Injunctions for patent infringement after the ebay decision Fitzpatrick, Cella, Harper & Scinto This text first appeared in the IAM magazine supplement From Innovation to Commercialisation 2007 February 2007
Feature Injunctions after ebay Injunctions for patent infringement after the ebay decision By Brian V Slater, William E Solander and Dennis Gregory, Fitzpatrick, Cella, Harper & Scinto, New York In the United States, the two principal remedies for patent infringement are money damages for past infringement and an injunction to stop future infringement. While damages awards tend to grab the headlines, it is often an injunction that an accused infringer fears the most and that provides the patent owner with the greatest leverage in settlement negotiations. And, until recently, the grant of an injunction after a judicial ruling of patent infringement referred to as a permanent injunction was virtually automatic except in rare circumstances that nobody talked about outside academia. However, the recent Supreme Court decision in ebay v MercExchange has raised the bar for obtaining permanent injunctions by eliminating the general rule in favour of granting them. In addition, the ebay decision has cast doubt on the availability of permanent injunctions in particular situations, including where a patent owner does not practise its own invention. While the full effects of ebay are not yet known, there are already indications that permanent injunctions are becoming more difficult to obtain, with some courts denying injunctions in situations where they previously may have granted them. Ordinarily, a life sciences patent owner sues for infringement on a patent that covers its own commercial product, and ebay is likely to present little obstacle to a permanent injunction in that case. However, as discussed below, there may be situations where life sciences patent owners may no longer be able to count on an injunction. Injunctions before ebay Patents confer on their owners the right to exclude others from practising the claimed invention. While money damages help to compensate for past infringement, they do not stop the infringement going forward. That is where injunctions come in. They are court orders that give teeth to a patent owner s right to exclude by stopping the infringer from continuing to make and sell the infringing products. Injunctions come in two basic varieties: (1) permanent injunctions, which prevent future infringement after the patent owner has won an infringement suit, and (2) preliminary injunctions, which prevent infringement while the litigation is ongoing. In some other countries, an alternative to a permanent injunction is a compulsory licence, under which the infringer is allowed to pay to continue to infringe. However, compulsory licences are almost never granted to private parties in the US. Although the US patent statute states that courts may grant injunctions in accordance with the principles of equity, the lower courts developed a general rule that a prevailing patent owner is entitled to a permanent injunction absent exceptional circumstances. Indeed, in the century before the ebay decision, the courts denied permanent injunctions in only a handful of cases, usually only where some important public interest was at stake. The ebay decision In ebay, the Supreme Court rejected the lower courts rule favouring permanent injunctions in patent cases. Instead, the general law of injunctions will apply to patent cases just as in any other type of case. From now on, the grant or denial of a permanent injunction will be decided on a case-by-case basis according to equitable principles, and a prevailing patentee will have to satisfy the following four factors: It has suffered an irreparable injury. Monetary damages are inadequate to compensate for that injury. From Innovation to Commercialisation 23
Injunctions after ebay Considering the balance of hardships between the plaintiff and defendant, an injunction is warranted. The public interest would not be disserved by a permanent injunction. While these factors are simple enough to state, applying them to any particular situation will inevitably prove more difficult. Indeed, although all of the members of the Supreme Court in ebay agreed that this fourfactor test is the appropriate standard, they diverged on how to apply the test in specific circumstances. In one concurring opinion, Chief Justice Roberts and two other members of the Court agreed that courts should apply the fourfactor test, but believed that its proper application should result in the continued easy availability of permanent injunctions in patent cases. They reasoned that the patent right to exclude is difficult to protect through money damages alone. And while they agreed there should be no general rule in favour of permanent injunctions, they appealed to the long American judicial tradition favouring their grant. In a separate opinion, four Justices, led by Justice Kennedy, argued for limiting the availability of patent injunctions more than in the past. They argued that new factual situations have emerged where the availability of a permanent injunction should not be assured. In particular, the justices pinpointed three categories of case where the threat of such an injunction may provide undue leverage to the patent owner: Where the patent owner does not practise its own invention. Where the invention is a small component of a larger product. Business method patents. Unfortunately, the remaining two Justices of the Supreme Court did not join either concurring opinion or write a separate opinion of their own, leaving the lower courts with no clear guidance on which approach to take. What does ebay change? The most obvious immediate change ebay will bring about is in the nature of the proofs a patent owner will have to present to a court. Patent owners will now have to present evidence in support of each of the four injunction factors, rather than relying on the mere fact of infringement. Factual evidence will have to be developed and submitted, for example, on the effects of the infringement on the patent owner s business and the likely impact of an injunction on the infringer and the public. In some cases, expert testimony to interpret that evidence may also be necessary. Of the four factors cited in ebay, the most important will likely be proof of irreparable injury to the patent owner. Types of harm that courts generally consider irreparable include loss of market share, injury to good will, injury to reputation and irreversible price erosion. As to the second ebay factor, the patent owner will have to justify why money alone will not fully make up for the injury suffered. The last two factors harm to the infringer and the public interest will also have to be addressed, but are likely to be less important except, for example, in the rare case where an important public interest is jeopardised by an injunction. Predictably, two lines of cases have emerged in the lower courts since ebay, one following each of the concurring opinions of the Supreme Court. While the majority of courts have followed the traditional approach and continue to grant permanent injunctions, several courts to date have denied permanent injunctions and instead have awarded some form of monetary relief, including compulsory licences. The unpredictability caused by this split is likely to continue at least until several appeals from post-ebay injunction denials have been decided. Going forward, it is likely that the most controversial areas will be the three categories that Justice Kennedy argued in ebay may not warrant permanent injunctions. We discuss below the two of these categories that have particular relevance to inventions in the life sciences. Non-practising entities Some critics have derided patent owners that do not practise their own inventions by referring to them as trolls. This term is usually reserved for entities whose sole purpose is to acquire patent rights and seek royalties often under threat of injunctive relief from producers of an already marketed infringing product. The critics argue that it is inequitable to grant trolls a permanent injunction because it may destroy the business of the infringer, while providing none of the traditional benefits of an injunction in the form of reduced competition for the patent owner s own product. Moreover, an injunction is not what the troll is really after. Rather, it is the mere threat of the injunction, a virtual certainty up until ebay, that provides the 24 From Innovation to Commercialisation
Injunctions after ebay leverage to extract a high royalty from the infringer, which may be too afraid to test its defences in court and risk having its product removed from the market. The counterargument relies on the historical purpose of the patent system itself, namely the reward of a time-limited right to exclude others from practising in exchange for public disclosure of a useful invention. In other words, even in the case of a troll, someone, somewhere, made a useful invention and received a patent. Often, that inventor cannot exploit the invention or seeks to sell the patent right for immediate economic gain. The acquirer of the right the alleged troll is simply attempting to realise value from its investment. Incentives to such inventors will be reduced, the argument goes, if the incentives to the acquirer of the patent are reduced. The check on the monopoly rights of the patent acquirer is simple: if the patent is weak (either of questionable validity or easy to design around), then the patent will not withstand scrutiny and the accused infringer will either settle for a nominal sum or prevail at trial. In the life sciences, the type of entity fitting the above definition of a troll has been relatively rare. Instead, the typical nonpractising entity is a university or non-profit research organisation. The question for courts, then, is whether those entities should be considered trolls for which a permanent injunction should be more difficult to get, or whether they should be treated the same as patent owners that practise their invention. A university or non-profit research organisation is in the business of doing research, the fruits of which may be inventions worthy of patents. It is the revenue from those patents that in turn contributes to further research and further innovation. Typically, those patents are licensed prior to the development and marketing of an infringing product, but suits between such entities and marketers of developed products are not unheard of. In those situations, some will argue that the policy argument for denying trolls a permanent injunction should also apply: namely, that the university or research organisation receives no benefit that equitably justifies the imposition of a permanent injunction. However, the policy argument for permitting permanent injunctions is also the same: namely, the threat of an injunction maximises the potential revenue by increasing royalties, which in turn promotes the useful research that such entities carry out. It remains to be seen how the courts will balance these competing views in light of ebay. Invention is a small component of a larger product In ebay, Justice Kennedy raised the concern that where the invention is a small component of a larger product, the patent owner has undue leverage if it can use that patent to obtain a permanent injunction that forces the larger product from the market. In that case, the bargaining power of the patent owner is increased some would say disproportionately compared to the contribution of the invention to the value of the overall product. Implicit in this concern is the assumption that the invention s contribution of value to the product is small. It is this assumption that critics of this theory say is unwarranted. They argue that a critical component could be the very thing that makes the larger product valuable, because if it did not, the accused infringer could simply avoid infringement by substituting a non-infringing component without sacrificing much of the product s overall value. Take the example of an inhaler containing an expensive drug substance and an excipient. A patent holder on the excipient could assert patent infringement and demand a large royalty based on the total value of the inhaler (including the value of the drug), by threatening a permanent injunction that would cause the inhaler s removal from the market. Some may argue that a permanent injunction should not be awarded in this situation because it inequitably favours the patentee, which, by virtue of inventing an excipient, can force an inhaler and expensive medication off the market. Those on the other side of this hypothetical would undoubtedly argue that if the excipient were that unimportant, it could be left out or easily substituted in the inhaler. If it cannot be, then it must be contributing significant value to the overall product and thus a higher royalty should be paid. Complicating this analysis are public interest arguments favouring access to lifesaving drugs and the inherent difficulty of changing a highly regulated product, even where the change is for something as seemingly minor as the change of an excipient. We can expect that the lower courts will wrestle with these competing considerations for some time to come. Preliminary injunctions Preliminary injunctions, ie, injunctions during From Innovation to Commercialisation 25
Injunctions after ebay suit, are far more difficult to obtain than permanent injunctions because they result in an accused infringer being taken off the market before a final court decision. The impact of ebay on preliminary injunctions is even less clear than its impact on permanent injunctions. Some courts have held that ebay has no impact at all on preliminary injunctions after all, ebay dealt only with permanent injunctions. However, until an appellate court says otherwise, accused infringers will likely continue to argue that ebay applies to preliminary injunctions. The four factors that are considered when a party seeks a preliminary injunction are: The likelihood of the patentee s success on the merits. Irreparable harm to the patentee if the injunction is not granted. The balance of the hardships between the parties. The public interest. The first factor the likelihood of success on the merits is by far the most important issue in preliminary injunctions and often effectively dictates the result. Likelihood of success is, of course, irrelevant to the situation dealt with in ebay injunctions after a trial court decision. Therefore, this factor s importance to a preliminary injunction decision is unlikely to be affected by ebay. The remaining three preliminary injunction factors, however, overlap with ebay s four-factor test for permanent injunctions, so ebay may still affect preliminary injunction practice. In one post-ebay case, for example, the court denied a preliminary injunction in the case of a patent on an insulin inhaler in part because the patent owner s product was at least four years away from marketing whereas the infringer was ready to market. Conclusion Patent owners in the life sciences can no longer assume that they will automatically obtain an injunction if they prevail in an infringement suit. Rather, they will have to prove that they deserve one by presenting evidence that supports each of the four ebay factors. In some circumstances, an injunction may be harder to obtain, which will affect the dynamics of settlement by shifting more power to the accused infringer. Patent owners would be well advised to follow the emerging law interpreting ebay to determine how it affects the value of their patents. 26 From Innovation to Commercialisation
Fitzpatrick, Cella, Harper & Scinto 30 Rockefeller Plaza New York, NY 10112-3800, USA Tel: +1 212 218 2100 Fax: +1 212 218 2200 Fitzpatrick, Cella, Harper & Scinto continued Fitzpatrick, Cella, Harper & Scinto continued www.fitzpatrickcella.com Brian V Slater Partner bslater@fchs.com Brian V Slater is a partner with Fitzpatrick, Cella, Harper & Scinto in New York, where he has practised since graduating from the University of Pennsylvania with a master s in law in 1990. Prior to that he obtained his LLB (with first-class honours) from the University of Strathclyde in Scotland. He specialises in patent litigation, especially in the pharmaceutical and biotechnology fields, and has extensive experience litigating disputes under the Hatch-Waxman Act. Mr Slater has argued before the Court of Appeals for the Federal Circuit and is a frequent author and speaker on intellectual property-related issues. William E Solander Partner wsolander@fchs.com William E Solander is active in all areas of the firm s litigation practice and has participated in the litigation of numerous patent disputes, including the coordination of litigation occurring on a worldwide basis. Mr Solander s practice has embraced a wide range of technologies including, most recently, anti-cancer drugs, polymorphs, antiulcer drugs, structural composites and new battery technologies. Mr Solander also counsels clients concerning noninfringement, invalidity and freedom to practise in these and other fields. He is an author and frequent lecturer on the topics of litigation strategy, polymorph patents and Hatch-Waxman litigation. Dennis Gregory Associate dgregory@fchs.com Dennis Gregory s practice focuses on pharmaceutical patent litigation. Mr Gregory has handled matters relating to thrombin inhibitors, beta blockers, calcium channel blockers and formulation technologies, as well as freedom to operate issues related to importation of pharmaceuticals into the United States. From Innovation to Commercialisation 27
Fitzpatrick, Cella, Harper & Scinto 30 Rockefeller Plaza New York, NY 10112-3800, USA Tel: +1 212 218 2100 Fax: +1 212 218 2200 www.fitzpatrickcella.com