Richard A. Epstein: A kind word for MercExchange

Typically, popular sentiment sides with David when he does battle with Goliath. But not when MercExchange (as David) must lock horns with Ebay (as Goliath). Their struggle is now before the United States Supreme Court, as ME tries grimly to hang on to an injunction stopping Ebay from making a wilful infringing use of ME’s patent technology to run its own fix-priced auctions. EBay thinks that the trial judge should use sound discretion to decide whether to grant that injunction or simply to require the payment of a royalty set by the court. The traditional rule routinely grants the injunction.

Ebay has a lot of supporters in clarion call for wide discretion. Patti Waldmeir’s FT column is sympathetic to Ebay. A distinguished group of 35 law professors took up Ebay’s cause in urging the Court to undertake its broad review.

The Supreme Court should reaffirm the traditional view. The impulse for the fresh look at doctrine lies in the evident (but hardly novel) holdout potential that strong patent rights give to a prior inventor. The concrete fear is that greedy holdouts will be able to shut down valuable devices that incorporate multiple patented technologies, such as those ubiquitous Blackberrys. Better, we’re told, to preserve the status quo by ordering the wrongdoer to pay the inventor a fair royalty, with no holdout potential.

That argument is not wrong in isolation. But it is fatally incomplete. Start with the particulars of this case. Ebay did not commit inadvertent infringement, because it was unaware that ME’s patent covered its pricing tools. Quite the opposite, Ebay had wilfully infringed the patent when it and ME came to a bargaining impasse over royalty terms.

Now the plot thickens. Just as we don’t like some holdouts after the fact, we also don’t like firms that take the law into their own hands by consciously deciding that it is cheaper to infringe than to purchase. Yet once the use of the injunction is relaxed at the back end of a transaction, then every firm can circumvent the law, hoping to profit from its own wrong. A veritable deluge of infringements can descend on ME, until endless litigation saps its incentive to innovate. Both Ms Waldmeir and the amicus professors never discuss wilful infringement, but work from an unstated and incorrect assumption that patent infringements won’t multiply like rabbits if injunctions aren’t routinely granted. Yet what’s to prevent Ebay from building a whole network out of infringing elements?

The problem is not new to the law, for the identical problem has arises in land encroachment cases. Suppose one landowner builds a large office structure located six inches on the land of the neighbour. After the fact, it looks as though ripping down the building is a huge social waste. Yet most courts will routinely order that destruction for any wilful encroachment. It’s important to force potential encroachers to enter into voluntary transactions to obviate the deluge of lawsuits if hapless owners get only trifling damages for repeated invasions. The holdout problem is only one form of abuse. Deliberate infringement is the far greater risk.

The same logic carries over to patents. It is wrong to insist that injunctions have to be denied in patent cases to spur innovation. Innovation depends on the work of multiple inventors through the entire technology chain, not just those at the back end. Why make it less attractive for ME to innovate to help out Ebay? Nor should it make the slightest difference that ME chooses to operate solely through licenses, rather than using its patented technology to fabricate its own equipment. No one strips a landowner of all protection if he decides to lease it out instead of building on it himself. We will get efficient make-or-license decisions in the patent context, as elsewhere, only if keep legal protection constant regardless of how the patent holder chooses to exploit its invention.

A strong tradition in all IP areas has rightly granted injunctions for wilful infringement except in rare circumstances. Once the remedy is up for grabs, courts will have to work their way through endless fact patterns, with the unhappy consequence of increasing costs and reduce the predictability. The strong injunction has worked so well on a systematic level, that not one judge on the specialised patent court, the Federal Circuit, saw fit to re-examine the basic rule. There might come a time for a fresh look if some innocent infringement threatens to shut down a complex operation which otherwise has scrupulously used only licensed technologies. But that inquiry is not needed when Ebay has only its own wilful misconduct to blame for the mess it created for itself.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago, and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.