Utility patents used to have much more value in the past than they do now.  There was a time when patents were a useful tool for all companies, big and small.  Due to a variety of decisions and lobbying by Big Tech, patents are now primarily a tool for big businesses.  I will lay out my case for why patents are no longer as good as they used to be in this and coming articles.

The Value of Patents Has Declined

In a case called Uniloc USA, Inc. v Microsoft Corp., the pendulum swung against the patent holder.  The Federal Circuit, our court of appeals for patent cases, held that royalties should be based not on the entire product but on the smallest salable patent practicing unit.  After the smallest salable unit has been identified, damages must be further apportioned to reflect the actual value of what is covered by the patent.

MercExchange owned patents that covered  eBay’s “Buy it Now” function. In 2000, eBay started negotiations to purchase MercExchange’s patent portfolio. But eBay abandoned the purchase. MercExchange sued eBay for patent infringement and won.  A jury found that eBay had willfully infringed the MercExchange’s patents.  Following the verdict, MercExchange sought an injunction to prevent eBay’s continued use of its patents, but the District Court denied the request. The United States Court of Appeals for the Federal Circuit reversed the District Court, stating that there was a “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances. Following this reversal, eBay took the case to the Supreme Court, where it prevailed. In the majority opinion, the Supreme Court concluded that a permanent injunction in patent infringement cases can be issued only if the plaintiff can show that the issue satisfies a certain four-factor test.

Before the Supreme Court’s decision in eBay, Inc. v. MercExchange, L.L.C., the Federal Circuit’s “general rule” held sway: after a finding of patent infringement, trial courts were expected to issue permanent injunctions to halt any continuing infringement “absent exceptional circumstances.” That general rule was intended to protect a patentee’s right to exclude others from making, using, selling, or offering to sell the patented invention while the patent was alive. Prior to the eBay decision, the Federal Circuit’s general rule meant that permanent injunctions were entered in all but rare and exceptional cases.

Justice Thomas, writing for the Supreme Court, wrote that neither the district court nor the court of appeals had appropriately applied traditional equitable principles to determine whether MercExchange was entitled to a permanent injunction. He was correct, patent courts had gone their own way.  They were aware that infringers were sometimes bad actors (though also sometimes accidental infringers) but either way were often much more powerful than patent holders.  The Supreme Court The Court held that the determination whether to grant injunctive relief rests within the equitable discretion of the district courts, and that such discretion must be exercised consistent with traditional principles of equity, in patent disputes no less than in other cases governed by such standards.

The eBay decision particularly harms universities, which are “non-practicing entities.”  Non-practicing entities have been villianized using disparaging terms such as “patent trolls” in attempts to weaken the patent system.  It is true that there have been some entities that do nothing but obtain patents and put them in the path of progress.  They would file continuation after continuation to create a “submarine patent” and then allow them to issue after a commercial product emerges that the patent claims can be twisted to cover.  However, patent law has changed such that patent terms are now 20 years from the earliest application in a chain, and is no longer 17 years after issuance of all patents in the chain.  This had already substantially ended the practice of submarine patents.   Justice Kennedy’s concurring opinion in this case mentions the “undue leverage” in licensing negotiations that non-practicing entities may have, where “an injunction may not serve the public interest.”  The Supreme Court notably decided this case after the resolution of NTP, Inc. v. Research in Motion, Inc., which at the time received widespread publicity due to the threat that nationwide Blackberry service could be shut down because of an injunction for patent infringement.  RIM lobbied congress, whose members at that time enjoyed using Blackberries, in a shrewd tactic to defend their business.  It was all in vain.  These days, hardly anybody uses Blackberry devices.  But the damage to the patent system was done.

After eBay’s elimination of the general rule affording permanent injunctive relief, those who infringe patents of non-practicing entities such as universities must still pay compensatory damages, but after eBay, are unlikely to face the threat of a permanent injunction. Compensatory damages take the form of a reasonable royalty because the nonmanufacturing patent owner, by failing to commercialize the invention or compete with the defendant, could establish nothing in the way of lost profits.

This decision was the end of automatic injunctions.  This was the start of the decline in the value of U.S. patents.

This is Part 1 of a multi-part article.  Read Part 2, Part 3, or Part 4.