eBay Decision Levels Patent Litigation Playing Field

On May 15, 2006, the United States Supreme Court addressed the circumstances under which patent holders may obtain permanent injunctions against infringers. eBay Inc. v. MercExchange LLC, 126 S. Ct. 1837 (2006). Specifically, the Court was asked to determine whether there should be a presumption in favor of issuing a permanent injunction against a patent infringer. In a unanimous opinion, the Court held that district court judges have discretion in deciding whether a party claiming infringement should win a permanent injunction against continued use of the product. The Court held that district court judges should apply the traditional four factor test for issuance of a permanent injunction.

eBay spells the end to the long-standing presumption in patent cases that an injunction should issue almost automatically against a patent infringer. The eBay dispute began in 2001, when MercExchange sued eBay for infringing on its patent that enabled the “Buy it Now” feature on eBay’s online auction site. A jury in the Eastern District of Virginia found that eBay had infringed on MercExchange’s patent and it awarded MercExchange $35 million in damages. Relying upon Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908), which established the presumption in favor of an injunction against the infringer, MercExchange petitioned the trial court for a permanent injunction. The trial court denied MercExhange’s motion, finding that the company, which licenses but does not practice its patents, would not suffer irreparable harm without an injunction. Rejecting the trial court’s reasoning, the U.S. Court of Appeals for the Federal Circuit declined to deviate from the rule in favor of an injunction.

Justice Thomas, writing for the Supreme Court, rejected the presumption in favor of automatic injunctions. The Court also rejected eBay’s request for a bright line rule in patent law that would prevent a patent holder from obtaining injunctive relief if it merely licensed its patents and failed to commercialize its products. Justice Kennedy provided guidance to the lower courts in his concurring opinion by suggesting that trial courts should now consider (1) whether a patent plaintiff is simply a "troll" asserting a questionable business patent to extort licensing fees and (2) whether there is “potential vagueness and suspect validity of some of these patents” which might affect the courts’ analysis of the traditional four requirements for an injunction.

In recent years, the presumption in favor of injunctions has been used by patent trolls to exact enormous settlements from manufacturers and service providers who want to avoid the risk of having their product or service removed from the market by permanent injunction. A patent troll is a patent holder who, instead of developing and commercializing useful products, merely obtains its patents for the sole purpose of generating licensing revenue from actual market participants. Earlier this year, the threat of a permanent injunction which would have shut down Research in Motion’s (“RIM”) blackberry network lead to a $600 million settlement between NTP, Inc (“NTP”) and RIM. Although NTP is the holder of several patents which RIM’s blackberry device infringes upon, NTP itself does not produce a product which utilizes these patents.

The eBay decision removes the fear of the automatic issuance of an injunction upon a finding of infringement. Upon a finding of infringement, companies now have options other than immediately negotiating a settlement. Companies may now be more willing to fight patent trolls because, for example, they may have additional time to exhaust avenues such as appellate review and patent re-examinations that are potentially unavailable when a company is faced with an imminent permanent injunction.

Although it is unclear whether the eBay decision will result in issuance of fewer permanent injunctions against patent infringers, the playing field has been leveled somewhat in the patent litigation process. If trial courts follow the guidance provided in Justice Kennedy’s concurrence, or take it upon themselves to expand the four factor test to include consideration of the reasonable royalty a patent holder is entitled to upon a finding of infringement, then the eBay decision will be a significant step in reducing settlement amounts and reducing the number of patent trolls that are currently taking undue advantage of the patent litigation process.

On March 1, 2006, the United States Supreme Court handed a victory to patent holders in overruling long standing precedent regarding the presumption of the market power of patented products. The decision affects patent holders who “tie” the purchase of an unpatented product to the purchase of a patented product and are then sued by a manufacturer of the unpatented product for anti-trust violations.

In Illinois Tool Works, Inc. v. Independent Ink, Inc., 126 S.Ct.1281 (2006), Trident, Inc. and its parent, Illinois Tool Works, Inc., (collectively “Trident”) manufactured and marketed printing systems that included a patented printhead and ink container and unpatented ink. These products were sold to equipment manufacturers who agreed to purchase ink exclusively from Trident and that neither they nor their customers would refill the patented containers with any other kind of ink. Thus, the sale of the patented printhead and container was “tied” to the sale of the unpatented ink.

Independent Ink, Inc. (“Independent”) developed an ink with the same chemical composition as Trident’s ink. Trident then filed an infringement action against Independent that was dismissed. Independent turned around and filed suit against Trident seeking a judgment of non-infringement and invalidity of Trident’s patents on the ground that Trident was engaging in an illegal “tying” and monopolization in violation of the Sherman Antitrust Act. As a result of this illegal “tying” arrangement, Independent alleged that the market for its identical but cheaper ink was diminished.

In reaching its decision, the Supreme Court recognized the long standing precedent that if a product has a patent, it is presumed to have the requisite “market power” that makes it illegal to “tie” the sale of the patented product to another product. The Court, however, rejected this precedent, holding that in cases involving a “tying” arrangement, the plaintiff must prove that the patent holder has market power in the patented “tying” product.

The Court reasoned that over the years, the Court’s disapproval of “tying” arrangements has diminished as the Court moved from relying on assumptions to requiring a showing of market power in the “tying” product. The Court’s holding recognizes the reality of the modern marketplace: these days, merely having a patent does not necessarily ensure market power to a patent holder.

The Court also reasoned that, in 1988, Congress undermined the market power presumption when it amended the Patent Act to eliminate the presumption in patent misuse cases. In rejecting this presumption in the context of antitrust cases, the Supreme Court has effectively “tied” together antitrust and intellectual property law.

The practical effect of the Court’s decision is a victory for patent holders because they are no longer at a disadvantage when sued by competitors for antitrust violations. The decision, however, will have a negative affect on the aftermarket industry. For example, makers of auto parts may be harmed if patent holders attempt to require purchasers of automobiles to buy their parts. Generic pharmaceutical manufacturers may also suffer. Copyright holders may try to cash in by selling their blockbuster films to theater owners bundled together with less successful films.

In future litigation, companies bringing anti-trust challenges for illegal “tying” will need to be prepared to establish whether the patent holder actually has market power in the “tying” product, as the presumption of market power no longer exists.

Trademark Dilution: Another Weapon in the War Against Intellectual Property Misappropriation

Most businessmen have heard about trademark infringement and have a fairly accurate idea of what it means. A “trademark” is any word, name, symbol, or device used by a person to identify and distinguish his or her goods in commerce. See 15 U.S.C. § 1127. Most businessmen, however, have never heard of trademark dilution and have no idea about the significant advantages that this statutory tort affords in protecting their trademark rights. A trademark dilution claim adds a potent new weapon with which to protect legitimate trademark rights against those who would “free ride” on the trademark owner’s creativity and advertising expenditures.

The elements of a cause of action for trademark dilution are set forth in nearly identical federal and Pennsylvania statutes. See 15 U.S.C. § 1125(c)(1); 54 Pa. Cons. Stat. Ann. § 1124. (Except for the broader geographical reach of the federal statute, the federal and Pennsylvania dilution statues are substantively the same.) The elements of a federal dilution claim under the Trademark Dilution Act (“TDA”) are (i) the plaintiff owns a mark that is “famous;” (ii) the defendant is making commercial use in interstate commerce of this or a confusingly similar mark; (iii) the defendant’s use of the mark began after the plaintiff’s mark became famous; and (iv) the defendant’s use causes dilution of the plaintiff’s mark by either blurring or tarnishment.

What is a “famous” trademark is a little like Supreme Court Justice Potter Stewart’s famous remark in 1964 giving his definition of pornography: “I know it when I see it.” Both the federal and Pennsylvania statutes give a list of factors that the court may — but is not required to — consider in deciding whether a mark is famous. These factors are the following:

15 U.S.C. § 1125(c)(1)(A) – (H). As noted above, each one of these factors is discretionary and is not binding on the court.

Dilution comes in two forms, blurring and tarnishment. “Blurring” is like a song or a picture that one has seen too many times to notice anymore. A trademark that is overused by a defendant, or is used in the wrong context, ceases to have the desired impact on the consumer. “Tarnishment” occurs when the defendant uses the mark in association with goods and services that are scandalous, disreputable or unlawful. For example, the use of the “Eveready” mark in association with a sexually oriented business would constitute tarnishment.

“Descriptive” marks (e.g. , "Coca-Cola," "Eat-N-Park," "FoodLand," "Jiffy Lube" and "Shop-N-Save") generally require proof of actual harm in a trademark dilution or infringement action. “It may well be, however, that direct evidence of dilution such as consumer surveys will not be necessary if actual dilution can reliably be proven through circumstantial evidence — the obvious case is one where the junior and senior marks are identical.” Moseley v. Secret Catalogue, Inc., 537 U.S. 418, 434 (2003). Actual harm in trademark dilution or infringement cases is measured by the presence or absence of “secondary meaning.” Secondary meaning is the degree to which consumers associate the original trademark with the goods and services being sold under that mark. The higher the level of association, the higher the level of secondary meaning, and, therefore, the higher the level of dilution or actual harm to the mark.

The advantages of a trademark dilution claim over a trademark infringement claim include the following:

In other words, because the typical form of relief under the Trademark Dilution Act (and often the only form of available relief) is an injunction, there is no need for the plaintiff to prove that he will suffer irreparable harm if the injunction is denied. Even if the plaintiff pleads a claim for willful misconduct by the defendant — which, if proved, would justify an award of money damages under the TDA (see 15 U.S.C. § 1125(c)(2)) — he can always plead an alternative claim that alleges merely dilution and not willful misconduct. This should allow the plaintiff to obtain at least a preliminary injunction without first proving irreparable harm.

Businessmen and corporations should keep in mind these advantages of a trademark dilution claim when deciding how best to protect their trademarks. In addition, trademark dilution claims can be pleaded together in one complaint with a myriad of other intellectual property claims, including patent, trademark and copyright infringement claims, along with claims under Pennsylvania’s Uniform Trade Secrets Act. Trademark dilution adds yet another potent weapon to this arsenal of intellectual property protections.

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