eBay vs. MercExchange IEOR 190 G 3/16/2009Rani

eBay vs. MercExchange (May 2006) With eBay, (Supreme Court unanimously decided that) Injunctions should not automatically issue on a finding of patent infringement With eBay, (Supreme Court unanimously decided that) Injunctions should not automatically issue on a finding of patent infringement So something changed about Injunctive Relief in Patent Cases with eBay So something changed about Injunctive Relief in Patent Cases with eBay

What is Injunction? At the core is the belief that monetary damages cannot solve all problems At the core is the belief that monetary damages cannot solve all problems Rationale behind Injunctions – provide fairness for someone whose rights have been violated by restoring the “status quo ante” (the way things were before) Rationale behind Injunctions – provide fairness for someone whose rights have been violated by restoring the “status quo ante” (the way things were before) e.g. money is no benefit to you if someone continues to trespass your land e.g. money is no benefit to you if someone continues to trespass your land

Injunction is a court order (equitable remedy). is a court order (equitable remedy). Courts take this step when they are of the opinion that a payment of damages only is not good enough for a just settlement of the case Courts take this step when they are of the opinion that a payment of damages only is not good enough for a just settlement of the case (equitable remedy – set of legal principles developed thru decisions of courts, rather than legislative statutes or executive action) (equitable remedy – set of legal principles developed thru decisions of courts, rather than legislative statutes or executive action)  Injunctions can be permanent or temporary

eBay vs. MercExchange MercExchange, a Virginia-based ecommerce company owned a business method patent (USP 5,845,265) to provide an Auction Service akin to eBay’s ‘Buy It Now’ feature – which enables users to buy an item for a set price without going thru the bidding process; >30% of eBay’s business MercExchange, a Virginia-based ecommerce company owned a business method patent (USP 5,845,265) to provide an Auction Service akin to eBay’s ‘Buy It Now’ feature – which enables users to buy an item for a set price without going thru the bidding process; >30% of eBay’s business Months before eBay came up with its first prototype, MercExch had filed patents that covered the eBay idea. Months before eBay came up with its first prototype, MercExch had filed patents that covered the eBay idea. In 2000, eBay initiated negotiations to outright purchase MercExchange’s online auction patent portfolio In 2000, eBay initiated negotiations to outright purchase MercExchange’s online auction patent portfolio eBay then abandons its efforts to purchase eBay then abandons its efforts to purchase Then MercExchange sued eBay for patent infringement (2001) for 3 of its patents Then MercExchange sued eBay for patent infringement (2001) for 3 of its patents

Initial Ruling In a 2003 Virginia jury trial, it was found that eBay had willfully infringed MercExch’s patents, and awarded MercExch $35m, a figure that reduced to $5.5m In a 2003 Virginia jury trial, it was found that eBay had willfully infringed MercExch’s patents, and awarded MercExch $35m, a figure that reduced to $5.5m Following this verdict, MercExch sought an injunction – to prevent eBay from using MercExch’s IP but the judge declined citing Merc’s own lack of commercial activity in practicing the patents. Following this verdict, MercExch sought an injunction – to prevent eBay from using MercExch’s IP but the judge declined citing Merc’s own lack of commercial activity in practicing the patents. So MercExch apparently fit the description of a patent troll.

Initial Ruling - District Court Denied this request Denied this request -- “No injunction” they said on the basis that MercExch does not itself practice the patented invention Judge denies saying “If the court did enjoin the defendants here, the court would essentially be opening a Pandora’s box of new problems.

The fight continues … 2004 – 2005: eBay requests to have the patents reviewed for legitimacy (even though they had tried to buy them before!) 2004 – 2005: eBay requests to have the patents reviewed for legitimacy (even though they had tried to buy them before!)

The US Court of Appeals for the Federal Circuit (court for all patent appeals) “For” the injunction, “For” the injunction, stating that there was a “general rule” that it has applied for two decades, (similar to property owners having the right to deny anyone the use of their property) stating that there was a “general rule” that it has applied for two decades, (similar to property owners having the right to deny anyone the use of their property) This decision on March 16, 2005 reverses the original decision So the two lower courts had opposite views

Supreme Court (2006) overturned the Federal Circuit approval of the injunction saying that nothing in the Patent Act eliminated the traditional reliance on weighing the equitable factors considered in determining whether an injunction should be issued and set forth a 4-part test to determine if injunctive relief should be granted overturned the Federal Circuit approval of the injunction saying that nothing in the Patent Act eliminated the traditional reliance on weighing the equitable factors considered in determining whether an injunction should be issued and set forth a 4-part test to determine if injunctive relief should be granted

Supreme Court (contd) 4 part test: A plaintiff must demonstrate - 1. Irreparable harm 2. Inadequacies of Remedies at Law 3. An equitable remedy is warranted considering the balance of hardships between the Plaintiff and Defendant 4. Public interest would not be disserved by entry of a permanent injunction  Neither the District Court nor US Court of Appeals applied these traditional principles

Bottom line Injunctions will be more difficult to obtain Injunctions will be more difficult to obtain Permanent injunctions will no longer be automatic based on a finding of patent infringement Permanent injunctions will no longer be automatic based on a finding of patent infringement 28 post eBay decisions from May 2006 – Sept post eBay decisions from May 2006 – Sept 2007 Rate of denial for permanent injunctions prior to eBay was 16.1% and post eBay was 25.1% Rate of denial for permanent injunctions prior to eBay was 16.1% and post eBay was 25.1% eBay finally bought MercExchange’s patents for an unspecified sum, bringing the 8-year battle to an end. eBay finally bought MercExchange’s patents for an unspecified sum, bringing the 8-year battle to an end.

eBay vs. MercExchange Opinions No winners and losers in this case No winners and losers in this case Supreme Court did not really take sides Supreme Court did not really take sides While eBay has won a reprieve (relieved from blame), the patent wars are far from over While eBay has won a reprieve (relieved from blame), the patent wars are far from over