High Court Rejects Patent Rulings Against EBay

By Charles Lane and Yuki Noguchi
Washington Post Staff Writers
Tuesday, May 16, 2006

The Supreme Court handed eBay Inc. a victory in its legal battle with Great Falls-based patent holder MercExchange LLC yesterday, throwing out an appeals court decision that would have shut down the online auctioneer's "Buy It Now" feature and ordering a federal district judge to start the case over from scratch.

But the ruling lacked the clear, sweeping implications for patent law that many had expected, because the court declined to settle the key issue -- whether the Patent Act essentially requires the court to issue an injunction prohibiting an infringer from using a patented invention.

Instead, the court's unanimous but tentative opinion, written by Justice Clarence Thomas, said neither of the two federal courts that have dealt with the case so far -- a district court that denied MercExchange an injunction and an appeals court that said it should get one as a matter of course -- got it quite right.

The lower courts should follow "traditional equitable principles" when they revisit the case, Thomas instructed. Those criteria -- the degree of harm to the patent holder, the adequacy of money damages, the "balance of hardships" between the patent holder and infringer, and the public interest -- are the same in patent cases as in other kinds of cases, he wrote.

Both sides in the case said incentives to innovate were at stake. Software giants that filed briefs siding with eBay argued that they are subject to too many frivolous suits by companies that hold patents but don't try to operate a business, wasting money that could otherwise be spent on advancing more technologies.

Companies siding with MercExchange -- including powerful, patent-dependent pharmaceutical giants -- argued that courts must guard the property rights of those who sink years of research into developing valuable inventions.

The troubled patent system is becoming a critical area for the courts, which are being asked to make decisions about cases involving fast-changing technologies and powerful business interests. Congress, too, is involved, with legislation pending that would have addressed the policy issues in the case.

A desire not to upstage Congress's efforts may help explain the court's tepid approach.

Still, four members of the court -- one short of a majority -- seemed clearly sympathetic to eBay and its backers.

Justice Anthony M. Kennedy wrote a separate concurring opinion, joined by John Paul Stevens, David H. Souter and Stephen G. Breyer, implying that the lower courts should focus on the dangers of so-called "patent trolls" -- a term applied to those who accumulate patents with the intention of making money by defending them rather than practicing them.

"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 injunction may not serve the public interest," Kennedy wrote.

But Chief Justice John G. Roberts Jr., joined by Justices Antonin Scalia and Ruth Bader Ginsburg, wrote a separate concurring opinion more sympathetic to MercExchange, emphasizing the long history of granting injunctions to patent holders.

In 2003, a federal jury found eBay guilty of willfully infringing MercExchange's patents on the "Buy It Now" idea and awarded MercExchange $35 million. A district judge later reduced that award by $5.5 million and denied MercExchange an injunction, saying it would not face "irreparable harm" without it.

But the U.S. Court of Appeals for the Federal Circuit reversed that ruling last year, saying MercExchange was entitled to an injunction because a "general concern" about business-method patents did not justify "the unusual step of denying injunctive relief."

The case is eBay Inc. v. MercExchange LLC , No. 05-130.

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