Stakes High in eBay Patent Dispute

The U.S. Supreme Court is now hearing arguments in eBay (Nasdaq: EBAY) v. MercExchange. It is not examining the underlying dispute between the two firms -- indeed, MercExchange has successfully challenged eBay's use of its buy now technology.

Rather, the court is examining whether issuing an injunction against the use of the technology is appropriate -- specifically, whether a judge has the discretionary power to grant or refuse an injunction request, or whether it should be imposed automatically.

To many, it may sound like a legal point to be parsed by the court. However, attorneys on both sides of the argument warn that the case may prove to be a tipping point in transforming the rights of patent holders.

Neither side has ignored the battle of public opinion -- especially in earlier high profile cases, such as the lawsuit against Research In Motion (Nasdaq: RIMM) that was settled earlier this year. Big companies have been painted as willfully trampling the rights of small companies. The patent holders -- aka "patent trolls" in many quarters -- have been described as bottom feeders interested in a quick buck.

Generalizations Don't Work

"It is very easy to generalize about these high-profile cases but once you get into the details about them, the generalizations typically fall apart," Brad Pedersen, an IP attorney with Patterson Thuente Skaar and Christensen, told the E-Commerce Times. "This case probably does not have the best fact pattern to be used as a basis for a decision in what is a fundamental point of patent rights," he added.

Pedersen hopes the Supreme Court kicks the case back to the lower court. "It wouldn't surprise me if it did," he remarked. The best forum for many of these issues is Congress, he maintains, which is getting set for hearings in the House on this and other related issues.

However, the industry is bracing for a decision either way.

Trampling Rights

Taking the threat of injunction off the table could seriously erode patent rights, according to Melissa L. Klipp, partner with Drinker Biddle & Reath.

"If eBay prevails in this litigation, it will have a profound affect on the ability of patent holders to enforce their patent rights," she told the E-Commerce Times.

The argument the defendants of such cases make is counterintuitive to patent law, Klipp continued. "They claim that because these companies are just holding the patent and not actually using them, it is okay to infringe the patents, and they should be satisfied with whatever money the infringer thinks is appropriate."

In short, she said, these are companies that have invested in patents and are now seeking to enforce their rights. "Whether they use them or not is their prerogative," Klipp emphasized.

Fighting Off Bottom Feeders

However, there is a reason why most of the large tech companies have thrown their support behind eBay: Legal activity against tech firms has exploded over the last 18 months, with many of the lawsuits brought by companies that have obtained rights to various technologies and/or business processes. Many of these firms have done so explicitly with the hope of a payday down the road.

Representing defendants against such firms accounts for about half of his current case load, attorney Michael Sacksteder, a partner with Fenwick & West, told the E-Commerce Times. "We have seen a significant uptick over the last 18 months," he noted.

"Some are what you might call shakedown artists -- they propose a settlement that is crafted to be less than the cost of litigating their claims," he said. Other firms go to court in the hope of hitting the jackpot -- that is, successfully suing an eBay or RIM.

Under those circumstances, if the plaintiff is granted an injunction, it basically has the defendant by the throat as it negotiates for damages.

If eBay prevails, the situation may ease somewhat for these firms. The threat of injunction would remain, but it would not be as fearsome a possibility in such cases. Meanwhile, there is little chance the suits will ease over the coming years, Sacksteder said, no matter what is decided with this particular case.

"There are a lot of patents out there and more are issued every day," he commented.

Mountain of Patents

However this case is decided, there are bound to be others given the dramatic change in the patent and tech industries.

For starters, keeping tabs on all the patents that could have an impact within a company is proving to be ever more difficult.

"While there are some IP-savvy companies that monitor patents in segments of their industries and conduct patent searches before introducing key products," George W. Jordan III, partner, Merchant & Gould, told the E-Commerce Times, "most companies cannot afford to monitor patents in their entire industry or to conduct patent searches on every product to be introduced. To do so would be cost prohibitive."

On the other hand, "a company should be vigilant of patents of others that would pose an infringement threat for its products," he cautioned.

Most standards bodies encourage their members to generally disclose any patents covering the technology that the committees are adopting, Jordan said.

"Yet, there are likely to be patents covering the technology that were filed by companies that are not members of the standards committees," he acknowledged. "Also, mere disclosure of patents covering the technology does not prevent the patent owner from charging an exorbitant royalty to any company that implements the technology unless the standards body requires its members to grant a royalty-free license."

Even for the most diligent firm, it is very difficult to lock up all of the intellectual property rights for a new technology, according to Manny Pokotilow, managing partner of Caesar, Rivise, Bernstein, Cohen & Pokotilow. That is why there is cross-licensing, he remarked to the E-Commerce Times.

Own Worst Enemy

However, large companies with new technologies often are their own worst enemy when it comes to taking licenses or buying out patents from inventors that do not have the financial means to manufacture and bring their creations to the market on their own, Pokotilow continued.

"It is the typical corporate culture to ignore the offers to license or sell patents," he explained. "What often happens is that after being offered a license under a patent -- which would have cost relatively little because the product has not been made commercially -- a large company later makes a product that is covered by the patent and creates a market for the product that is substantial."

It is at that point, he said, that the company sets itself up for an expensive patent license -- or a lawsuit.