When both sides claim victory, it usually means no one is happy. Such is the sentiment following the Supreme Court’s decision in a closely watched patent case, eBay v. MercExchange. The key question was how easy it should be for a patent owner to put a stop to infringing activity. Should an injunction issue as a matter of course? Or must a patent owner demonstrate special circumstances? The answer isn’t self-evident; the two lower courts took essentially opposite views. Calling Solomon’s bluff, the Supreme Court appears to have split the baby.

Businesses that live and die by their patents — high-tech upstarts, big pharma companies and outfits that amass patents instead of making products (the much-maligned "patent trolls") — favor easy injunctions. Imagine, they argue, if anyone could set up house on your property and a court refused to kick them off. Patents supposedly provide the right to exclude others. How real is that right if the most a court will do is order a squatter to pay rent?

Proponents of limiting injunctions argue the issue is less about ejecting dangerous squatters than gaining leverage to negotiate what they’ll pay. Faced with the prospect of shutting down factories or even going out of business entirely, an accused infringer may feel unable to offer much resistance. Easy injunctions, their foes insist, tilt the playing field too far toward patent owners.

The issue has been hotly debated for well over a year. Efforts to reform the patent laws, for example, have foundered on whether the existing rules for injunctions should be changed. In holding that both sides have a point, the Supreme Court may have lowered the stakes surrounding this key stumbling block. (Whether patent reform is such a great idea is another story.)

So what exactly did the court say? It actually did no more than reaffirm the traditional standards governing injunctive relief. An order to cease activity really is an extraordinary remedy, since its consequences may be difficult or impossible to undo. The balance of hardships, therefore, must demonstrably favor the patent owner, who has to show that the injury caused by infringement is irreparable and uncompensable by money damages alone. The patent owner must also show that shutting the infringer down is consistent with the public interest.

At minimum, lower courts will now have considerable discretion in deciding whether to grant injunctions. How they will exercise that prerogative, and which factors will count most, remains to be seen. Different judges will surely see the world in different terms. But it’s possible to discern some general guidelines.

Licensors vs. Manufacturers. Patent owners who compete in the marketplace will have the strongest case for an injunction, particularly against direct competitors. The inability to exclude infringing competition can spell the loss of precious market share forever. Those who gain no more than negotiating power from an injunction, by contrast, will have a much harder time. Money damages fully compensate your average patent troll; he only seeks money in the first place. And if a troll and an infringer can’t come to terms, it’s hard to argue the public interest favors banishing products from the marketplace.

But who is a troll? Certainly not everyone who decides to pursue a licensing strategy. As the Supreme Court’s opinion recognizes, universities and small inventors can’t, as a practical matter, enter the market. Yet denying them injunctions would eliminate their control over who can use their technology. Innovators would be forced to admit all comers at a court-ordered price; exclusive licenses might become untenable. And investments made by existing licensees could be threatened by the prospect of uncontrolled competition.

In short, the more a patent licensor resembles a university or individual inventor, the greater will be the chances of obtaining injunctive relief. Licensors who discriminate among prospective takers, or who can portray the infringer as an unwanted interloper, will have the strongest cases. After all, if a copycat knows he will suffer no more than the obligation to pay “rent,” where’s the incentive to innovate?

Business methods and "small components." In a concurring opinion, Justice Anthony Kennedy suggested that injunctions may be inappropriate for patents that cover “but a small component” of an infringing product or a “business method.” Before frantically measuring patents against products or agonizing over what qualifies as a business method, it’s important to recognize, first, that a concurring opinion is not legally binding. Moreover, any judge’s decision whether to grant an injunction must ultimately be grounded in the “traditional” factors discussed above. These emphasize the structure of the market and the patent owner’s place in that market rather than the nature of the invention. In all likelihood, the concurring opinion will come to be viewed as a general observation rather than a blanket exclusion of patents covering components or business methods.

The bottom line. Following the Supreme Court's decision, injunctions will be more difficult to obtain, and defendants who perceive their adversaries as mere patent trolls may be more willing to risk trial. But the threat of injunctions remains, particularly for those who can demonstrate harm that’s difficult to value or non-monetary altogether. Building the case for an injunction into a business model can pay off when the time for patent enforcement arrives. — Steven J. Frank

Steven J. Frank is a partner in the law firm of Goodwin Procter LLP. His latest book, Intellectual Property for Managers and Investors, was recently released by Cambridge University Press.

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