Tripping Up

Corporate America celebrated when the international agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) went into effect Jan. 1, 1995. Many companies believed TRIPS would go a long way toward protecting their IP rights overseas. Patent owners were especially happy with a provision that requires countries to grant patent injunctions when requested.

Many high-tech companies soon may wish that provision had never made it into the treaty. One such company will likely be eBay, which is asking the U.S. Supreme Court to overturn a century-old precedent that allows patent holders to almost always obtain injunctions against infringers.

Many computer software, hardware and Web-based companies are supporting eBay's position. They claim that the explosion of patent infringement suits combined with the easy availability of injunctive relief threatens their ability to do business. On the other side are many biotech and pharmaceutical companies, which claim that easy-to-obtain injunctions are absolutely essential to their ability to stay in business.

And TRIPS is complicating the issue. "eBay's position, if adopted, would risk putting the United States into violation of the TRIPS provision that we fought so hard to get," says Harold Wegner, a partner in the Washington, D.C., office of Foley & Lardner.

Buy-It-Now

The eBay case began with a patent owned by MercExchange, a small, Virginia-based patent licensing company. U.S. Patent No. 5,845,265 gives MercExchange the exclusive right to an online transaction method whereby shoppers can bypass an auction and immediately buy an item at the seller's predetermined price.

After eBay added such a "buy-it-now" feature to its Web site in 2000, MercExchange sued for patent infringement. In 2003 a jury found eBay guilty of infringement and awarded MercExchange $29.5 million in damages. However, the district court judge declined to issue an injunction against the San Jose, Calif.-based online auctioneer.

Both sides appealed, and in March 2005 the Federal Circuit held that MercExchange was entitled to an injunction. The appellate court found that except in "rare instances" where there is an "important public need," a patent owner is entitled to an injunction against an infringer.

Soon after the court handed down its ruling, eBay filed a certiorari petition with the Supreme Court, and the Federal Circuit stayed its order, pending the High Court's review. The Supreme Court granted certiorari in November 2005 and is expected to hear eBay v. MercExchange in March or early April.

One part of the Patent Act seems to support eBay's position. According to 35 U.S.C. ?? 1/2 283, courts "may grant injunctions in accordance with the principles of equity ?? 1/2 on such terms as the court deems reasonable."

The Supreme Court, however, effectively threw out this permissive language in 1908. In Continental Paper Bag Co. v. Eastern Paper Bag Co., the High Court held that a patent provides its owner with only the right to exclude others from practicing the invention, so an injunction is almost always necessary to protect this right. Since Continental Paper Bag, U.S. courts have routinely granted injunctions against patent infringers.

Tech Fears

Many companies in the online and IT industries argue that the Supreme Court needs to revise the 100-year-old rule of Continental Paper Bag in order to keep up with changes in patent law.

"The patent system has developed a lot in the past 30 years," says Matthew Schruers, senior counsel of the Washington, D.C.-based Computer & Communications Industry Association, which has filed an amicus brief supporting eBay. "The Federal Circuit has consistently made patents stronger, broader, easier to get and easier to enforce."

As a result, patent litigation has boomed in recent years--especially lawsuits against software and Web-based companies, whose products and services often involve several patents. And if just one tiny part of the product or service infringes a patent someone else owns, the patent owner is entitled to an injunction that can stop sales of the entire product or service.

"In eBay, the infringement [of the buy-it-now feature] is only a small element of eBay's business, but an injunction could force the entire company to shut down," says Emery Simon, counsel for the D.C.-based Business Software Alliance, a trade organization representing the software industry, which has filed an amicus brief supporting eBay.

Thus, many technology companies want judges to have more latitude in deciding whether to issue injunctions for patent infringement. But TRIPS could interfere with those plans.

"TRIPS requires each state to grant injunctions for patent infringement except when there are extraordinary circumstances," Wegner says. Such extraordinary circumstances are usually viewed in terms of a large and imminent danger to public health. For instance, if a country is facing a deadly epidemic and having trouble getting sufficient amounts of a patented drug, the country could refuse to issue an injunction against an infringer that is making or selling the drug.

Pharm's Desires

If the IT industry has its way, the Supreme Court will reinterpret 35 U.S.C. ?? 1/2 283 to provide judges with wide discretion over whether to issue injunctions for patent infringement. However, this interpretation of the statute could violate U.S. obligations under TRIPS. And the High Court has repeatedly held that statutes should be interpreted consistently with treaty obligations.

Courts have used this rule of construction since 1804, when the Supreme Court decided Murray v. The Charming Betsy. The Court stated that "an act of Congress ought never to be construed to violate the law of nations [including ratified treaties] if any other possible construction remains."

The Charming Betsy canon still remains influential. Just last term, the Court reaffirmed this rule.

TRIPS thus strengthens the hand of the pharmaceutical and biotech industries, which are in favor of maintaining the status quo on injunctions. These companies make products that are often based on just one or two patents, so these businesses are far less concerned than IT companies about frivolous infringement suits and far more concerned about protecting their own patents.

"In general patents are much more important to us than to the IT industry," says Nancy Linck, deputy general counsel for the Washington, D.C.-based Biotechnology Industry Organization. "In the pharmaceutical and biotech industries, the long time it takes to develop a product and the amount of risk involved in bringing a product to market mean that no one would do it without strong patent rights. No one."

TRIPS' possible effect on the eBay case has garnered relatively little attention. It is possible that the Court will issue its ruling without considering the effects of TRIPS. And that could spell danger for companies that want to protect their IP rights around the world.

If the Court hands down a ruling that violates America's obligations under TRIPS, other countries may also water down their IP protections--and companies in all industries might suffer.

"TRIPS is the basis for protecting American IP globally," Wegner warns. "We should do everything we can to protect it."

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[Sidebar]

Reform Wars

During the summer of 2005, Congress considered changing the law to make it harder for patent owners to obtain injunctions. This proposal was part of a larger patent reform bill, which Rep. Lamar Smith introduced into the House of Representatives June 8, 2005.

By August 2005, however, Smith dropped the provision on injunctions from his bill, in response to strident opposition from the biotech and pharmaceutical industries.

This should be dispositive of the injunction issue, according to Scott Robertson, a partner in the D.C. office of Hunton & Williams, who represents MercExchange. "They left the rule on injunctions unchanged," he says. "After taking lots of testimony, Congress decided that if it ain't broke, you shouldn't fix it."

But others have a different spin on what happened. "There's a deadlock on Capitol Hill [with the IT industry battling the biotech and pharmaceutical industries]," says Matthew Schruers, senior counsel for the Computer & Communications Industry Association. "The Supreme Court should sort this mess out."

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Steven Seidenberg

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