Monday, May 29, 2006

Patent cases like eBay and Blackberry triggered an outcry over “patent trolls” — who supposedly ambush business with junk patents. The U.S. Supreme Court responded last week by speaking to the longstanding principle under patent law that a patentee may get a permanent injunction once patent validity and infringement have been adjudicated.

Unfortunately, besides flagging the two outer limits — no “general rule” in favor of injunctions nor any “broad swath of cases” exempt from them — the court said little other than the four-factor general test for injunctions should be applied. The effect of this watershed case on innovation turns on how close the courts avoid “writing on an entirely clean slate” by adhering to the status quo.

Negotiating against the backdrop of an injunction may seem like having a gun to one’s head, especially when the patentee is not practicing the invention. But just imagine a rule that allowed me, anytime I notice you are not using your car as I like, to use it myself and pay whatever a court might later request, if you sue me and win.

Even when a patentee is not looking for a deal, the infringer can still offer him one too attractive to pass up. This presumably motivated the court to reject exceptions based on a patentee’s “willingness to license” or “lack of commercial activity” and to affirm the century-old Continental Bag decision that a patentee need not practice the patented invention. As the court noted: “Some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves.”

While an injunction could shut down a business, it also drives parties to strike deals — because shutting down the business is a loss for both sides. These patent deals are essential to innovation. While some bemoan the hefty $600 million Blackberry settlement, waiting to settle will prove costlier to the party that loses legal battles along the way. And high-profile, high-priced eleventh-hour settlements reveal little about the often overlooked and remarkably low royalty deals that could have been reached earlier. This presumably motivated Chief Justice John Roberts, and Justices Antonin Scalia and Ruth Bader Ginsburg to note in their concurrence a discomfort in letting an infringer unilaterally decide to use another’s property simply by paying the owner a court-determined fee. The first two factors from the general test for injunctions — irreparable harm and inadequacy of money damages — are both met when a patent has been adjudicated to be both valid and infringed.

Concerns over the “true” importance of an invention to an infringer presumably motivated Justices Anthony Kennedy, John Paul Stevens, David Souter and Stephen Breyer to question a patentee’s “undue leverage.”

Yes, many patents are “trivial” to real business. But the decision by an infringer to spend millions on litigation — and, increasingly, lobbying — is plenty of evidence the invention is not trivial. And if truly trivial, the patented technologies should be cheap to omit or design around. Sure, in some cases, the value is due mostly to the hassle costs of litigation. But it would be better for infringers to put their ingenuity into striking deals or inventing around the patent, rather than trumping up novel legal arguments about how their case is “special” and not right for an injunction.

Denying an injunction would give infringers an option to take a court-determined price or later strike a deal with the patentee for less. Leaving the question of an injunction open to an all-things-considered analysis in each case would give even brazen infringers strong incentives to litigate in perpetuity rather than accept a reasonable settlement at an early stage. Both approaches would tip the balance of hardships against patentees, without offering benefits to innovation, which is the third factor from the general test for injunctions.

There are always irrational holdouts and other uncooperative behaviors. But it is perverse to let avoiding the injunction hinge on failure to strike a deal. A legal test that rewards a failure to cooperate would lead to a decrease in cooperation, not an increase — all at expense of the public interest, the fourth factor from the general test for injunctions.

Believing a court could step in to set the “right” price in lieu of an injunction is unrealistic. First, doing so requires immense information that only the disputing parties have and that a court must obtain at great cost. Courts also err by setting prices either too low or too high, with seriously distorting effects in either case — if too low, a rush to infringe ensues; if too high, the tremendous additional costs gain nothing over the injunction. Finally, not only are error and administrative costs far higher for the court than the market, but most technology deals are about more than price and courts are woefully inadequate compared to the market for determining and policing these other terms.

While many patents are held invalid — on business methods or other methods and products — present practice only allows permanent injunctions after the court has determined the patent is both valid and infringed. It would be ironic and harmful to let fears about the weakest patents prevent injunctions for those shown to be the strongest. If we think the possibility of invalid patents is so great that all seem tarnished, the culprit is the institutional problem of policing bad patents. And a direct attack on these problems is far likelier to yield gains. Why not weaken or abandon the judicial presumption of validity and publish patents soon after filing?

In the end, who won? It may be too soon to tell. To the extent we’ve entered a new uncertain domain ruled by an all-things-considered analysis in each case, the trial lawyers win. To the extent the present practice is an acceptable general tendency to issue injunctions — though short of a “general rule” — innovation wins.

F. Scott Kieff is associate professor at Washington University School of Law and research fellow at Stanford University’s Hoover Institution. R. Polk Wagner is Professor at the University of Pennsylvania School of Law. They wrote, together with Richard Epstein, an amicus brief for various law and economics professors in the eBay v. MercExchange case.

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