United States: The Effect of the U.S. Supreme Court’s Decision in eBay v. MercExchange on the Biopharmaceutical Industry

A version of this article was originally published in the fourth in a series of reports published by BNA International as part of the IP & Technology Programme, June 2006

Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

Historically, a permanent injunction was granted almost as a matter of right after a holding of patent infringement, a virtual automatic injunction. A compulsory licence was rarely a remedy. That all changed, however, on May 15, 2006, when the Supreme Court of the United States in the matter of eBay v. MercExchange decided that the virtual automatic issuance of a permanent injunction upon a finding of patent infringement violates traditional principles of equity.¹ This ruling signals a fundamental change in U.S. patent law.

While members of the Court appear split on the proper use of the traditional four-factor injunction test in a patent context, a concurring opinion, involving four Justices, leaned toward allowing trial courts more discretion to consider patent use and the public interest when ruling on permanent injunctions. Thus, it is likely that a patentee’s good-faith use of a patent and the public interest in access to the invention will carry significant weight in future district court decisions. Many of those decisions could result in denials of requests for permanent injunctive relief, essentially awarding compulsory licences to the infringers. The consequences for the biopharmaceutical industry, for whom patents constitute its life blood, could be mixed. For big pharma marketing patented products, the likelihood of an injunction should not greatly diminish. Smaller biotech companies with patented technology may not, as a practical matter, fare as well. Without the threat of an automatic permanent injunction, those companies will lose significant leverage in negotiations to license their patented technology.

Compulsory licensing of patented inventions has long been an accepted practice in Europe, especially in matters closely tied to public interest like the biopharmaceutical industry. The patent laws of most European countries allow courts to grant nonexclusive licences to exploit patented inventions, provided certain conditions are met. Two important factors European courts consider when deciding whether to grant such a licence include whether the public needs the invention and whether the patentee has endeavoured to practice the invention within the country.

The German Patent Act provides a good example of a typical European scheme. Under the Act, a compulsory licence will be granted if the applicant has made reasonable, yet unsuccessful, efforts to obtain a licence from the patentee and "the public interest commands the grant of a compulsory licence".² In addition, if a patentee does not use the patented invention within Germany, a court may grant a compulsory licence "to ensure an adequate supply of the patented product to the domestic market".³

The United States has viewed a patent as a strongly protected property right since the first Patent Act of 1790. Indeed, the fundamental right bestowed on the patentee by the grant of a patent is the ability,

"to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States".⁴

In contrast to practices in Europe, the availability of injunctive relief has long been an integral part of U.S. patent law to ensure a patentee’s ability to enforce this core right. The Supreme Court had recognised the essential connection between injunctive relief and the right to exclude, stating that,

the "heart of [a patentee’s] legal monopoly is the right to invoke the State’s power to prevent others from utilizing his discovery without his consent".⁵

Historically, U.S. law also made no distinction between patentees who practice their invention and those who choose merely to license or do nothing with the patent. A patent is granted in return for the public disclosure of an invention, not for a promise to practice it. The Supreme Court had consistently held that the failure of a patentee to use the invention does not alter the strength of the patent and permanent injunctions were equally available to all patent holders.⁶ This principle was succinctly stated by the Supreme Court in Continental Paper Bag:

"[E]xclusion may be said to have been of the very essence of the right conferred by the patent, as it is the privilege of any owner of property to use or not use it, without question of motive".⁷

It was the rare exception in the United States that compulsory licences would be granted.⁸ In those rare situations, courts most frequently exercised their discretion to deny injunctive relief in order to protect a significant public interest. That public interest had to be compelling, however, given the noted countervailing interest in the benefits provided by a strong patent system.

The most frequently cited case for a critical public need trumping the grant of a permanent injunction was City of Milwaukee v. Activated Sludge, Inc.⁹ In Activated Sludge, a case decided before the establishment of the Federal Circuit, the Seventh Circuit Court of Appeals reversed a district court’s grant of a permanent injunction due to public-health concerns. The patents at issue claimed methods and apparatuses for sewage treatment, and the trial court found that the claims were valid and infringed by the wastewater treatment plant being operated by the city of Milwaukee. An injunction would effectively have left the city with no option but to dump raw sewage directly into Lake Michigan. Noting that the health and lives of more than half a million people would be put at risk by such a decision, the court reversed the grant of a permanent injunction, allowed the city to continue operating the plant, and effectively granted a compulsory licence.

There are also several statutory exceptions to permanent injunctions. The U.S. Congress has specifically provided that certain medical emergencies and governmental or environmental interests constitute sufficient public need to justify denial of injunctive relief.¹⁰ In addition, the Bayh-Dole Act, which governs the licensing of technology resulting from federally funded research, often at a university, permits government-mandated compulsory licences in two scenarios. If a university pursues patent rights in an invention arising from federally funded research, it is obligated to grant a,

"nonexclusive, nontransferable, irrevocable, paid-up license to practise or have practiced for or on behalf of the United States any subject invention throughout the world".

Additionally, the federal government maintains "march-in" rights to license or require licensing of the technology in certain scenarios.¹¹

Sometimes, a compulsory licence has been ordered when patents have been wrongfully acquired or pooled and then cross-licensed. This activity typically is perceived as associated with possible antitrust conduct,¹² and compulsory licensing is used to ward off monopolistic behaviour.¹³ The recent use of compulsory licences has occurred almost exclusively in merger cases as a condition for the settlement of an anti-trust enforcement action brought by the Federal Trade Commission (FTC), a practice to which the Supreme Court has given its explicit approval.¹⁴ Another situation invoking a compulsory licence occurs where the new entity created from the merger may control nearly all the intellectual property in a market. For example, the FTC has recently used compulsory licences in the context of consent decrees in mergers involving pharmaceutical companies, where the merged company possessed a potentially dominant patent portfolio in a particular therapeutic area. In essence, the merging companies agree to license certain patents to third parties rather than be subjected to FTC scrutiny or be forced to divest the new entity of the intellectual property assets entirely.

The merger of Ciba-Geigy, Ltd and Sandoz, Ltd to form Novartis AG raised government concerns about anti-competitive effects on the commercialisation of gene therapy products. Because the merged company would have controlled many of the critical patents covering the technology, the FTC was worried that potential licensees of the patents would be forced to pay more than when Ciba-Geigy and Sandoz were competitors. As a result, the merger would have raised costs for companies looking to enter the gene-therapy market, thereby delaying or preventing products from reaching the public. The FTC approved the merger only after the parties agreed to license certain patents and know-how to a third party.

Similarly, the merger between Pfizer and Warner-Lambert in 2000 involved the two leading companies developing Epidermal Growth Factor receptor tyrosine kinase (EGFr-tk) inhibitors for the treatment of solid tumours. Again, concerns were raised that the merged company could readily deter industry investment in competing research programmes due to the strength of the combined patent portfolio. To alleviate the FTC’s apprehensions about the anti-competitive effects of the merger on the development of these drugs and the potential for increased consumer costs, Pfizer consented to the grant of an irrevocable worldwide licence of key EGFr-tk patents to a rival drug developer.

The situations just discussed represented some of the rare exceptions to the virtual automatic injunction following a holding of patent infringement. But recent events in the United States generated renewed interest in expanding the use of compulsory licences, the first stemming from post-September 11 fears of biological terrorism. Following the delivery of the anthrax bacteria to several members of Congress and the media, the U.S. government began to stockpile ciprofloxacin, then the only antibiotic approved for the treatment of anthrax infections. At the time, the German pharmaceutical company Bayer AG owned U.S. patents covering ciprofloxacin, which is marketed under the trade name Cipro.

Concerned about Bayer’s capacity to manufacture enough Cipro in the event of a larger attack and the premium price being charged due to market exclusivity, prominent politicians suggested that Bayer’s patents should be overridden by legislation authorising generic manufacturers to produce the drug without fear of infringement actions by Bayer. In other words, the generics would have been granted compulsory licences in Bayer’s patents in the face of an urgent, although only potential, public need. The debate, however, quickly ended when Bayer agreed to increase production and reduce the price of Cipro and the FDA began expediting approval of alternative antibiotics effective against the anthrax bacteria.

Despite a more questionable public need relative to a private business need, additional calls for increased compulsory licences have come in response to the recent patent infringement action against Blackberry manufacturer Research in Motion (RIM). In 2002, a federal court found that RIM’s Blackberry service infringed NTP’s patents covering the integration of e-mail systems with wireless networks.¹⁵ The court issued a permanent injunction, which was stayed pending the result of RIM’s appeals.

RIM officials complained bitterly that the company was being held hostage by a patent holding company that did little to commercialise its patents. Noting the over one million government and emergency personnel who use the service, RIM also stressed that the public interest necessitated that no injunction issue. These arguments did not persuade the appellate courts, and on January 23, 2006, the Supreme Court refused to hear RIM’s appeal. Faced with a looming shutdown of the entire Blackberry network, RIM agreed to pay $612.5 million to settle all outstanding claims.

The events surrounding the Cipro and Blackberry disputes highlighted a recent debate about whether the exploitation of the virtual automatic injunction rule was a serious problem, plaguing the U.S. patent system. Some argued that the automatic injunction provided smaller companies, such as biotech start-ups, with the needed clout to bring a larger company to the table for a fair licensing negotiation. Without the threat of a permanent injunction, a smaller biopharmaceutical company would not be able to effectively negotiate. Others argued, however, that the added ammunition of a permanent injunction resulted in higher valuation of some patented technologies, especially in cases involving companies with no intention of practicing the invention. As discussed above, the right to exclude, which is the core of a patent, has not historically been contingent on whether the patentee uses or licenses the patent under current U.S. law. "Patent trolls"– as companies that make little or no effort to commercialise patented technologies are often called – are said to seek out patents on key technologies and unfairly use the leverage of a possible injunction to extort from an alleged infringer a windfall amount much greater than that achieved by an arm’s length licence negotiation.

Interestingly, the proposed Patent Reform Act of 2005 included a compulsory-licensing provision for the United States. The proposal would have limited a patentee’s automatic right to an injunction by taking into account the patentee’s use of the technology.¹⁶ The 2006 version of the act no longer includes this provision, but the proposal itself may have signalled a shift in Congress’s thinking about compulsory licences in the United States.

The Supreme Court decision in the eBay case may fundamentally change U.S. patent law. In ending the virtual automatic issuance of permanent injunctions in patent-infringement, the Court held automatic injunctions violate traditional principles of equity and required that in all cases where a patentee requests permanent injunctive relief against an adjudged infringer, the patentee must demonstrate:

"1) that it suffered an irreparable injury; 2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; 3) that, considering the balancing of hardships between plaintiff and defendant, a remedy in equity is warranted; and 4) that the public interest would not be disserved by a permanent injunction".¹⁷

The extent to which this decision affects the patent landscape in the U.S. will depend on its application.

The road to this landmark decision of the Supreme Court began in 2001, when MercExchange filed suit against eBay and its subsidiary Half.com for infringement of three U.S. patents claiming methods and systems for electronic commerce.¹⁸ A jury from the United States District Court for the Eastern District of Virginia found that the relevant claims of two of the patents were valid and infringed by the direct purchase feature of eBay’s website. Despite the jury verdict, the district court judge denied MercExchange’s motion for a permanent injunction, citing, among other things, a growing public concern over the issuance of business method patents and that MercExchange sought to license the patents rather than to practice the invention.

On appeal, the Federal Circuit reversed the district court’s denial of a permanent injunction.¹⁹ Noting that the essence of a patent is the right to exclude, the court stated that, absent exceptional circumstances,

"the general rule is that a permanent injunction will issue once infringement and validity have been adjudged".

The court specifically recognised, however, that in rare instances a court may deny injunctive relief where the invention is needed to protect the public health yet the patentee fails to practice the patented invention. But the district court’s generalised concern over business-method patents was not the type of important public need justifying denial of a permanent injunction. Likewise, MercExchange’s public statements of its willingness to license the patents was not a sufficient basis for denial. Injunctions are equally available to patentees who intend to practice or license their inventions, the court stated.

On November 28, 2005, the Supreme Court granted eBay’s petition for writ of certiorari to review the Federal Circuit’s general rule in patent cases that a district court must, absent exceptional circumstances, issue a permanent injunction after a finding of infringement.²⁰ The Court also asked parties to address whether its precedents on the appropriateness of granting an injunction against a patent infringer should be reconsidered. The decision in Continental Paper Bag was singled out by the Court for particular attention.

At the heart of the case was the effect of a patent’s exclusionary rights on determining whether injunctive relief is appropriate. At one end of the spectrum was the Federal Circuit’s "general rule" just summarised, and at the other was the traditional four-factor test used in non-patent cases, which the Supreme Court articulated in its opinion.

eBay and amici in support of eBay, favoured giving courts more discretion to deny injunctions, arguing that the four-factor test should be applied to patent cases. The Federal Circuit’s view, they asserted, allowed a company with a patent covering a minor element of a complex product to easily obtain an injunction and threaten industry-wide shutdown. The leverage obtained from such a threat permitted the patentee to extort a settlement from the infringer far in excess of a reasonable royalty. For eBay and its supporters, the public interest would suffer as a result, with customers being forced to pay higher prices or, worse still, losing access to the product completely.

MercExchange countered that the Federal Circuit approach properly applied the principles of equity to its decision while taking into account the strong exclusionary rights of a patent found valid by both the USPTO and a district court. Because the first three factors tilted strongly in the direction of a patentee, only in rare cases of critical public interest should a permanent injunction be denied. Taking away injunctive relief, MercExchange argued, would strip patents of their value by undermining the very essence of a patent: the right to exclude.

Not surprisingly, the position of MercExchange was supported by the biopharmaceutical industry and by other industry groups favouring strong patent rights. They contended that the public interest was better served by reaping the innovations driven by a robust patent system than by potential short-term benefits to consumers.

On May 15, 2006, a unanimous Supreme Court ended the debate and eliminated automatic permanent injunctions in patent cases. Justice Thomas, writing for the Court, noted that nothing in the Patent Act indicates Congress intended a departure from traditional equitable principles in patent cases. Equating patents to personal rather than real property, Justice Thomas found that the statutory right to exclude does not justify a "general rule in favor of permanent injunctive relief".²¹

The Court held that both lower courts had improperly not applied traditional equitable principles when ruling on the permanent injunction against eBay. The district court erred in suggesting that broad categories of parties, such as those who do not commercially exploit their patented inventions, may not be entitled to injunctive relief. For its part, the Federal Circuit improperly articulated a general rule unique to patent cases. The Court thus vacated the Federal Circuit’s decision, allowing the district court to reconsider the issue utilising traditional principles of equity. Consistent with this ruling, the Court expressly took no position on whether an injunction was appropriate in the case at bar.

Two concurring opinions offered distinct guidance on how the traditional test should be applied in patent cases. Chief Justice Roberts, joined by Justices Scalia and Ginsburg, pointed out that strong judicial protection of the right to exclude also has a long tradition in equity that should not be ignored. In contrast, Justice Kennedy, joined by Justices Stevens, Souter and Breyer, advised trial courts that,

"the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases".²² Alluding to public concern over patent trolls and business method patents, Justice Kennedy further opined that legal damages may be adequate in an increasing number of cases, particularly where "an injunction may not serve the public interest".²³

The members of the Court thus appear split on the proper use of the traditional four-factor test in a patent context. Three Justices, though concurring with the principal opinion, seem to lean toward the Federal Circuit approach. Four others lean toward allowing trial courts more discretion to consider patent use and the public interest when ruling on permanent injunctions. And the two Justices on the principal opinion offer little guidance other than to indicate that injunctions in patent cases should be treated like those in copyright cases. As a result, district court judges will be required to apply the traditional four-factor test without significant guidance. However, emboldened by current public opinion and the concurring opinion of four Supreme Court Justices, it is a good bet that a patentee’s good-faith use of a patent and the public interest in access to the invention will be given significant weight by district court judges in the application of that test.

Now that the Supreme Court has ended the automatic permanent injunction in patent-infringement cases, can we expect to see more compulsory licences in the biopharmaceutical industry? The answer is most likely yes. And whether an injunction is granted may depend on the invention covered by the patent and the market affected by the patent.

In the traditional big pharma areas, where patents usually cover specific products or methods of treatment using those products, permanent injunctions may not diminish. For starters, the good-faith use of an asserted patent is rarely an issue. Pharmaceutical companies usually market patented products, which helps to recoup the high costs of research and development. Second, in such circumstances, the public’s interest would not be disserved by enjoining an adjudged infringer. The prospect of consumers saving money due to the presence of the infringing product, such as a generic drug, has been held not to constitute a pressing public need that outweighs a strong patent system.²⁴ Only in extreme cases, where a catastrophic event occurs (such as a bioterrorist attack or disease outbreak) and/or no effective product exists should the public need justify the denial of an injunction. These rare events, of course, were accounted for prior to the Supreme Court’s ruling.²⁵

However, in many cases involving biotech tool patents (e.g., those directed to recombinantly generated products and techniques, methods of treatment based on inhibiting biological functions or based on the discovery of a receptor, and other methods and techniques for generating new therapies using biotechnology advances), use of a compulsory licence could become prevalent when the four-factor test is applied. For example, the public’s interest in a new available therapy developed or produced using such a tool may tip the balance in favour of denying an injunction. For the same reasons, patents directed to diagnostic products, including genetic screening, may also find themselves susceptible to a compulsory licence.

For illustrative purposes, we have applied the old law and the new Supreme Court ruling to the following hypothetical situation: Biotechnology company X manufactures a new influenza vaccine. The vaccine is very useful due to its broad applicability for different influenza strains, including H5N1, the strain responsible for the bird flu. Additional vaccines are on the market, yet they are generally less effective, and a patient may need to receive multiple inoculations to achieve the same protection afforded by company X’s vaccine. Company Y, which is not producing a competing product, holds a patent covering the recombinant methods used by company X to mass produce its new vaccine. A district court has just ruled that the patent held by company Y is valid and infringed by company X.

We start with the old law of the Federal Circuit, which the concurrence of Justice Roberts most closely approaches, and look at how a district court might have decided this hypothetical before the Supreme Court’s decision. The district court would have likely granted a permanent injunction unless a pandemic outbreak of bird flu imminently threatened the health of U.S. citizens. Even in view of such a health threat, the court would have likely considered the ability of the market to provide an equivalent therapy. In the present scenario, consumers still have the option of purchasing other equally effective vaccines, though multiple inoculations would have been required. In the final analysis, there would not have been a public-health crisis sufficient to justify the denial of a permanent injunction.

Today, however, the traditional four-factor test will almost certainly produce a different result. Since it is not marketing a patented and competitive product, company Y should not suffer irreparable harm in the absence of an injunction. As such, damages for past infringement and a reasonable royalty going forward may adequately compensate company Y. Because a legal remedy would appear adequate, the equities would weigh in favour of permitting X to bring its vaccine to market and recoup substantial research and development costs for such a product. Finally, considering the need for a new vaccine and the minimal injury to company Y, the public interest would be best served by denying a permanent injunction. Indeed, in the context of a request for a preliminary injunction, the Federal Circuit has already held that the public interest in adequate access to diagnostic kits for cancer and hepatitis detection supported the denial of the requested injunction.²⁶ Thus, keeping the new vaccine of company X on the market would result in a compulsory licence to X under Y’s patent.

In limiting the number of permanent injunctions, the Supreme Court’s decision will likely diminish the bargaining position of biotech companies, especially a small company with limited resources, with patents to innovative biotech inventions. In our hypothetical example, assuming company Y is a small biotech company, company X may be more willing to take the risk of bringing a potentially infringing product to market without licensing company Y’s patent.²⁷ Without the threat of a permanent injunction, the risk to company X would most likely be only a reasonable royalty. If that represents the extent of its risk, company X, like many other companies facing similar situations in the post eBay era, will not likely pay upfront money for a licence when they can defer the payment until later and gamble on whether company Y will ultimately enforce its patent.

The recent decision in the eBay v. MercExchange case could fundamentally change in U.S. patent law and may have a dramatic effect on patents in all industries. Requiring trial courts to apply the traditional four-factor injunction test gives the courts more discretion to consider the issues of patent use and the public interest in ultimately denying permanent injunctive relief. Application of the test will undoubtedly lead to the imposition of compulsory licences across industry sectors. Although big pharmaceutical companies marketing patented products should not be significantly effected, the players in the biopharmaceutical industry most heavily hit by the Supreme Court’s decision will be the smaller companies looking to license their patented innovations. Without the threat of an automatic permanent injunction, they will certainly see a substantial erosion of their leverage in negotiations to license their patents.