20 March 2006

Hot Patent Suit

Hot Patent Suits
Jessica Holzer, 03.20.06, 6:00 AM ET
Washington, D.C. Innovation has led to tremendous technological advances in the last half-century. Yet not much has changed in American patent law since the invention of the hula hoop back in the '50s.

Now, it looks set to get a dramatic update: The U.S. Supreme Court will rule on a slew of patent cases in the coming months, including two that threaten to tip the balance of power away from patent owners to users of their inventions. It's the most intense spate of patent cases to reach the high court in 40 years.

On Tuesday, the Supreme Court will hear the arguments in Laboratory Corp. v. Metabolite Laboratories, which could narrow the range of inventions eligible for patents. Next week, the high court will hear the arguments in eBay Inc. v. MercExchange, a case that many in high-tech hope will curb the power of "patent trolls," a type of company that makes money by suing for infringement of patents it owns but doesn't use.

One such company, MercExchange, won millions in damages when it successfully sued eBay for violating two of its patents in operating the fixed-price auction part of eBay's Web site. But a U.S. District Court stopped short of forcing eBay to shut down the service entirely, on the basis that MercExchange wouldn't be harmed if eBay continued to offer the service while it tried to design around the patents. After all, MercExchange didn’t use the patents itself and could be compensated with extra money damages, the court wrote.

But on appeal, the U. S. Court of Appeals, Federal Circuit, reversed the decision, saying that injunctions should always be imposed when infringement is found. Now the Supreme Court must decide whether this should really be so.

Since 1989, the Federal Circuit, which is based in Washington and has a monopoly on all appeals of patent cases, has, as a matter of course, handed down injunctions in cases of infringement. The court views patents more or less as real estate, as opposed to contracts, and thus grants patent holders a property owner's "right to exclude." Just as the owner of a field that is lying fallow isn't forced to rent it out to farmers, a patent holder should not be forced to license his patent, the court's thinking goes.

But this view poses many practical problems in today's high-tech world, argue a host of high tech companies that have filed friend-of-the-court briefs on eBay's (nyse: EBAY - news - people ) behalf.

For starters, more and more U.S. companies are churning out high-tech gizmos instead of razor blades. Often, only a small part of a complex product is the object of an infringement suit, and therefore companies may not even be aware they are infringing. But with a standard of automatic injunction, a whole product is taken off the market, however small the infringing portion and regardless of the substantial investments made by the defendant or the harm done to the public interest. Recall the horror of BlackBerry users when a patent suit from Canada's NTP threatened to deprive them of their addictive gadgets.

"An injunction is a pretty heavy hammer," says Joshua Rosenkranz, an appellate lawyer at Heller Ehrman in New York.

Another sticking point is that automatic injunctions give enormous leverage to patent holders over the users of their inventions. With the threat of being shut down hanging over them like a sword of Damocles, defendants in patent suits have a strong incentive to settle with patent holders and pay far in excess of the value of the patented technology.

But the Supreme Court is probably concerned less about patent trolls getting rich off tech giants like Yahoo! (nasdaq: YHOO - news - people ) and Microsoft (nasdaq: MSFT - news - people ) and more about whether the standard of automatic injunction holds up under the law. And here, the Federal Circuit appears to have ridden roughshod over the will of the people: The law states plainly that the courts "may," not "shall," impose injunction "in accordance with the principles of equity"--factors that include harm done to the patent owner or the public interest.

The Supreme Court's motives for accepting the other major patent case, Laboratory Corp. v. Metabolife, are murkier. The justices raised eyebrows in legal circles when they asked the solicitor general whether they should hear the case--a rather mundane dispute over a lab test--and then ignored the government's advice to deny the appeal. The court may decide whether a correlation of two phenomena--in this case, an elevated amino acid level and a vitamin deficiency--is really eligible for patent protection, because one cannot patent "laws of nature, natural phenomena and abstract ideas." Many fear that the court could end up disqualifying an entire class of patents, throwing the patent system into turmoil.

"There's an enormous sector of the biotech industry that's built upon exactly these types of correlations," says Rosenkranz.

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