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Patent suit could sting eBay

A loss in a legal tussle over patents could force the Net success story to hand over millions of dollars in royalties--and even change its auction format.

eBay, one of the biggest success stories on the Web, is being threatened with a patent infringement lawsuit that could force it to modify its winning auction format.

Learn more about patent lawsuits
A loss could compel the Internet auction company to pay millions of dollars in royalties and damages and even to make significant changes to its business model.

MercExchange founder Thomas Woolston, an inventor and patent attorney who has been granted four online auction-related patents since 1998 and has some 10 others pending, said he sued eBay in 2001 after negotiations broke down over the auction site's offer to purchase his patents.

The company first contacted Woolston in 2000 with an interest in buying the patents. E-mail to that effect is expected to figure prominently in the case because it indicates that eBay knew about Woolston's patents but continued to infringe them, he said.

"We expect to be vindicated at trial," Woolston said. "They are rank infringers."

eBay representatives did not return calls seeking comment about the lawsuit. However, in a recent regulatory filing of quarterly earnings, eBay said it believes it has "meritorious defenses" to the claims, but noted that the lawsuit could prove costly even if eBay wins.

"If (MercExchange) were to prevail on any of its claims, we might be forced to pay significant damages and licensing fees, modify our business practices or even be enjoined from practicing a significant part of our U.S. business. Any such results could materially harm our business," eBay said in its filing. "We are unable to determine what, if any, potential losses we may incur if this lawsuit were to have an unfavorable outcome."

MercExchange has suggested a specific figure to settle the case, but the court has sealed the report and the amount sought is unavailable, said Scott Robertson, an attorney with Hunton & Williams, who represents Woolston and MercExchange.

"We are seeking reasonable royalties as permitted under the patent laws," Robertson said. "It's not our goal to put eBay out of business. It's our goal to provide just compensation for the patent owner."

The trial is scheduled for Nov. 12 in the U.S. District Court for the Eastern District of Virginia.

At the heart of the case is patent paperwork Woolston filed less than five months before eBay founder Pierre Omidyar spent Labor Day weekend of 1995 creating the first iteration of his auction site. Today, eBay is one of the most successful online businesses, with nearly $750 million in revenue last year and continued profitability.

But eBay, like many other Internet businesses, does face the prospect of crippling patent suits, said James Pooley, an intellectual property attorney in Palo Alto, Calif. with Milbank, Tweed, Hadley & McCloy.

• Patent No. 5,845,265
This patent is for a system that creates a computerized marketplace for goods using a database on one computer to store digital images, text descriptions, prices and legally binding offers that were previously input into another computer and transmitted across the Internet or a WAN (wide area network). The patent also covers the use of a payment-processing service to allow purchasers to pay for the goods.

• Patent No. 6,085,176
This patent covers a method of using software search agents on Internet-connected computers to comb multiple marketplaces or electronic auctions in search of a particular item.

• Patent No. 6,202,051
This patent covers a method of holding automated auctions using computers, databases and the Internet to register and link buyers and sellers, and facilitate transactions.

eBay's founding came not only at the beginning of the dot-com boom, but also during a time of great flux in the world of intellectual property. Courts hadn't yet determined the legitimacy of patents that covered business methods. Even if they had, patent applications at the time were largely kept secret until the patent office granted a patent, a process that can take several years, Pooley said. Even if a company had focused on patenting its technology or business methods before it got started, it might have to face a patent claim from months or years earlier, he said.

"If you are into fast-moving and high-growth business, it's not for the faint of heart when it comes to intellectual property issues. You can never know all of the intellectual property you may need to operate in a given space," Pooley said. "You have to take disputes very, very seriously. If you lose, depending on how hard it is to design around, you could be shut down."

Patent registration--and subsequent lawsuits--have ballooned since 1998, when the courts ruled that business processes could be patented. During the dot-com boom, numerous companies sought patent protection for their e-commerce services and poured millions into proprietary software.

Some of the biggest names in e-commerce have found themselves in court, including,, Barnes& and Expedia. Most of the lawsuits ended in settlements.

Critics say many patented business methods are obvious and that enforcement would hinder the growth of the Internet of e-commerce.

Amazon Chief Executive Officer Jeff Bezos--himself the target of such criticism for patenting the company's "one click" technology, which speeds up the purchasing stage of an online transaction--called for patent reform in March 2000. The U.S. Patent and Trademark Office responded by saying it would give greater scrutiny to e-commerce and business-method patents.

From baseball to online sales
Woolston says he first started thinking about virtual markets and online auctions in the late 1980s and early 1990s, when he was working on computer networking projects. But it took the 1994 baseball strike to pull it together. A strike, he figured, would have a big effect on the market for baseball cards--and he says he envisioned a network of buyers and sellers on the Internet and tried to figure out a way of building a trustworthy and scalable system.

He filed his idea with the patent office in April 1995 and founded MercExchange to try to turn the idea into a business. But he couldn't raise the funding and eventually turned to the business of licensing his patents to other companies. Today, two companies license his work.

"It was terribly frustrating," he said. "I followed the rules. I was convinced that was the right way to go. Now I'm convinced we're going to have our day in court and win."

Let the lawsuits begin
Woolston took steps to protect his patents almost immediately after he got his first one in 1998--No. 5,845,265, covering a method of creating a marketplace for used or collectible goods over the Internet. That same month, he filed an administrative action with the U.S. Patent and Trademark Office against Priceline, attempting to have Priceline's patent on its "name your own price" business model thrown out on the grounds that it covered the same process he patented. That dispute is still pending before the patent office, which will decide which patent takes precedence.

Frustrated by the slow progress of the patent office, Woolston and MercExchange turned next to the courts, suing search site in 2000 for infringing on his patent No. 6,085,176, which covers auction search engines. GoTo paid MercExchange an undisclosed sum to settle the case out of court.

Woolston says he sued eBay last October after it became clear that the company wasn't going to license his patents. So far, the auction site has lost a few legal skirmishes in the case.

Last month, U.S. District Court Judge Jerome Friedman denied two motions to dismiss the case and denied a request to move the case to California courts. The judge has postponed ruling on two similar motions to dismiss, eBay said in its regulatory filing.

The judge has not translated MercExchange's patent claims into plain English, an important part of a patent dispute. Until he completes this step, known as the Markman ruling, it's hard to tell how big the threat is to eBay, said Carl Oppedahl, an intellectual property lawyer with Dillon, Colo.-based Oppedahl & Larson.

But should the case go to trial, eBay could suffer a serious setback, Oppedahl said.

"Clearly they have some exposure," he said. "No one can predict with certainty what a jury will do."

Woolston said there have been no attempts to settle the case.

"We can't agree on anything," he said. "They just want to litigate everything."