updated 5/15/2006 10:23:10 PM ET 2006-05-16T02:23:10

The U.S. Supreme Court handed a victory to patent-reform advocates Monday, ruling that a small company whose patent was infringed by eBay Inc. was not automatically entitled to a court order blocking the offending service.

In a closely watched case, the court unanimously ruled that judges have flexibility in deciding whether to issue court orders barring continued use of a technology after juries find a patent violation. The decision threw out a ruling by a federal appeals court that said injunctions should be automatic unless exceptional circumstances applied.

The case, which pitted the small Virginia company MercExchange against San Jose-based eBay, has become a rallying point for critics of the U.S. patent system. They have argued the patent system is riddled with abuse, mainly from “patent trolls,” or small businesses that sue established companies to enforce patents for ideas that have never been developed into products.

“What’s happening today, particularly in the electronics industries, is a widespread misuse of the patent system,” said Robert Merges, a University of California, Berkeley, law professor who filed a friend-of-the-court brief in the case on behalf of Web portal Yahoo Inc. “People have been looking for tools to deal with it, and I think we just got a big one.”

The eBay-MercExchange battle focused on the online auctioneer’s button for buying products at a fixed price, bypassing the bidding process, and MercExchange’s claim that the technology infringes on its intellectual property. MercExchange sought an injunction against eBay.

A federal jury in Alexandria, Va., had sided with MercExchange, finding that its patent had been willfully infringed by eBay, and awarded the patent-holder $35 million. A trial judge later reduced the award by $5.5 million. The Supreme Court ruling does not affect the judgment against eBay.

The trial judge also denied MercExchange’s request for an order permanently stopping eBay from offering the feature on its Web site.

An appeals court said that MercExchange was entitled to an injunction, ruling that such rulings should be automatic in cases where a patent is found to be valid and infringed.

Not always in public's best interest
In a concurring decision, Justice Anthony Kennedy said injunctions may not always be in the public’s best interest. He was joined by Justices John Paul Stevens, David Souter and Stephen Breyer.

“An industry has developed in which firms use patents not as a basis for producing and selling goods, but instead, primarily for obtaining licensing fees,” Kennedy wrote. “For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent.”

In a brief opinion, Justice Clarence Thomas said that neither the district court nor appeals court had correctly applied the law in the case. Trial judges must consider several factors under a legal principle known as equity in deciding whether to issue an injunction, he said.

“We hold only that the decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity,” he wrote.

He sent the case back to the federal court in Alexandria to rule again whether MercExchange is entitled to a permanent injunction.

“We are confident that the district court, when it fairly applies the traditional principles of equity set forth in the Supreme Court’s opinion, will grant the injunctive relief to which MercExchange is entitled,” the company said in a statement.

MercExchange went on to note that the high court rejected the district court’s determination that a willingness to license patents and the holder’s lack of commercial activity in applying the technology were sufficient grounds for denying the injunction MercExchange had sought.

But eBay and other computer-related companies applauded the ruling.

“The trial judge originally found in this case that money was sufficient, and denied an injunction,” Jay Monahan, eBay’s deputy general counsel, said in a statement. “We are confident that when the district court revisits this issue, particularly in light of the ongoing reexamination of the patents, that the result will be the same.”

The Business Software Alliance, a trade group that represents software companies said Monday’s ruling was “a clear victory for innovation and for consumers, and a defeat for patent trolls and others who are abusing the legal system.”

Drug and biotechnology companies have also argued that court injunctions were needed to shield their ideas and recoup costs of their investments.

The case is eBay Inc. v. MercExchange, 05-130.

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