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In its decision in eBay, Inc. v. MercExchange LLC, 126 S. Ct. 1837 (2006), the U.S. Supreme Court rejected the long-prevailing federal court rule that a finding of patent infringement resulted in a presumption of irreparable harm that, in turn, resulted in a permanent injunction against continued infringement. The court did so by looking to the Patent Act language requiring that permanent injunctions be granted “in accordance with the principles of equity,” 35 U.S.C. 271, which Congress required of a patent owner to exclude unlicensed actors from infringing. The court thus clarified that judges in patent cases must apply the four-factor test traditionally used to determine whether to grant permanent injunctive relief. A patentee must now prove, by a preponderance of the evidence, that it has suffered an irreparable injury; remedies available at law, such as monetary damages, are inadequate to compensate for that injury; considering the balance of hardships between the patentee and the infringer, a remedy in equity is warranted; and the public interest would not be disserved by a permanent injunction. See eBay, 126 S. Ct. at 1838. The totality of circumstances must weigh in the patentee’s favor. Since eBay was decided (at least as of press time), a permanent injunction issued in 77% of cases (23 out of 30). This compares to 84% for pre- eBay cases, as reported by Paul M. Janicke, HIPLA Professor of Law at the University of Houston Law Center, in a presentation at the Intellectual Property Owners Association conference entitled Recent Developments, Strategies & Tactics in IP Damages Law (March 27, 2007). Thus, the elimination of the presumption of irreparable harm has only modestly raised the bar. The post- eBay district court decisions indicate that of the four factors, a patentee’s loss of market share from direct competition and a patentee’s loss of licensing opportunity drive the finding of the first two, if not three, prongs in the patentee’s favor. Some courts also weigh whether the patented component is a large or small component of the infringing product or process (collectively “instrumentality”) in assessing the first two prongs. This article will look at the ways courts have evaluated the four-factor test to determine whether to grant a permanent injunction. • Has the patentee suffered irreparable injury? Judges typically find irreparable injury when the infringement adversely affects the patentee’s ability to directly or indirectly profit from the patent. Interference with a patent owner’s right to exclude arguably inflicts at least a partial adverse effect on the patentee. See Transocean Offshore Deepwater Drilling v. GlobalSantaFe Corp., No. H-03-2910, 2006 WL 3813778, at *3 (S.D. Texas March 27, 2007). Issue of direct competition When the patentee and the infringer are direct or “head-to-head” competitors for the infringing instrumentality, irreparable harm often is established by showing that the infringement will cause the patentee to lose additional market share, profits and/or goodwill. See, e.g, z4 Techs. v. Microsoft Corp., 434 F. Supp. 2d 437, 440 (E.D. Texas June 14, 2006); Smith & Nephew v. Synthes, 466 F. Supp. 2d 978, 983 (W.D. Tenn. 2006). Irreparable injury also is supported by a showing that there are few (or no) products with the same function manufactured by third parties. See, e.g., Praxair v. ATMI, No. 02-2873, 2007 WL 906704, at *3 (S.D. Texas March 27, 2007) (Praxair’s and ATMI’s products are the “only two mechanical-based systems . . . on the market”). In addition, irreparable injury is supported when the market is at the formative stage, so that either customers stick with the perceived first provider innovator, or else there is a small customer base. See Tivo v. Echostar, 446 F. Supp. 2d 664 (E.D. Texas 2006); Transocean, 2006 WL 3813778, at *4. Further, irreparable injury can be supported when the infringing competition interferes with the patentee’s ability to create or maintain customer relationships and develop new products, or when the patentee loses its reputation for innovation with continued infringing sales. See Smith & Nephew, 466 F. Supp. 2d at 983. A finding of irreparable injury is generally not supported when the infringing component forms only a small aspect of the infringer’s overall product, and that overall product does not compete with or exclude the patentee from selling or licensing its technology to its customers. See z4 Techs., 434 F. Supp. 2d at 441. Nor is it supported when the patentee fails to prove harm by lost sales, market share, revenue and customers. See, e.g., Praxair, 2007 WL 906704, at *3. In the absence of head-to-head competition, irreparable injury can exist on proof that the continued infringement distorts the market demand for a license, i.e., that it resulted in a nonmanufacturing patentee’s lost opportunities to license third parties. See z4 Techs., 434 F. Supp. 2d at 441. Lost licensing opportunities Courts have found irreparable harm vis-�-vis lost licensing opportunities when a patentee research institution showed that lost patent licensing revenue resulted in lost opportunities to fund its research (expand existing projects or start new projects) that can never be recovered. See Commonwealth Scientific and Industrial Research Organization v. Buffalo Technology Inc., 492 F. Supp. 2d 600, 604 (E.D. Texas). Also, courts have held that monetary relief will not aid a patentee’s licensing efforts when the patentee’s goodwill and brand name recognition have been tainted by the infringement. See Paice v. Toyota Motor Corp., No. 2:04-CV-211-DF, 2006 WL 2385139, at *4 (E.D. Tex. Aug. 16, 2006). Further, irreparable harm has been found when the patentee shows that lost third-party licensing revenue cannot be calculated with reasonable certainty. See z4 Techs., 434 F. Supp. 2d at 441. Similarly, when the patentee licenses patents to its subsidiary, anticipating that its value “will increase with the successful marketing of the licensed technology,” irreparable injury has been found. See Novozymes v. Genencor Int’l, 474 F. Supp. 2d 592, 612 (D. Del. 2007). On the other hand, tolerating infringing conduct prior to adjudication of infringement, by not seeking to license or not pursuing a preliminary injunction, suggests that the patentee’s licensing ability is not impaired, and would likely undermine a claim of irreparable harm. When money is not enoughCan the patentee be adequately compensated by cash? Money damages are typically found to be inadequate when violation of the patentee’s exclusionary right cannot be adequately compensated by cash. Smith & Nephew, 466 F. Supp. 2d at 983. This inquiry is highly fact specific. It depends, among other things, on the nature of the patent and economic function of the patentee. See z4 Techs., 434 F. Supp. 2d at 441. Generally, harm inflicted by direct competition from the infringing instrumentality is not adequately compensable by monetary damages because of the difficulty of calculating future loss of market share, goodwill and price erosion, and an inability to exclude competition. See Smith & Nephew, 466 F. Supp. 2d at 985; MPT v. Marathon Labels, No. 1:04-cv-2357, 2007 WL 184747, at *12 (N.D. Ohio Jan. 19, 2007) (royalties won’t stop market erosion); Brooktrout Inc. v. Elcon networks Corp., No. 2:03-CV-59 2007, WL 1730112 (E.D. Texas June 14, 2007) at *2. In the absence of direct competition, legal remedies are generally inadequate when potential third-party licensees will be dissuaded from seeking a license if only money damages are awarded. Paice, 2006 WL 2385139, at *4; Commonwealth Scientific, 492 F. Supp. 2d. at 605. Courts have found inadequate legal remedies when the patented invention is central to the functionality of the product and therefore “drives the market,” such that the denial of a permanent injunction in effect forces on the patentee a compulsory license to the infringer without the commercial terms typical of the patentee’s licensing agreements. See Transocean, 2006 WL 3813778, at *6; Commonwealth Scientific, 492 F. Supp. 2d. at 605. Similarly, when lost-profits damages are not available because the patentee licenses the patented technology to a subsidiary, or when there is no easily ascertainable cash equivalent for the patentee’s expectation that its patents will exclude direct competitors from marketing its licensed technology, the legal remedy has been found to be inadequate. See Novozymes, 474 F. Supp. 2d at 613. Further, a legal remedy is inadequate when the patentee has consistently refused to license the infringer and spent a substantial amount of time litigating to protect its interest. See 3M Innovative Props. v. Avery Dennison Corp., No. 01-1781, 2006 WL 2735499 (D. Minn. Sept. 25, 2006). When legal remedy is enough On the other hand, courts have held that legal remedies are adequate when the “patented invention is but a small component of the product the companies seek to produce” and is unrelated to the core functionality of the infringer’s actual product. z4 Techs., 434 F. Supp. 2d at 441 (quoting eBay, 126 S. Ct. at 1842). Further, they have found an adequate legal remedy when the patentee offered to license the patent to the infringer prior to filing suit or during post-trial motions. Sundance v. DeMonte Fabricating Ltd., No. 02-73543 , 2007 WL 37742 (E.D. Mich. Jan. 4, 2007); Paice, 2006 WL 2385139, at *4. Moreover, there is an adequate legal remedy when the patentee fails to prove that the infringer’s infringement caused the loss of potential licensing agreements. Paice, 2006 WL 2385139, at *4. The Commonwealth Scientific case is significant because, prior to any litigation, Commonwealth Scientific assured the industry it was willing to license to all on reasonable and nondiscriminatory terms. However, the judge found that because no one in the industry accepted a license, Commonwealth Scientific had to litigate, and concluded that monetary damages would not be sufficient. The balancing testWhom does the balance of hardships favor? Is the hardship suffered by the patentee in the absence of a permanent injunction greater than the hardship imposed on the infringer by the permanent injunction? Courts have held that the balance of hardships tips in the patentee’s favor when the total percentage of the infringer’s business that relies on the use of infringing product, and is subject to injunction, is small. MPT, 2007 WL 184747, at *13 (10-15% of defendant’s products use the infringing component, and only a small percentage of that is sold in the United States); Commonwealth Scientific, 492 F. Supp. 2d. at 602 (11% of defendant’s business). The balance also tips in the patentee’s favor when the patentee is barred from exercising its right to exclude for a substantial portion of the patent term. 3M Innovative Props., 2006 WL 2735499, at *2 (20% of patent life). In addition, the balance tips in the patentee’s favor when the only hardship borne by the infringer stems from the cessation of its infringing operations, and the patentee is “likely to face substantial hardship [such as negative commercial reputation] from the continued infringement.” Smith & Nephew, 466 F. Supp. 2d at 985 Conversely, the balance of hardships is more likely to tip in the infringer’s favor when the injunction will impose hardships not ordinarily expected by the infringer or that negatively affect third parties, such as related businesses and customers. Paice, 2006 WL 2385139, at *4. The balance also tips in the infringer’s favor when the infringer’s business is in a “burgeoning” market in which vital research initiatives would be stifled by the injunction ( Paice, 2006 WL 2385139, at *4 (hybrid automobiles)) or when the injunction would damage the infringer’s commercial reputation and goodwill (id.) or have severe repercussions for the infringer’s customers. z4 Techs., 434 F. Supp. 2d at 444. Considering the public interestWhen is the public interest not disserved by a permanent injunction? The public holds an interest in enforcing patent rights, which favors a permanent injunction. See Smith & Nephew, 466 F. Supp. 2d at 985. This relates to patents that have survived any validity challenge, not those that are merely presumptively valid. However, the court may find that the public interest is disserved by an injunction when there is critical public need for use of the infringing product for, say, public health and safety seasons ( MPT, 2007 WL 184747, at *13), or when there is immense continued public reliance on an infringer’s product. In the z4 Tech case, the court noted that the public relied heavily on Microsoft’s operating system, of which only a small component was infringing. Similarly, the eBay court found that eBay had become a monopolist in online auctions and was used by vast numbers of people before the infringing conduct began. Both judges denied an injunction. In contrast, in a generic drug case the court balanced “the public interest in having access to generic drugs at reduced prices with ‘significant public interest in encouraging the massive investment in research and development that is required before a new drug can be developed and brought to market.’ ” Sanofi-Synthelabo v. Apotex, 492 F. Supp. 2d 353, 397 (S.D.N.Y 2007). The court then found the balance to be either in equipoise or favoring slightly the patentee, and so it entered a permanent injunction. The latest patent reform bill in Congress, H.R. 1908; S 1145, does not address or propose to change when permanent injunctive relief may be had. Perhaps this is because Congress believes that the Supreme Court got it right when it rejected the presumption of irreparable harm and reinstated the traditional principles of equity to control the patentee’s right to exclude others from infringing. Robert M. Isackson is a partner in the New York office of Orrick Herrington & Sutcliffe and is the New York intellectual property group leader for the firm. Sunni Yuen, who was a summer law clerk at the firm and is attending the University of Pennsylvania School of Law, assisted in the preparation of this article.

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