ANALYSIS
eBay Ruling Puts Patent Rights Under the Microscope

On Monday, the U.S. Supreme Court ruled in favor of eBay (Nasdaq: EBAY) in a longstanding patent dispute with MercExchange. In particular, the Court reversed the appeals court's interpretation regarding the granting of an injunction in a patent infringement suit.

For well over a hundred years, patentees, in addition to recovering monetary damages for infringement, have also been entitled to seek injunctive relief. The theory has been that a patent is a property right, covering intellectual property, and injunctive relief gives the patentee dominion over the usage of that right and denying others from traversing.

Akin to personal property rights, injunctive relief is necessary for an owner to exercise exclusivity, which is the precise nature of a patentee's limited grant from the government.

The Court held that patentees seeking equitable relief are not automatically entitled to injunctions, and must instead demonstrate that injunctive relief is necessary and in the public's interest. The Court, unhappy with both the trial and appellate court interpretations, remanded the case for further proceedings -- that is, instructed the parties to try again.

A monetary judgment against eBay for US$29.5 million for infringement of MercExchange's patent rights is not affected by this ruling.

The Troll Factor

The eBay decision is a boon for IT companies and a possible bane for other industries such as life sciences. Over the last year or so, Microsoft (Nasdaq: MSFT) and other large IT companies -- notably Intel (Nasdaq: INTC) -- have campaigned to soften the power of patentees in seeking injunctive relief.

Their considered argument is that IT/software products incorporate numerous innovations, each of which is potentially a patent lawsuit in and of itself. There is an inherent unfairness in being compelled to defend myriad suits, they maintain, especially those brought by companies that are not competitors -- that is, patent-holding companies seeking licensing fees, or so-called "trolls."

The troll argument was used effectively by RIM in its defense against NTP's lawsuit, although the parties ultimately settled. The bitter pill RIM swallowed and the lawsuit's attack on the U.S. patent system -- RIM is a Canadian company -- got considerable press that likely influenced the Justices' opinions, especially the concurrence by J. Kennedy.

Negative Climate for Innovation

For life sciences, chemical and many other industries, the eBay decision will decrease the value of patents. A patent, being an exclusionary right, protects the "property" in question -- that is, the intellectual property -- and injunctions prevent others from abusing that property.

Since these innovations are covered by a small number of patents -- as opposed to large software products or integrated circuitry with thousands of discrete innovations -- the patent rights are key tools in these industries.

Any erosion of patent rights will adversely affect valuation of assets, downplay the amount of R&D spent -- if it cannot be protected, why spend millions? -- and otherwise create a negative climate for innovation.

Justice Roberts, however, indicated in his concurrence that the long history of granting injunctive rights to patentees should be a good indication of the need for such relief, even if not automatically given.

Serving the Public Interest

The very short and unanimous opinion written by Justice Thomas, however, does not necessarily spell the end of innovation. The Justices well know that the social balance for patenting requires giving innovators a stake in their inventions and the power to exercise their rights.

Over time, as new cases accumulate that articulate the reasons for the social contract and advantages patents bring, we can then examine the impact to various industries of Monday's decision.

It is possible that Congress may get into the act to more precisely define the standards for imposition of the patent right -- for example, to require that an infringement determination would trigger the injunctive right unless particular factors apply.

The "normal" injunctive relief standard is, however, quite workable in patent infringement actions, with the assumption that the public interest is served by having a robust patent system.

A refinement of the equity test for injunctive relief is not necessarily a call for action -- yet. Nonetheless, it may cause concern among stockholders and innovators. The U.S. patent system, with all its flaws, is still a marvel of the present age and, in large measure, a reason for the industrial might of the U.S.

Any decrease in the value of patent rights must be carefully evaluated and the impact on society, as a whole, considered. Monday's opinion provides a catalyst to start this dialogue anew.