The Supreme Court's 2006 eBay v. MercExchange2 decision continues to transform the way companies and their counsel evaluate and litigate patent infringement. The two central post-eBay questions are the availability of a permanent injunction and, in the absence of an injunction, the assessment of a running royalty. As courts have tackled these new issues, some guideposts for litigation strategy and expectations have begun to surface.
II. The eBay Equities
The basic principles of eBay and its progeny are now well known. Notwithstanding a patentee's statutory right to exclude, permanent injunctions for patent infringement are a question of equity. As permanent injunctions are not automatic, a successful plaintiff must prove that (1) it will suffer an irreparable injury; (2) remedies available at law are inadequate to compensate for that injury; (3) the balance of hardships between the parties favors the plaintiff; and (4) the public interest would not be disserved.3 In the absence of a permanent injunction, the court may award an ongoing royalty for the infringer's continued practice of the claimed invention.
A court's failure to address the eBay factors when determining the appropriateness of injunctive relief is an abuse of discretion and reversible error.4 This underscores the importance of understanding how the eBay factors have been implemented when planning litigation strategies and managing your or your client's expectations. This is particularly true for the plaintiff, who chooses the jurisdiction and bears the burden to show that the equities favor permanent injunctive relief.
A. Availability of a Permanent Injunction
Although no longer issued as matter of course, permanent injunctions remain the most common outcome for patent infringement. In over 75 decisions applying eBay from May 15, 2006 through June 15, 2009, permanent injunctions against further infringement were granted roughly 70% of the time. The availability of injunctions is, however, not an all-or-nothing proposition. Limited term compulsory licenses, to allow the infringer time to appeal or change its product, have been issued and affirmed by the Federal Circuit.5
In practice, while the particular circumstances of each case will be unique, several factual considerations have been prominent in applying eBay to balance the equities.
1. Competition Between the Parties
The parties' relationship in the market is a dominant—though not determinative—factor for granting or denying a permanent injunction. Where the parties were competitors, injunctions were granted in 80% of the cases. While a high rate of injunctions for competitors is not surprising, the 20% of cases between competitors where an injunction was not issued are noteworthy. For non-competitors, injunctions were granted about one third of the time. This may be seen as a surprisingly large fraction given the predicted effect of eBay on limiting injunctions for non-practicing entities.6
As with most considerations, there are shades of competition. Where the plaintiff is actually practicing the invention, a finding of irreparable harm has been found.7 Yet, a plaintiff who does not practice the patented invention but still competes in the market might also be able to obtain an injunction.8 However, depending on the circumstances, a non-practicing entity without a product on the market could be less likely to obtain an injunction.9
2. Nature of the Market
Even for head-to-head competitors, more nuanced market considerations have led to the denial of a permanent injunction. In a two-player market, the infringer's market share may be to the direct detriment of the patentee. In a multi-player market, however, an injunction may not be warranted where the infringer is taking sales from a third party.10
Denial of a permanent injunction can also follow from the absence of a proven nexus between the infringing feature and product sales, such as where sales of the infringing product may be driven by a non-patented feature.11 Similarly, an injunction has not been favored where the patented feature is only a small component of the commercial product.12
Of course, other market considerations may also favor imposition of a permanent injunction. The loss of so called "sticky customers," those who will continue to buy additional products from the original manufacturer, can compound the patentee's potential harm resulting from infringement, thereby favoring an injunction.13
3. Licensing History
It may be more difficult to obtain a permanent injunction where the patentee has a history of licensing or offering to license the patent. Rather than being irreparably harmed by another party practicing the claimed invention, prior licensing or licensing offers may suggest that any loss to the patentee is compensable by money damages.14 However, there is no categorical rule denying an injunction to even a non-practicing patentee who prefers licensing.15
There are, of course, subtleties here as well. While a licensing offer to the infringer was found to weigh against an injunction,16 licensing to a non-competitor17 or to settle a prior litigation18 may be regarded differently. Licensing terms are also taken into consideration by the court when deciding whether to grant permanent injunctive relief. Relying on its own prior licensing practices, a patentee had argued for and been awarded a permanent injunction in addition to damages for past infringement that included a $5.8 million "market entry" fee and an additional $1.2 million lump sum royalty payment.19 The Court of Appeals for the Federal Circuit held that there could be no irreparable harm to the patentee for future infringement, and hence no permanent injunction, because the large upfront entry fee contemplated future sales by the licensee.
4. Defendant Considerations
The harmful effects of a permanent injunction on the infringer has been considered by the courts in evaluating the eBay equities. Interestingly, opposing extremes—the infringing product being effectively de minimis20 or being central21 to the infringer's business—have both been found to weigh against an injunction. An injunction between non-competitors was also not imposed where it would cause the defendant hardship and damage to its reputation.22
5. Plaintiff Considerations
One clear message from the case law is that a presumption of irreparable harm to the patentee does not automatically follow from a finding of infringement.23 Indeed, while the loss of the leverage provided by an injunction, or its threat, is a recognized harm to the patentee, this loss has been rejected as factor in favor of imposing an injunction.24
Instead, analogous to considering the effects on defendant's business, an injunction was favored where practicing the patented invention was central to plaintiff's business.25 On the flip side, an injunction was disfavored where the plaintiff did not practice the patented invention or a competing product.26
Even where some equitable factors favor an injunction, actions by the plaintiff can tip the scales the other way. Delay in filing suit, effectively allowing the infringing activity to continue unchecked, can—but does not always—undercut plaintiff's ability to prove irreparable harm.27 Not seeking a preliminary injunction has been regarded as a "factor in the calculus" indicating the absence of irreparable harm and adequacy of money damages.28 Other conduct by the plaintiff, such as being found to have committed inequitable conduct in another asserted patent, can also militate against a permanent injunction.29
6. Public Interest
"Public interest" is one of the specifically enumerated eBay considerations and must be addressed in evaluating requested injunctive relief. This consideration, however, does not point in a single direction. On the one hand, maintaining a strong patent system is a public interest that favors injunction.30,31 On the other hand, product diversity and availability can compel denial of an injunction even between competitors.32 The tipping point may be technology dependent. While injunctions have been denied for some medical devices based on strong public interest considerations,32 in other cases there was no public interest in dual computer screen display or entertaining technology33 that outweighed the importance of a strong patent system. The public's continued access to existing products, e.g., Microsoft® Word, has also been found to weight against injunction.34
B. Assessment of a Running Royalty
When a permanent injunction is denied, a new question arises: should the patentee be otherwise compensated for future infringement? If the answer is yes, the judge or jury will then be tasked with determining a proper ongoing royalty. While we have seen different royalty rates imposed for pre-suit and post-judgment infringement, given the flexibility in fashioning remedies, thus far there is no clear guidance from the case law on numerous important details including who determines the new royalty rate and how the rate should be determined.35
Some courts have given the role of deciding post-judgment royalties to the jury and reasoned that this will not substantially increase the complexity of the case for the jury.36 However, a jury is not required, as courts may decide a running royalty rate as a matter of equity.37 The parties have also been ordered to negotiate a post-judgment royalty rate, an alternative advocated by the Court of Appeals for the Federal Circuit.38
Beyond the question of who, the methodology by which post-judgment royalties are determined is still in flux. Several courts have relied on the pre-judgment royalty rate determined for past infringement as a starting point for the post-judgment royalty rate.39 However, the Court of Appeals for the Federal Circuit has found that, because of changes in the parties' positions, it is a "faulty premise" to use a pre-judgment rate as the starting point.40 For this reason, simply trebling the pre-judgment royalty rate to account for post-judgment infringement being willful was deemed improper.40
The fundamental difference in the parties' between pre- and post-judgment positions is that infringement and validity of the patent are no longer uncertain post-judgment.40 Even this seeming absolute is not without refinements, however, as considerations such as the infringer's likelihood of success on appeal have been taken into account to establish the post-judgment royalty rate.40
Several methods have been implemented by various courts to determine an appropriate royalty rate. An evidentiary hearing before the court can be used to address the changed circumstances and their economic consequences.41 The Georgia Pacific factors,42 traditionally relied on to determine a pre-judgment royalty rate based on a hypothetical negotiation between the parties, have been applied to determine an appropriate post-judgment royalty rate based on a "hypothetical negotiation" between the parties.43 Notably, in a recent Northern District of California case, the District Court held that the Georgia Pacific factors may be weighed differently in the post-judgment context.44
The pieces of the post eBay world are starting to fall into place. While no single criteria is determinative in affecting the grant or denial of a permanent injunction, understanding and applying the relevant factors will add another dimension to patent litigation expectations and strategy. Independent evaluations of pre- and post-judgment royalties layer still further complexity. Clearly, a finding of infringement does not end the story for either party.45