The Misapplication of eBay v. MercExchange, LLC

Note from the Editor: This article discusses the Supreme Court’s decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) and why lower courts seem to be misapplying it. The Federalist Society takes no positions on particular legal and public policy matters. Any expressions of opinion are those of the author. Whenever we publish an article that advocates for a particular position, as here, we offer links to other perspectives on the issue, including ones opposed to the position taken in the article; those may be found on this page under "related content." We also invite responses from our readers. To join the debate, please email us at [email protected]. 

In eBay Inc. v. MercExchange, L.L.C., the Supreme Court unanimously ruled that injunctions in patent infringement cases must be granted in accordance with well-settled principles of equity.[1] The majority opinion—authored by Justice Clarence Thomas—purports to make a simple point: in determining whether to grant or deny an injunction, a district court cannot base its decision on any particular categorical rule, but instead must consider equitable factors holistically. Despite this relatively straightforward ruling, eBay has drastically changed the legal landscape for when courts issue injunctions in patent cases. Post-eBay injunction denial rates appear to have at least quadrupled. And patent holders that do not produce goods or services related to their patents but instead seek to exercise their patent rights through litigation and licensing—sometimes pejoratively called “patent trolls”—have suffered the most. The main reason for the dramatic change appears to be that district courts are citing Justice Kennedy’s concurrence—rather than Justice Thomas’s majority opinion for nine justices—to support holdings that deny injunctions. These results, however, are deeply at odds with the Court’s unanimous eBay opinion.

I. The eBay Case

As patent cases go, eBay’s facts are relatively straightforward. Most readers are likely aware of eBay’s business: providing a website for private sellers to sell goods either at a fixed price (the “buy it now” function) or through an auction. Most readers probably do not know that a company called MercExchange holds a business-method patent for an internet market designed to facilitate transactions between private individuals, although the company does not personally use its patent. Rather MercExchange makes money by licensing its patent to other companies who seek to operate internet markets. MercExchange believed that its business-method patent covered eBay’s “buy it now” feature and offered to license its patent to eBay. Negotiations broke down and, ultimately, MercExchange sued eBay for patent infringement. The case proceeded to trial, the jury found in favor of MercExchange, and it recommended an award of damages. MercExchange then moved the district court for a permanent injunction barring eBay from infringing its patent.

The district court denied MercExchange’s motion for an injunction.[2] It explained that the issuance of injunctive relief “is governed by traditional equitable principles, which require consideration of [four factors:] (i) whether the plaintiff would face irreparable injury if the injunction did not issue, (ii) whether the plaintiff has an adequate remedy at law, (iii) whether granting the injunction is in the public interest, and (iv) whether the balance of the hardships tips in the plaintiff’s favor.”[3] The district court concluded that the irreparable-harm factor “tip[ped] against an injunction,” in part because there was evidence of MercExchange’s “willingness to license its patents” and “its lack of commercial activity in practicing the patents.”[4] The district court similarly held that money damages constituted an adequate remedy and that the balance of hardships counseled against granting the injunction because MercExchange’s willingness to license its patents suggested that monetary damages would be sufficient.[5] In short, the district court appeared to adopt a rule that MercExchange did not deserve an injunction because its business model was to license its patent instead of personally using it.

MercExchange appealed. The Court of Appeals for the Federal Circuit reversed, and did not consider the equitable four-factor test for granting or denying injunctions. Instead, it opted to apply a “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.”[6] In the Federal Circuit’s view, “the district court did not provide any persuasive reason to believe this case is sufficiently exceptional to justify the denial of a permanent injunction.”[7] eBay petitioned the Supreme Court for review. The Supreme Court agreed to consider the appropriateness of the general rule in favor of injunctions for patent infringement. The Court ultimately vacated and remanded the Federal Circuit’s judgment in a unanimous opinion written by Justice Thomas.

The opinion drastically changed the landscape for the issuance of injunctions for patent infringements, so it is worth parsing carefully. The Supreme Court started off agreeing with the district court that “well-established principles of equity” govern “act[s] of equitable discretion” like the decision to grant or deny an injunction.[8] According to these “well-established principles,” the Court also agreed with the district court that a plaintiff may not obtain a permanent injunction unless it demonstrates four things: “(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.”[9]

The Court parted ways with the courts below, however, by holding that neither the Federal Circuit nor the district court correctly applied this four-factor framework. The Federal Circuit’s error was obvious: that court did not apply the four-factor test, and instead applied a general, categorical rule in favor of injunctions. But the district court’s error was less obvious. The Supreme Court acknowledged that the district court had at least correctly recited the four-factor test. But it had incorrectly applied the four-factor test because it “appeared to adopt certain expansive principles suggesting that injunctive relief could not issue in a broad swath of cases.”[10]

Most notably, the Supreme Court criticized the district court’s conclusion that a “‘plaintiff’s willingness to license its patents’ and ‘its lack of commercial activity in practicing the patents’ would be sufficient to establish that the patent holder would not suffer irreparable harm if an injunction did not issue.”[11] The Court explained that “traditional equitable principles do not permit such broad classifications.”[12] The Court further clarified that even patent holders that do not utilize their patents themselves—and instead choose to license them—may suffer irreparable harm. The Court provided examples of patent holders who “may be able to satisfy the traditional four-factor test” and obtain an injunction, including “university researchers or self-made inventors” who “might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves.”[13] The Court could “see no basis for categorically denying [such researchers and investors] the opportunity to” “satisfy the traditional four-factor test.”[14] The Court concluded that such categorical rules “cannot be squared with the principles of equity adopted by Congress” and that they were also “in tension with” a 1908 precedent—Continental Paper Bag Co. v. Eastern Paper Bag Co.[15]—“which rejected the contention that a court of equity has no jurisdiction to grant injunctive relief to a patent holder who has unreasonably declined to use the patent.”[16] Ultimately, the Court vacated the judgment below and remanded.

A handful of Justices also issued or joined concurrences authored by Chief Justice Roberts and Justice Kennedy. These, too, are worth parsing carefully. The Chief Justice—joined by Justices Scalia and Ginsburg—agreed that equitable principles controlled the discretionary decision to grant or deny injunctive relief in patent cases “no less than in other cases governed by such standards.”[17] The Chief took the view, however, that when it comes to the exercise of that discretion, district courts should consider that, “[f]rom at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases.”[18]

Justice Kennedy—joined by Justices Stevens, Souter, and Breyer—agreed that the “courts should apply the well-established, four-factor test—without resort to categorical rules—in deciding whether to grant injunctive relief in patent cases.”[19] However, contra Chief Justice Roberts, he took the position that the historical practice of liberally issuing injunctions was instructive only “when the circumstances of a case bear substantial parallels to litigation the courts have confronted before.”[20] Justice Kennedy pointed out that several recent patent cases are “quite unlike earlier cases” because many stem from “a burgeoning industry that uses patents primarily for obtaining licensing fees, rather than for producing and selling goods.”[21] With respect to firms in this industry, Justice Kennedy explained, “the threat of an injunction could be employed to charge exorbitant licensing fees to companies seeking to practice their patents.”[22] Justice Kennedy thus took the position that an injunction may not be appropriate in situations in which “the patented invention is but a small component of the product the compan[y] seek[s] to produce and the threat of an injunction is employed simply for undue leverage in negotiations.”[23] Justice Kennedy also noted “the calculus under the four-factor test” might turn on the type of patent. In particular, he pointed out that some patents over business methods “were not of much economic and legal significance in earlier times,” could be “vagu[e],” or might be “[in]vali[d].”[24]

II. The Post-eBay Landscape

Despite the fact that the Supreme Court believed that it was simply reaffirming the place of a “well-established principle[] of equity” in determining whether to grant patent injunctions, eBay has effected a sea change in the law regarding the issuance of injunctions. This change is reflected in both the total number of injunctions that have issued and the type of case in which patent holders have successfully obtained injunctive relief. These changes appear to be the result of courts relying on Justice Kennedy’s concurrence as if it were the precedential opinion. Indeed, one scholar has concluded that “a review of post-eBay federal district court decisions shows that though it is not the opinion of the Court, [Justice] Kennedy’s concurrence has proven to be highly persuasive.”[25]

In the wake of the eBay decision, district courts have denied injunctions much more frequently, which reflects Justice Kennedy’s opinion that injunctions should not issue in many modern patent infringement cases. Before eBay, injunctions were granted in almost all cases. Indeed, studies based on a sampling of district court decisions between May 2003 and May 2005—just before the Court decided eBay—found that courts granted motions for permanent injunctions in patent infringement cases between 94% and 100% of the time.[26] In the decade since eBay, however, numerous studies have found that district courts grant motions for permanent injunctions in patent cases no more than 75% of the time.[27] At a minimum, post-eBay injunction denial rates have quadrupled.

In evaluating whether to grant an injunction, many district courts have relied heavily on Justice Kennedy’s concurrence. The district court’s opinion denying the injunction on remand in eBay is particularly instructive. Indeed, although the district court acknowledged that the Supreme Court had rejected its previous “analysis implying that a categorical exclusion prevented injunctions from issuing if a patent holder did not practice its patents and existed only to license them,” it nonetheless relied on Justice Kennedy’s concurrence in three main ways to bolster its decision to deny the injunction.[28] First, the district court invoked Justice Kennedy’s concurrence to consider the nature of MercExchange’s patent, explaining that, “if the application of the case specific facts to the four-factor test reveals that equitable relief is warranted, the nature of [business-method] patents may be considered by the court when balancing the equities.”[29] Second, the district court acknowledged that MercExchange “had every right to utilize its patents” “primarily as a sword to aid in litigation or threatened litigation against infringers or potential infringers,” but concluded that “such behavior suggests that an injunction against eBay may also be used to obtain similar ends.”[30] The court again cited Justice Kennedy’s concurrence in support of its ruling that “[u]tilization of a ruling in equity as a bargaining chip suggests both that such party never deserved a ruling in equity and that money is all that such party truly seeks, rendering monetary damages an adequate remedy in the first instance.”[31] Third, the district court invoked Justice Kennedy’s concurrence to explain that MercExchange’s position in an industry that “developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees” also weighed against issuing an injunction.[32] In short, the district court again appeared to take the position that MercExchange was not entitled to an injunction because it chose to license its patent and used Justice Kennedy’s opinion to support that conclusion.

The eBay district court does not stand alone in treating Justice Kennedy’s opinion as almost precedential. Like Justice Kennedy, other district courts have tended to consider four main factors—apart from the well-settled principles of equity—in determining whether to grant injunctions. First, courts are much less likely to grant an injunction where the patent holder does not practice the patent itself but instead licenses its patent. Second, and relatedly, courts appear to be much less likely to grant injunctions where the parties are not competitors in the marketplace. Third, courts appear to consider the type of patent involved when making an injunction decision. Fourth, courts appear to be much less likely to grant injunctions when the infringing portion of the good in question is only a small component of that good.

First, as Justice Kennedy encouraged and like the district court in eBay, many district courts consider whether the patent holder produces a product or service related to its patent or merely exercises it patent rights through licensing and/or patent infringement litigation. The latter type of patent holders includes patent assertion entities (PAEs), which are firms that buy patents and attempt to generate revenue by asserting them against businesses that are already using the patents in their own goods or services. A study by Professor Christopher Seaman considered PAEs’ success rate in obtaining injunctive relief after eBay, and found that such entities rarely prevail. After prevailing on liability, Seaman found that only 16% of PAEs successfully obtain injunctive relief, while other patent holders manage to obtain injunctions in 80% of cases.[33] Other studies make similar findings.[34] These results reflect Justice Kennedy’s opinion that district courts should be reluctant to grant injunctions when the patent holder is using the patent “not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”[35]

Second, and relatedly, district courts often consider whether the parties are competitors in the marketplace, which is often a proxy for considering whether a patent holder is a PAE. Consistent with his PAE findings, Professor Seaman found that patent holders who competed with an infringer were granted a permanent injunction in the overwhelming majority of cases (84% of the time), while patent holders who were not market competitors with the infringer rarely succeeded in obtaining injunctive relief (21% of the time).[36] Individual court opinions confirm these statistical findings, with some district courts explaining that the “[t]he best case for obtaining a permanent injunction often occurs when the plaintiff and defendant are competing in the same market.”[37]

Third, as Justice Kennedy suggested, district courts consider the type of technology at issue in deciding whether to issue an injunction. Professor Seaman found that permanent injunctions are almost always granted in cases where the patented technology at issue involves biotechnology (100%) or pharmaceuticals (92%).[38] By contrast, district courts granted injunctions only about two-thirds of the time in cases involving electronics and medical devices patents (67%, and 65%, respectively).[39] And, most notably, district courts granted permanent injunctions only slightly more than half the time in cases involving computer software patents (53%).[40] These results suggest that courts have followed Justice Kennedy’s advice to consider that “injunctive relief may have different consequences for the burgeoning number of patents” that “were not of much economic and legal significance in earlier times” and are “potential[ly] vagu[e]” and of “suspect validity.”[41]

Fourth, following Justice Kennedy’s concurrence, some courts consider whether the patent covers a “small component” of an infringing product in determining whether to issue the injunction.[42] One case in particular—z4 Techs., Inc. v. Microsoft Corp.[43]—illustrates this approach. In that case, a jury found that Microsoft infringed z4’s patents covering methods for limiting the unauthorized use of computer software, referred to as product activation. Next, z4 moved the district court to enjoin Microsoft from making, using, selling, offering for sale, and/or importing its current software products that use product activation; this would have covered Windows XP products since 2001 and Office products since 2000. Relying on Justice Kennedy’s concurrence, the court denied the requested injunctive relief in part because the patented component of Microsoft’s products was only a small component of the software as a whole.[44]

III. Courts Are Misapplying eBay

These drastic changes—the reduction in the total number of injunctions that have issued and the nature of the cases in which patent holders have successfully obtained injunctive relief—are irreconcilable with the Court’s unanimous eBay opinion. Recall that the unanimous majority opinion in eBay may be distilled in three points. First, traditional equitable principles—not categorical rules—govern the grant of injunctions. Second, district courts must apply the traditional four-part equitable test in determining whether to grant injunctions instead of relying on a general rule in favor of injunctions (although Chief Justice Roberts pointed out that there was a tradition in American law of liberally granting injunctions in the patent context). And third, a patent owner may obtain an injunction even if it “unreasonably declines” to use the patent it owns, and instead merely licenses it (despite Justice Kennedy’s concurrence suggesting that such entities are less worthy of injunctions than entities that practice their patents).

Where district courts have adopted categorical rules denying injunctions to certain types of patent holders or in cases involving certain types of patents, they have misapplied eBay. Any suggestion that a non-competitor or a PAE or a holder of a certain type of patent cannot obtain an injunction clearly runs afoul of the Court’s ruling that district courts should not create categorical rules that would deny relief in broad swaths of cases. And any suggestion that a PAE is not entitled to relief because it does not use its patent is contrary to (1) the Court’s admonishment that well-settled principles of equity govern the grant of injunctive relief, and (2) its recognition that, historically, even those who “unreasonably declined” to use a patent could obtain such relief. Indeed, in reaching its holding, the majority cited Continental Paper Bag—a case that confirmed that patents confer the right to exclude others, even if the patent holder itself has not practiced the patent.

eBay is a unanimous opinion that makes one thing clear: every type of patent holder—regardless of whether the holder practices its patent—may be entitled to injunctive relief if it shows that principles of equity tip in favor of such relief. Justice Kennedy’s non-precedential concurring opinion cannot be invoked to justify a categorical rule to the contrary. As one scholar has put it, “the use of [Justice Kennedy’s] concurrence to hold a conclusion in conflict with the Court’s unanimous opinion is entirely inappropriate.”[45] At most, district courts should consider Justice Kennedy’s opinion a “thought-drop in time for a future case and Court to consider, not the spark to an anti-non-practicing entity conflagration resulting in an 84% drop in injunction grants for those patent owners.”[46]