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It is axiomatic that a patent is only as valuable as the owner’s ability to enforce it. Though the risk of big damage awards deters infringers, the ultimate threat to businesses with significant revenue riding on infringing products is the permanent injunction. The likelihood of injunctive relief has hung like the sword of Damocles over accused infringers’ heads, giving settlement leverage to patent holders. Just look at the $612.5 million settlement by Research in Motion in the BlackBerry case. But on May 15, the balance between patent holder and patent infringer created by the threat of a permanent injunction was upset by the Supreme Court’s decision in eBay Inc. v. MercExchange LLC. The Supreme Court unanimously reversed the lower court’s articulation of a “general rule” that permanent injunctions will be issued upon a finding of infringement, absent exceptional circumstances. The high court’s decision effectively diminishes the threat of a permanent injunction and thereby reduces the strength of all patents. This perceptible shift in the balance of power may be somewhat offset, however, by the continuing availability of an alternative remedy for cases in which the infringing product is manufactured outside the United States. An exclusion order obtained from the U.S. International Trade Commission (ITC) is tantamount to a permanent injunction. DIFFERENCE OF OPINION The battling amicus briefs in eBay provide a useful synopsis of the business world’s debate over permanent injunctions in patent cases. For those companies with limited diversity of products or services subject to bottleneck patents, a permanent injunction can threaten their very existence. Patent litigation is truly a “bet the company” proposition for them. Despite the obvious applicability, Research in Motion, in its eBay amicus brief, did not acknowledge the effect of permanent injunctions on companies such as itself, instead arguing that money damages are sufficient to compensate a patent holder whose sole business is licensing patents. But Amazon.com, Chevron, Cisco Systems, Google, Infineon Technologies, Shell Oil, Time Warner, and Visa filed a joint amicus brief that was less restrained in condemning the presumption in favor of permanent injunctions stated by the U.S. Court of Appeals for the Federal Circuit. Their brief observed that the automatic-injunction rule provides “no exception for injunctions that would effectively prevent the use of an entire complex line or service when the patent in question covers only a minor element.” The brief pointed out that this increases patent holders’ leverage even “in cases of broad, vague patents of dubious technical merit.” Even well-diversified companies are not immune to the power of permanent injunctions. High-tech powerhouses Intel, Micron, Microsoft, and Oracle filed a joint amicus brief arguing that the automatic-injunction rule imposed a disproportionately harsh sanction on inadvertent infringers: “As the number of patents continues to multiply, it is becoming increasingly difficult for innovators to keep track of all patents in a particular area to avoid inadvertent infringement.” But not all large companies agreed with Research in Motion. The role of many corporations as both patent holders and accused infringers must have led to extensive internal discussions before companies chose sides in eBay. Industrial giants DuPont, General Electric, Johnson & Johnson, Procter & Gamble, and 3M filed a joint amicus brief in support of an automatic-injunction rule. They argued that the patent system “represents a bargain between the public and inventors” — public disclosure of the invention in return for the right to exclude others for a limited time. They had “built their respective patent portfolios in reliance on this bargain,” the brief said. At patent-holding and patent-licensing companies (derisively termed “patent trolls”), the power to threaten a permanent injunction is seen as necessary in dealing with more powerful corporations. In its amicus brief, Rembrandt IP Management argued that the leverage of the injunction threat is intrinsic to the “actual value” of a patent. Rembrandt also made the point that “non-practicing entities” (NPEs) level the playing field: They “allow inventors to do what they do best — invent — while leaving to the NPE the risks and potential rewards of developing the value of their inventions in the marketplace. NPEs, in short, function with respect to inventions both as venture-capital firms and as market-makers.” The genesis of the eBay decision was an otherwise unremarkable infringement case in the Eastern District of Virginia. MercExchange sued Internet giant eBay and others for willful infringement of patents describing business methods online. After a jury verdict finding infringement and substantial damages, Judge Jerome Friedman denied a permanent injunction to MercExchange. Among the reasons he gave was growing public concern over business method patents and MercExchange’s willingness to engage in licensing. Both sides appealed. In a decision written by Judge William Bryson, the Federal Circuit affirmed the overwhelming majority of Judge Friedman’s determinations. Nonetheless, the Federal Circuit reversed his refusal to grant injunctive relief, iterating what many already perceived to be the law on permanent injunctions: “We therefore see no reason to depart from the general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” The Supreme Court’s unanimous decision last week rejected the approaches of both the District Court and the Federal Circuit. The high court held instead that the traditional four-factor test for injunctions — irreparable injury, inadequate remedies at law, balance of hardships between the parties, and the public interest — should be applied in patent cases, subject to an abuse-of-discretion standard of review. Four justices — John Paul Stevens, Anthony Kennedy, David Souter, and Stephen Breyer — were willing to go even further than Justice Clarence Thomas’ majority opinion. In a concurring opinion by Justice Kennedy, they noted the disproportionate bargaining power enjoyed by patent-licensing companies wielding the threat of an injunction and the “vagueness and suspect validity” of many business method patents. The four justices would have included these considerations in the four-factor test, thereby adapting the test “to the rapid technological and legal developments in the patent system.” The majority decision carefully balanced its criticism of both the District Court’s rejection of a permanent injunction for a nonpracticing patent holder and the Federal Circuit’s general rule, “unique to patent disputes,” requiring an injunction. But it is the rejection of the Federal Circuit’s rule that will inevitably have a chilling effect in future proceedings. In truth, the “general rule” was merely an articulation of what the Federal Circuit correctly noted had become the general practice of courts. The Supreme Court’s flat rejection of this practice eliminates a tacit assumption by alleged infringers in calculating the potential costs of a litigation loss. An adjudicated infringer will now be able to employ the full panoply of equitable defenses under the four-factor test. This will increase enforcement costs for patent holders and, necessarily, diminish the likelihood of obtaining a permanent injunction. TURN TO TARIFF ACT Fortunately for patent holders, Section 337 of the Tariff Act provides a remedy similar to — and as justly feared as — a permanent injunction: the exclusion order. Section 337 defines the importation of an infringing good to be an unfair trade practice. The importation of a good made abroad by a process patented in the United States has also been judged an unfair trade practice. The statute provides that, upon finding a violation, the ITC shall issue either a limited exclusion order (affecting only parties named in the action) or a general exclusion order (applicable to all the world). Exclusion orders are enforced by the Bureau of Customs and Border Protection so that no goods found to be infringing may enter the country during the patent’s term. At one time, Section 337 was viewed as a more narrow remedy, useful against a limited range of infringers. But today it is broadly applicable. Last year most of the manufactured goods consumed in the United States were imported and thus fall within the ambit of Section 337. Resorting to the ITC has several advantages relative to federal district court. The first is speed. Obtaining an exclusion order from the ITC takes far less time than winning an injunction from a district court. The ITC holds an evidentiary hearing, analogous to a trial, before an administrative law judge about seven months after a complaint is filed. Virtually all Section 337 cases are completed, including administrative review by the ITC commissioners, within 12 to 15 months. Another advantage is that the ITC is a patent-friendly venue. In recent years, it has decided 54 percent of contested cases in favor of the patent holder. This compares positively with win rates for district court patent cases. A third advantage arises when the patent holder alleges importation of a product made overseas using a process patented in the United States. If a plaintiff brings such a claim in a district court, it must contend with the defenses set forth in Section 271(g) of the Patent Act. These provide that a product is not infringing if it is “materially changed by subsequent processes” or becomes “a trivial or nonessential component of another product.” Similar defenses do not apply under Section 337. Often district court cases are filed at the same time as Section 337 actions. A party that is both a district court defendant and a Section 337 respondent may invoke a mandatory stay of the district court proceeding. Yet a patent holder bringing a Section 337 complaint may still file a companion case to prevent the alleged infringer from bringing a declaratory-judgment action in an unfavorable forum. Similarly, filing a Section 337 complaint can put a declaratory-judgment defendant back in the driver’s seat in a patent-friendly venue. Thus, whether filed by the patent holder or the accused infringer, a district court case typically does not impede a Section 337 action. There is one catch, but it is a small one. To initiate a Section 337 investigation, the patent holder or its licensees must practice at least one claim of the patent in the United States. At one time, this “domestic industry” requirement largely limited Section 337 complainants to those companies that manufactured goods in the United States. This is no longer so. In 1988, Congress expanded the definition of domestic industry to include activities such as “engineering, research and development, or licensing.” The legislative history of the amendment indicates that this deliberate lowering of the threshold was done to permit “universities and other intellectual property owners who engage in extensive licensing” to avail themselves of Section 337. At least one ALJ has construed the provision liberally such that the licensing activities of only five employees constituted an “industry.” Thus, most patent holders can meet the domestic-industry requirement. And that means patent holders trying to stop infringers have a real choice. In the wake of the Supreme Court’s eBay decision, they should consider a Section 337 proceeding as the first remedy. It is evident that the threat of a permanent injunction is no longer the ultimate bargaining chip. But as long as the infringing products are manufactured abroad, patent holders need not accept the prospect of diminished bargaining power, mandatory licensing, or loss of the critical ability to exclude competitors.
Rodney R. Sweetland III and Michael G. McManus are partners in D.C.’s Adduci, Mastriani & Schaumberg. The firm specializes in international trade, intellectual property litigation, and customs law.

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