The Unintended Consequences of the Injunction Law after eBay v. MercExchange

The Unintended Consequences of the Injunction Law after eBay v. MercExchange - An Empirical Study of the Effects on Injunctions in Patent Law

Christopher J. Clugston and Wonjoon Kim

Good intentions often have unintended consequences. This applies to recent changes in the injunction law in patent cases. Although these changes were intended to alleviate some of the problems caused by patent owners that do not practice their invention, the changes have also unintentionally made it more difficult for patent owners in certain industries to obtain injunctions.

An injunction in patent litigation is generally an order prohibiting the manufacture, use, sale, or importation of any device that embodies the patented technology. As authorized by the Patent Act, courts “may grant injunctions in accordance with the principles of equity.” Outside patent law, the “principles of equity” traditionally means that an injunction can be granted only if the plaintiff can show that the following four factors, in the aggregate, favored an injunction: (1) irreparable injury, (2) an inadequate remedy at law, (3) a balance of hardships between the parties, and (4) the public interest. However, different standards developed for injunctions in patent cases. In 1982, Congress created the US Court of Appeals for the Federal Circuit (the Federal Circuit), giving it jurisdiction over all patent law appeals. From its inception, this court has instead interpreted the phrase “principles of equity” to mean that injunctions should routinely be granted after a patent was found to be valid and infringed. A denial was appropriate only in “exceptional circumstances.” Indeed, one study found that, prior to 2006, injunctions were granted in over 95 percent of cases. The rationale for this nearly automatic grant of injunctions was that the right to exclude is “the essence” of a patent, and, without an injunction, the value of that right would be significantly diminished. However, because of the increasing number of patent plaintiffs that do not, themselves, practice their invention, many began to question the soundness of this general rule.

These nonpracticing entity (NPE) plaintiffs can come in many forms—an individual inventor who does not have the resources to offer a product or service, a university or research institute that does not have an interest in doing so, or a company whose business model is to earn revenue through licensing, rather than by practicing its invention. Members of the last group are sometimes derisively referred to as “patent trolls” because they are not seen by critics as contributing to the technological development of an industry. Instead, they act like the mythical troll under a bridge, exacting a toll through litigation and licensing on those who do contribute. The advantage of being an NPE is that, because it does not offer a product or service, such a plaintiff cannot be threatened with counterclaims for infringement. This significantly reduces the risks of litigation for these plaintiffs and decreases the chance of a low-cost settlement for a defendant. 

This advantage, combined with the once-customary practice of granting injunctions as a matter of course, contributed to the problem of patent holdup. The threat of an injunction, particularly when a defendant had already significantly invested in the potentially infringing product, provided a plaintiff with considerable leverage in negotiations. Because an injunction was likely to be issued after successful litigation of the validity and infringement issues, a defendant that could not negotiate a license was faced with the possibility of having to remove its product from the market until it could design around the patent. The result was often a royalty overcharge; the plaintiff obtained licensing royalties that were significantly more than the true market value of the patented technology. This royalty overcharge was, essentially, a tax on innovation in an industry. 

One particularly high-profile example occurred when an NPE brought an infringement action against Research in Motion, the maker of the once ubiquitous BlackBerry device. This case gained widespread attention because it almost led to the shutdown of all BlackBerry devices. In that case, the jury found the patent was valid and had been infringed and awarded a 5.7 percent royalty, resulting in approximately $53.7 million in damages. The court also granted an injunction. While the injunction was stayed pending appeal, the parties settled the case for $612.5 million, eleven times the damages award. 

This outsize settlement award was attributed to the pending injunction. In response to this and similar cases, the Supreme Court addressed the injunction issue in eBay v. MercExchange. In that case, the Court unanimously rejected the “general rule” employed by the Federal Circuit, holding that the four-factor test does apply in patent cases. Commentators consider the eBay case a response by the Court to the NTP settlement. This decision was intended, at least in part, to make it more difficult for NPEs to obtain injunctions. 

This article empirically evaluates the aftermath of the eBay decision, looking at ten years of post-eBay injunction decisions. Numerous early studies were conducted to evaluate the effect of the eBay decision on NPEs. Although this study confirms the findings in the earlier literature that NPE plaintiffs are significantly disadvantaged, more interestingly, our results reveal that firms in certain industries are likewise granted injunctions at significantly lower rates than other industries and that can reduce the innovation incentive in these industries. In the case of NPEs, the innovation incentive is not a problem because these patent owners merely license their technology for others to exploit, and the primary concern is whether an injunction provides excessive leverage in settlement negotiations. However, for patent owners that do practice their inventions, the reduced likelihood of an injunction can have an impact on the potential value of a patent and thus can materially affect the incentive value of patents. 

The article is organized as follows. Part II provides a detailed history of Ebay, following the case from the district court to the ultimate Supreme Court resolution and reviewing the early empirical research on this issue. Part III describes the research methodology and the study’s results. Finally, Part IV offers some preliminary conclusions regarding this research.  

99 J. Pat. & Trademark Off. Soc’y 249(2017)

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