Bloomberg News

EBay Wins at U.S. Supreme Court on Patent Orders

May 15, 2006

The U.S. Supreme Court, siding with EBay Inc. (EBAY:US) and its allies in the technology industry, said companies that have infringed on patents don't necessarily have to change their products.

The high court today unanimously set aside a ruling that would have barred EBay, the world's largest Internet auctioneer, from using patented technology owned by MercExchange LLC, a Virginia company. The justices said a federal trial judge should have discretion whether to issue such an order.

The ruling is a victory for technology companies that backed EBay, including Microsoft Corp. (MSFT:US) and Intel Corp., which said they are under siege from small patent owners who use the threat of court orders to seek high licensing fees. The decision is a setback for Pfizer Inc., Johnson & Johnson and other drugmakers, which said any lessening of that threat would reduce the value of their inventions.

``It appeared they were concerned about large corporations held hostage to minor innovations,'' said Brad Wright, a patent lawyer at Banner & Witcoff in Washington who also teaches at George Mason University School of Law.

The U.S. Court of Appeals for the Federal Circuit had said trial judges almost always should bar future infringement. Justice Clarence Thomas, writing for the Supreme Court, said trial judges instead should consider four factors, including the adequacy of damages as compensation and the needs of the public.

`Imbalanced' System

``The decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts,'' Thomas wrote.

The ruling is ``the right way to redress a system that, over time, has become quite imbalanced,'' Intel General Counsel Bruce Sewell said in an interview.

Chief Justice John G. Roberts Jr. and Anthony Kennedy each added a separate opinion, staking out dueling positions that might foreshadow disagreements among the justices down the road.

Roberts, writing for three justices, said that historically judges have barred use of the disputed invention in ``the vast majority of cases.'' He added, ``in this area, as in others, a page of history is worth a volume of logic.''

Kennedy, writing for four justices, pointed to changes in the patent world and an increasing number of companies that seek patents as a means of extracting ``exorbitant'' licensing fees, rather than selling products.

Kennedy said damages may be adequate ``when the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations.''

`Buy It Now'

A jury found that EBay's ``Buy It Now'' service, which lets customers buy products at a set price instead of bidding in an auction, infringed a software patent owned by MercExchange LLC. A trial judge rejected a bid by MercExchange to force EBay to stop using the software.

The Federal Circuit then reversed that ruling, saying shutdown orders should be denied only in rare cases, such as when an invention is needed to protect public health.

The Bush administration backed MercExchange, saying that patent owners shouldn't be forced to license their inventions when they don't want to.

Shares of EBay, which is based in San Jose, California, fell 26 cents to close at $31.23 on the Nasdaq Stock Market.

EBay said in a statement that the company was ``extremely gratified by the Supreme Court's unanimous decision.'' The company said it was confident the trial judge in the case again would refuse to issue the disputed order.

Reasoning Reversed

MercExchange lawyer Scott Robertson of Hunton & Williams in Washington said the trial judge's initial refusal to order EBay to stop using the invention was based on factors other than those laid out by the Supreme Court.

``The Supreme Court clearly reversed the district court's reasoning,'' he said.

MercExchange already has won a $25 million award from EBay for past patent infringement. Robertson said that amount will grow to more than $100 million to account for later infringement and interest.

The EBay case raised issues connected to those in a highly publicized dispute that had threatened to shut down the BlackBerry e-mail service. BlackBerry maker Research In Motion Ltd. (RIM) agreed in March to pay NTP Inc. $612 million to avoid an order to halt U.S. service and sales.

That fight may have been in the minds of the justices as they considered the EBay case, according to Robert Yoches, a patent lawyer with Finnegan Henderson Farabow Garrett & Dunner in Washington. ``They read the papers and I believe they are aware of the issues,'' he said.

The ruling ``gives the corporations another tool to stand and fight rather than feel they need to settle,'' said Lawrence Gotts, a patents lawyer with the firm of Pillsbury Winthrop Shaw Pittman in McLean, Virginia.

Adobe, Cisco, Nokia

Companies backing EBay in the case, either directly or through their trade groups, included Adobe Systems Inc., Cisco Systems Inc. (CSCO:US), Nokia Oyj, Time Warner Inc. (TWX:US) and Yahoo! Inc. Trade associations representing the securities and communications industries also sided with EBay.

On the other side were General Electric Co., Procter & Gamble Co., Qualcomm Inc. (QCOM:US), research universities such as the University of California and trade groups for the pharmaceutical and biotechnology industries.

Drugmakers view patent protection differently than technology companies because blockbuster drugs may be based on single patents held by manufacturers who fear generic competition, lawyers say. Drug and biotech companies, as well as universities, say strong patent protection is needed to encourage costly research to develop new products.

Officials with trade groups for the biotechnology and pharmaceutical industries said they were reviewing the opinion and would issue a statement tomorrow.

By contrast, devices such as computers may include thousands of patented inventions. A computer maker may prefer to pay a licensing fee to a patent holder rather than risk being forced by a judge to shut down an entire product line over a single component.

The case is EBay v. MercExchange, 05-130.

To contact the reporters on this story: Greg Stohr in Washington at gstohr@bloomberg.net; Susan Decker in Washington at sdecker1@bloomberg.net.

To contact the editor responsible for this story: Ken Fireman at kfireman1@bloomberg.net.


Hollywood Goes YouTube
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

Companies Mentioned

  • EBAY
    (eBay Inc)
    • $54.88 USD
    • -0.62
    • -1.13%
  • MSFT
    (Microsoft Corp)
    • $45.09 USD
    • -0.34
    • -0.75%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus