but they take a swipe at “business method” patents as well:

In addition conjunctive relief may have different consequences for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test.

The majority opinion, written by Justice Thomas, is careful to urge protection for university researchers and self-made inventors, implicitly distinguishing them from patent litigation firms.

To sum up, patent litigation firms are in a far weaker position to negotiate lucrative settlements based on the threat of an injunction today than they were only 24 hours ago. Unfortunately, the decision comes too late for Research in Motion, the maker of Blackberry cell phones and email devices which, under threat of an injunction, settled a patent infringement case in March for over $600 million. Had the eBay decision arrived ten weeks earlier, RIM almost certainly would have saved a substantial amount of money on that settlement.

The full decision is here [link].

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