May 16, 2006 6:14 pm

Richard A. Epstein: Court soft on property rights

The United States Supreme Court this past May 15, 2006 decided one of the most eagerly awaited patent cases in many a moon: eBay v. MercExchange. The case was exhaustively briefed by the parties and many amici (myself included, defending strong injunctive relief) and most observers had confidently predicted that the Supreme Court would rise to the challenge of answering what is perhaps the most recurrent issue in the patent law: when there has been an infringement of a patent, is the patentee entitled to enjoin the violation in order to protect its exclusive right of use, or must it sometimes accept a damage remedy that is somehow calibrated either to the infringer’s gain or the patentee’s loss.

Instead of the serious judicial discussion we needed, we got three short opinions, which punted on the important issues, and which did not resolve the serious disagreements that remained. The terse Court’s opinion by Justice Thomas announced without argument that the proper rule in this instance was a four-factor public interest test that asked whether the patent holder suffered an irreparable injury, whether damages were an adequate remedy, what was the relative balance of hardships between the parties, and how best to serve the public interest. It should take no imagination to realise that if literally applied, each and every patent dispute could lead to a full scale hearing as the relevant costs and benefits of different forms of relief. Whatever sense a rule like that might make in the context of a single patentee and a single infringer, it is a recipe for disaster if it opens the way for literally hundreds of parties to first use an invention and then to claim that they are only responsible for damages that could, in the public interest of course, be far less than the applicable licensing arrangement.

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One would have thought in these circumstances, that the Supreme Court would look closely at what Justice Thomas rightly termed the tension between this loose standard and the long-standing rule of equity from the Court’s 1908 Continental Paper Bag decision, which treated the issuance of an injunction as a matter of course whenever a patentee practices an invention, licenses it for use, or chooses not to use it in order to develop some substitute technology. The older rule allowed injunctions in the vast majority of cases. But Justice Thomas just noted the rule without examining its foundations or exploring its limitations.

Worse still, the two brief concurring opinions read the Court’s decision in diametrically opposed ways. Chief Justice Roberts, writing for himself and Justices Scalia and Thomas, stressed the importance of tradition in these cases and noted the historical practice of granting injunction in the “vast majority” of patent cases, without stopping to explore what exceptions should be sustained. But it seems clear he contemplated little deviation from the historical practice. But Justice Kennedy, writing for himself and Justices Stevens, Souter and Breyer, read the Thomas opinion in exactly the opposite fashion, and insisted that the entire patent game has changed so that the legal rules had to change with it. The chief source of concern for Kennedy was that patentees now tend to license rather than invent. But he never explains why this is a difficulty when it should be regarded as a testimony to the division of labour, which allows for efficient specialisation in the market. He also frets about the now often lamented but rarely sighted patent troll who uses its power to charge “exorbitant fees,” without ever once explaining how the huge and sophisticated license marketplace, replete with patent pools and cross-licenses, remotely fits that description. And he laments the use of business method patents for their “vagueness” but never once explains how that problem is cured by allowing for extensive damages while denying, maybe, some injunctive relief.

What is so hard to comprehend about this dismal performance is the utter lack of attention to the basic structure of an industry in which literally trillions of dollars depend on the sound operation of a patent system. The troll problem occupies a little corner of this vast universe, and yet the Court seems to be prepared to impose massive indecision and uncertainty on the entire system without ever stopping to think how it actually works.

The issue here, moreover, is even more troublesome because there are other major patent cases on the docket, where it seems quite likely that the Court will find it within itself to overturn the more property-protective rules that have held sway in the Federal Circuit. Right now, for example, one question before the Supreme Court in MedImmune v. Genentech is whether a party can both pay royalties under a license and then seek to use the information that it obtains as a licensee to attack the validity of the underlying patent. The Solicitor General has recently weighed in by saying that it favours allowing the licensee to both attack and pay royalties at the same time. My own view is that the risk of suit and the fear of strategic behaviour will lead to a contraction of the number of licenses that are issued in the first place. The basic principle here is simple: robust economic performance depends on strong protection of property rights from invasion without and the enforcement of voluntary contracts between parties. Right now the fate of that principle is in the hands of a somewhat bored Supreme Court that seems to believe in neither.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, the University of Chicago, and the Peter and Kirsten Senior Fellow, The Hoover Institution. Along with Scott Kieff and Polk Wagner he authored an amicus brief defending on the MercExchange side of the case, calling for a retention of the current rules

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