Suffering defeat at a patent infringement trial is bad, paying a damages award to a successful patent–holding plaintiff is worse––but what may truly strike fear into the heart of any defendant is the prospect of a post–verdict permanent injunction prohibiting use of the patented technology.

Recall that Microsoft was hit with a nine–figure damages award ($105.75 million) in March of this year following a trial with VirnetX––and then was immediately sued again. Last month, VirnetX sought a permanent injunction against Microsoft, which, if granted, would presumably block Microsoft from using Virtual Private Network (VPN) technology in its Windows operating system. The point became moot, however, when Microsoft announced yesterday an agreement under which it would make a $200 million payment to VirnetX in order to settle the litigation and obtain a license to use the patented technology. Microsoft’s willingness to pay nearly double the jury’s March award is no doubt due in large part to the existence of the second lawsuit––but the prospect of a permanent injunction barring the company from incorporating VPN in its systems altogether may have hung like a Sword of Damocles over the settlement negotiations.

The sword swung the other way last month, when Judge Crabb of the Western District of Wisconsin denied plaintiff’s request for a permanent injunction, relying in part on the fact that plaintiff did not practice the invention in the patent, nor did it manufacture or sell any products incorporating such technology. While allowing that it was “possible” for a non–practicing patent holding company to satisfy the Supreme Court’s test for injunctive relief in eBay v. MercExchange, LLC, the court seemed to suggest it was unlikely––focusing on the fact that the “best case” for obtaining a permanent injunction occurs when the plaintiff and defendant are competitors. Here, plaintiff was not trying to limit the practice of its invention but rather to “maximize a potential licensing fee.” The decision is now on appeal to the Federal Circuit.

Under threat of a permanent injunction, a loss at trial may be a first step down a troubling, forked path ending in a business decision either to forgo the patented technology altogether (especially difficult if it involves a core feature of the business such as VPN technology), or to pay a ratcheted up licensing fee. The size of the threat, however, may depend on the nature of your opponent. For those accused of patent infringement by non–practicing entities, Judge Crabb’s analysis offers a roadmap for demonstrating why a business should not be permanently barred from doing business by a plaintiff whose only business is litigation.

Eyes on IP ,May,18,2010