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Legal TimesMay 16, 2006 A Supreme Court ruling Monday in favor of eBay Inc. in a closely watched patent dispute made it harder for those claiming infringement to win permanent injunctions against major patent holders and manufacturers. The unanimous decision was a major win for eBay and other big patent holders that frequently face crippling litigation from parties that get injunctions to protect one of thousands of patents used in a complex product. Writing for the Court, Justice Clarence Thomas said district court judges have discretion, guided by traditional factors such as whether “irreparable harm” would result if an injunction is not issued, in deciding whether a party claiming infringement should win a permanent injunction against continued use of the product. The ruling in eBay Inc. v. MercExchange spells an end to the long-standing presumption in patent cases that an injunction should issue almost automatically when infringement is found. That presumption has been used as leverage against manufacturers that would rather settle with challengers than risk seeing a product halted in its tracks. The recent multimillion-dollar settlement between the makers of BlackBerry devices and a patent holder, NTP Inc., which narrowly averted a shutdown of the BlackBerry network, was often cited in debate over the issues in the eBay case. “The decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity,” Thomas wrote. The ruling sends the dispute between eBay and MercExchange, a Virginia company that sued eBay for infringement, back to the U.S. District Court for the Eastern District of Virginia. A statement from MercExchange predicted it would win an injunction even under the standards the Supreme Court articulated on Monday. Some analysts predicted that the ruling would not put an end to efforts by challengers to seek injunctions. “Patentees will continue to exploit the threat of an injunction, along with the always-present threat of an enormous judgment, in their negotiations with deep-pocket defendants, says Erik Puknys of Finnegan, Henderson, Farabow, Garrett & Dunner in Palo Alto, Calif. In a concurring opinion four justices — Anthony Kennedy, David Souter, John Paul Stevens and Stephen Breyer — also took note of the growth of what they described as an “industry” of small patent holders, known as patent trolls, who use patents not to manufacture products but as a “bargaining tool to charge exorbitant fees” from major companies to license their patents. But Thomas’ majority opinion did not take such a dim view of patent holders who do not manufacture their products, asserting that solo inventors and university researchers might have legitimate reasons for seeking licensing arrangements, and they could still win injunctions if they meet the traditional test for injunctive relief in civil cases. Chief Justice John Roberts Jr. also wrote a concurrence, joined by Justices Antonin Scalia and Ruth Bader Ginsburg, suggesting that judges, while having discretion, should still issue injunctions more often than not. Roberts noted that since the early 19th century, “courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases.” In a statement, Robert Holleyman of the Business Software Alliance, which supported eBay, called the decision a “clear victory for innovation and for consumers, and a defeat for patent trolls and others who are abusing the legal system. … By giving courts greater latitude on whether or not to issue an injunction, we are making progress towards restoring much-needed balance to the out-of-control patent litigation process.” The Court’s ruling was one of several unanimous decisions Monday. The rulings seem to bolster a growing perception that, at least for the moment, the high court under Roberts is achieving a considerable degree of agreement. Even though Thomas’ decision drew several concurrences, they were brief and devoid of any criticism of the majority opinion. At oral argument in March, it was far from clear that the justices would come to such a pro-patent decision unanimously. The eBay dispute began in 2001, when MercExchange sued eBay for infringing its patent that enabled the “Buy it Now” feature used on the popular online-auction site. A jury in the Eastern District of Virginia awarded MercExchange $35 million for infringement, and the company promptly sought a permanent injunction to prevent future infringement by eBay. MercExchange invoked the 1908 precedent, Continental Paper Bag Co. v. Eastern Paper Bag Co., that established the presumption in favor of an injunction against the infringer. But the judge denied MercExchange’s motion, finding that the company, which licenses but does not practice its patents, would not suffer irreparable harm without an injunction. But the U.S. Court of Appeals for the Federal Circuit rejected the District Court’s reasoning and said that nothing in the case justified deviating from the rule in favor of an injunction. “We are extremely gratified by the Supreme Court’s unanimous decision,” said Jay Monahan, eBay’s deputy general counsel for intellectual property, in a statement. “The trial judge originally found in this case that money was sufficient and denied an injunction. We are confident that when the District Court revisits this issue, particularly in light of the ongoing re-examination of the patents, that the result will be the same.” But other companies, joined by the Bush administration, argued that the precedent should be upheld to give needed protection to valid patents. The solicitor general argued that infringement alone amounts to irreparable harm and, therefore, should trigger an injunction against the infringer. Also on Monday, the Court ruled that Ohio taxpayers had no standing to challenge a tax-incentive program that encouraged Daimler-Chrysler to build a new facility in Toledo. The case, DaimlerChrysler v. Cuno, was closely watched by businesses and states because it threatened commonly used tax incentives aimed at luring business investment. A group of taxpayers successfully challenged the program before the 6th U.S. Circuit Court of Appeals, which found a commerce clause violation because it favors companies that invest in Ohio. The high court opted to sidestep the merits of the issue, focusing instead on the standing issue. Roberts, writing for the Court, said expanding the concept of standing to allow the suit to proceed to the merits would have “remarkable implications” for both state and federal taxpayer claims. “The Supreme Court’s ruling today is a big win for America because it sends a clear message that states will not be held hostage to lawsuits brought by individuals or groups with no direct connection to the issue at hand,” says W. Frank Fountain, spokesman for DaimlerChrysler. In a third decision, the Court ruled that hydroelectric dams have the potential for creating a “discharge” that triggers federal and state regulation through the Clean Water Act, even though the water is not changed by the dam itself. Souter, writing in S.D. Warren Co. v. Maine Board of Environmental Protection, said the word “discharge” is not limited to the release of pollutants, as Warren had argued, but also includes the mere release of water from one location to another. Souter also accepted the argument of environmentalists that hydroelectric dams alter the temperature and quality of the water downstream and have significant environmental effects. The ruling boosts state as well as federal regulation, because the Clean Water Act gives states a major role in the federal licensing of any activity that produces a discharge into a navigable water. Scalia dissented only to the extent that Souter used the legislative history of the Clean Water Act to justify his decision. Scalia has long rejected legislative history as a way to interpret statutes, arguing instead that the law’s words should guide the interpretation.

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