Diluting the eBay Standard Will Embolden Trolls

Patent reform is proving to be an incremental process. Congress took a big step in 2011, when it passed the America Invents Acts. Additional legislation to protect both established businesses and small entrepreneurs from unique and “innovative” forms of lawsuit abuse is pending both on Capitol Hill and in state houses around the country. The U.S. Supreme Court also delivered two decisions in 2014 that will make it easier for defendants to recover legal costs if an infringement suit is deemed frivolous.

But the work is far from over. Indeed, legislation and court rulings are credited with a 27 percent reduction in patent suits in 2014 compared to the year before. The downturn was short-lived, however, as patent suits surged again in the first half of 2015, increasing 11 percent compared to the same period in 2014. One powerful weapon for patent plaintiffs, foreign or domestic, is the injunction. That’s when a court, at its discretion, imposes a moratorium or ban on the sale or import of an alleged infringing product or component.

Patent litigation destroys more than $60 billion in wealth each year, according to a March 2015 study published by the Boston University School of Law. In 2012, Santa Clara University School of Law research found that companies with less than $100 million annual revenue comprised 66 percent of defendants in troll suits. Patent trolls equipped with the threat of injunction are a danger to small business innovators, as are larger companies that wield injunctions and lawsuits rather than trying to maintain healthy marketplace competition and boardroom negotiation.

Patent troll is the pejorative name for a non-practicing entity that doesn’t produce with its patents. Instead, it lies in wait until another company develops something using similar technology, and then it sues claiming infringement. The cost of a defense can be high, especially for a start-up with limited capital, so the defendant is often pressured into entering into a licensing agreement even if there is no real infringement. Abuse of this system turns an innovation protection into a playground for legal arbitrage.

While Congress examines patent troll activities and ways to combat abuse, there is fortunately court guidance on injunctions. In its 2006 decision in eBay Inc. v. MercExchange LLC, the U.S. Supreme Court determined traditional equitable considerations must be applied to infringement. The upshot is that the “eBay standard,” as it has come to be known, calls for a more equitable remedy standard, such as royalty payments or fines. Injunctive relief should be the last resort, not the first action.

In the wake of eBay, a report by law firm K&LNG concluded the decision made it much less certain a troll would be able to win an injunction on the claim it has suffered such an irreparable injury that monetary damages alone would not be sufficient.

Recently, Federal District Court Judge Lucy Koh applied the eBay standard in Apple Inc. v. Samsung Electronics Co. Ltd. Although Apple won the case, Koh did not grant an injunction against Samsung, because Apple did not demonstrate it would suffer irreparable harm without it. Unfortunately, in September the Federal Circuit Court of Appeals reversed Koh’s decision. Samsung has since moved for an en banc review of that decision.

While the appellate process plays out, the U.S. Patent and Trade Office has found several of the contested patents should not have been issued in the first place. With an estimated250,000 patents within the average smartphone, injunctive relief, when granted too hastily, can wreak havoc in a supply chain, with consumers bearing the brunt.

Small businesses need a solid framework of standards to compete against larger rivals. The eBay standard has made a positive impact. A Cornell Law Review article noted district courts granted 95 percent of requests for injunctions before the eBay standard. After eBay, it was down to 75 percent, suggesting injunctions are more thoroughly scrutinized since the framework was established.

Much of the effort in combatting patent abuses is geared toward leveling the playing field, providing innovators with more tools to counter frivolous claims and dissuading frivolous assertions or threats.

The recent Apple decision could undermine the progress created by the eBay standard. This is especially important for small businesses, such as many tech startups, who often face costly infringement proceedings, a well-funded plaintiff, the threat of injunction, and the possibility of being forced into unfair licenses or insolvency. It is imperative to solidify a legal framework for injunctions rather than allow businesses to wield the threat of drastic embargos unpredictably.

An earlier version of this article was orginally published in The American Spectator Nov. 17, 2015.