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Twice in two years the Supreme Court has heard cases involving fundamental questions of private property rights. The first decision, Kelo v. City of New London, spurred much criticism and a wave of legislation over the past year. After oral argument in late March, we now await the high court’s conclusions in eBay v. MercExchange. To people uninterested in patent law, the eBay case may seem noteworthy only for its potential business impact. Just as earlier this year a veritable Armageddon was predicted if addicted users were deprived of their BlackBerries as a result of NTP Inc. v. Research in Motion Ltd., we are now told that another patent holder is attempting to stop a service so ubiquitous that a shutdown would seem to threaten our way of life. But there’s another side to the story, which is seldom told. The eBay case, like Kelo, threatens the fundamental right of all property holders to exclude others from using their property. Even if property holders choose to use that right simply as a bargaining chip, it is their choice to make. Looking back at Kelo, we see plaintiffs such as Wilhelmina and Charles Dery, an elderly couple living in the Fort Trumbull area of New London, Conn. The Derys were asked to sell their house, in which Mrs. Dery was born in 1918 and in which they had lived together for 60 years, so that it could be destroyed and replaced by a new private waterfront development. They refused. But the city didn’t give up. Instead, New London exercised its power of eminent domain and announced that it would “take” the Derys’ property. Under the Fifth and 14th Amendments to the Constitution, such governmental takings must be for “public use” and owners must receive “just compensation.” Unfortunately, what the courts recognize as “just compensation” is seldom as large a sum as a private transaction could yield, and in the New London case, their property was being taken for a clearly private development. So the Derys, Susette Kelo and other area homeowners took their plight to the courts. The case eventually reached the Supreme Court, where on June 23, 2005, a divided bench ruled 5-4 that New London could take people’s homes for private redevelopment. Now, only a year later, the court returns to the fundamental question of private property rights in eBay v. MercExchange. In 1998, Thomas Woolston, the founder of MercExchange, received patents covering his invention of an “electronic market,” including tracking and mediation features. Acknowledging the value of Woolston’s invention, eBay offered to purchase MercExchange’s entire patent portfolio in June 2000. MercExchange wasn’t interested in an outright sale and refused. For its part, eBay declined to enter into a licensing agreement. Over the next few years, MercExchange licensed its patented technology to a number of other Internet vendors, including AutoTrader, while eBay used the technology without MercExchange’s permission. In 2001, MercExchange sued eBay for patent infringement. At trial, a jury found that eBay (and its wholly owned affiliate Half.com) had willfully infringed MercExchange’s patents. The jury awarded $35 million in damages. The willfulness finding enabled the trial judge to treble those damages to account for eBay’s past infringement. And to prevent future infringement, the court was empowered to issue a permanent injunction against eBay’s use of MercExchange’s invention, potentially shutting down large portions of eBay’s Internet business. But the trial judge denied MercExchange’s motion for permanent injunctive relief. The court cited concerns about the validity of many business method patents, noted the risk of additional litigation, and pointed to MercExchange’s expressed willingness to license its patents to others. The Federal Circuit U.S. Court of Appeals disagreed, and eBay turned to the Supreme Court. Without that injunction, MercExchange will be set adrift in the same boat as the Derys � it will receive a relatively meager sum for its property, over which it will be denied control. In both of these recent cases, the Supreme Court has been asked to limit a property owner’s most fundamental right � the right to exclude. Traditionally, the right to exclude empowers a property owner with two options, both of which were denied the Derys and may be denied MercExchange. First, the property owner may choose not to sell at all. In both intellectual and real property law, this refusal power is rooted in a property owner’s ability to enjoin others from infringing on his property right. In certain cases, the value of property to its owner is sufficiently high that the owner does not wish to sell � for any price. As Justice Felix Frankfurter explained almost 60 years ago in Kimball Laundry Co. v. United States (1949), “The value of property springs from subjective needs and attitudes; its value to the owner may therefore differ widely from its value to the taker.” This was the case for the Derys, who planned to live out their lives in the house they had enjoyed together for 60 years. And it was at least initially the case for MercExchange, which did not want to sell its patents outright to eBay. As a second option, the property owner may use his right not to sell as leverage to obtain a higher sale price. This latter option, in the real property context, is commonly referred to as the holdout problem. Left with no other choice, a prospective purchaser is supposedly forced to offer the property owner a premium. In fact, however, this second option may simply drive the eventual sale price to a true market value. Just how much was the Derys’ property actually worth to the developers in New London? We will never know because the Derys did not have the opportunity to exercise their right, even if they had wanted to. But in the BlackBerry case, we do know from a widely reported settlement how much NTP’s patents were actually worth to Research in Motion � $612.5 million. And if the Supreme Court sides with MercExchange, we likely will discover how much its patented technology is worth to eBay. That is, assuming MercExchange wishes to offer a license at all.
Not everyone agrees that market transactions produce the right outcomes. In response to cases like Kelo and eBay, federal and state legislatures have picked up the issue of property rights, simultaneously considering bills that purport to curb the use of eminent domain against homeowners and bills that limit the availability of injunctive relief for patent holders. These two avenues appear at first blush to diverge, tending toward greater protection for real property owners and lesser protection for intellectual property owners. But under the surface, there is a consistent erosion of property rights. For homeowners, this erosion is hidden inside an elaborate maze of mirrors. Many state legislatures have spoken out against abuses of eminent domain, and at last count 14 states have passed legislation to limit the use of eminent domain. But a closer reading uncovers a deeper truth � all but one of these new laws expressly permit eminent domain takings under a wide variety of circumstances, allowing precisely the types of forced private-to-private property transfers they claim to prevent. With respect to patent rights, the trend is more apparent. As part of a wave of patent reform legislation in 2005, Congress considered a number of proposals to limit injunctive relief. One such proposal went so far as to recommend that injunctive relief be denied as a matter of course, except in very limited circumstances. The common theme of these parallel sets of legislation is the notion that private property rights can and should be sacrificed in favor of an ethereal notion of the public good. In the case of eminent domain takings of real property, the public good at least is relatively clear when takings are for “public use,” as allowed by the Fifth Amendment. Classic examples include takings of land for roads and schools. The taking for private use in the Kelo case, however, was justified under a more elusive concept of “public benefit.” Here the public good is supposedly served by the economic expansion expected to accompany redevelopment. But this is a very different matter. Corporations bringing new jobs may provide indirect public benefits (as does almost all economic activity), but these benefits are necessarily more elusive and tangential. And it is unclear why the state ought to prefer the private economic interests of certain parties over others. In the case of denying injunctive relief to patent owners, it is similarly not evident what public good, if any, would be served by the harm to property rights. MercExchange already has every financial incentive to put its intellectual property to profitable use, either by using it directly or by licensing it to any number of businesses that do meet MercExchange’s terms. In light of these market incentives, MercExchange’s technology will be used, even if not by eBay. If eBay has to pay MercExchange a high asking price (or, alternatively, design around the violated patents), how is that contrary to the public good? Though eBay may own and operate a number of popular Web sites, in this case it has been found to be a willful patent infringer, and such behavior ought not to warrant either sympathy or tacit encouragement by excusing the company from the full consequences of its behavior. After all, eBay has profited from using MercExchange’s patented technology. Some commentators have suggested that fairness requires patent owners to license their inventions to all interested parties if they choose to license at all. Others have said that forced licensing serves the public good by fostering the economic expansion expected to accompany an innovative technology. But both of these arguments directly violate the patent holder’s right to exclude. This right is critical. Inventors seek patents, rather than keeping their inventions secret, partly because in return for public disclosure they receive the right to exclude. Indeed, an inventor’s decision to apply for a patent ultimately serves the public good by placing innovative technology into the public domain to be shared with all upon the expiration of the patent. The widening scope of mandatory sales or licenses of both real and intellectual property in the supposed interest of the public good threatens to shift the balance of power from property owners to courts and governments, which must then decide how the public good is best met in each situation. Property owners are removed almost entirely from this decision-making process, left with no more than a voice crying out in protest. The power to control the disposition of property is, and should remain, the property owner’s. The Supreme Court’s decision in Kelo was wrong. Let’s not make the same mistake twice. Paul M. Schoenhard is an associate in the Washington, D.C., office of Ropes & Gray, where he specializes in intellectual property law. This commentary first appeared in Legal Times, the Recorder’s Washington, D.C. affiliate. The views expressed are solely those of the author.

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