Either patents are the first line of defense for the garage-based inventor, or they're tools of the ruling class intended to block innovation and maintain lucrative monopolies. Either the U.S. Patent and Trademark Office is spinning wildly out of control, or it's stretching to meet the demands of a changing business landscape. Both sides of the argument have their adherents, and both are simplistic and flawed. Patents are a fact of business life, one that many companies have to come to terms with, whether it's through litigation, settlement, or something as drastic as what eBay may be facing--a change in business model. True to form, Microsoft wants to be both patent powerhouse and arbiter of change.

---

EBay Faces Patent Problems
EBay Inc., the online-auction powerhouse, was dealt a blow last week when an appeals court decided in favor of MercExchange LLC in a long-running patent dispute. The ruling means eBay may have to pay MercExchange $25 million or more and may have to alter or drop one of its E-commerce capabilities.

MercExchange, a small online vendor, was started by Tom Woolston, an inventor who was granted three patents in 2000 and 2001 related to online auctions and shopping. Woolston filed for his patent on the process of conducting online auctions (No. 6,202,051) several months before eBay started its service in 1995. Woolston claims eBay approached him in 2000 about licensing his patents, then broke off negotiations. MercExchange subsequently sued eBay.

MercExchange won a district court ruling in 2003 that held that eBay violated its patent

for direct online buying (No. 5,845,265), as represented by eBay's "Buy It Now" feature, and its patent for searching the Web for merchandise from other vendors (No. 6,085,176), which is the role of eBay's Half.com subsidiary. The district court threw out MercExchange's patent for the online-auction process, claiming it wasn't explained well enough.

Both sides appealed, and last week the appeals court reaffirmed not only the validity of MercExchange's direct-buy patent but ruled that eBay had willfully violated that patent. The appeals court recommended an injunction against eBay over that feature, which means it will have to either stop using it, come up with a different way to do it, or license the MercExchange patent. At the same time, the appeals court denied the validity of the online search patent, effectively ending that litigation.

In a statement, eBay claimed it was pleased with the appeals court ruling to eliminate one of MercExchange's patents, and that any injunction issued by the district court "will not have an impact on our business because of changes we have made following the District Court's original verdict."

The most surprising result of the appeals court ruling was its decision to reinstate MercExchange's patent on the online-auction process itself, which means another trial. The appeals court ruled "the [lower] court made a mistake and now we're entitled to a jury trial," says Greg Stillman, lead counsel for MercExchange. An injunction in connection with that very core capability could be problematic for eBay. "Any injunction would be narrowly tailored to avoid shutting down eBay and may only apply to eBay's Buy It Now feature," says Dennis Crouch, a patent attorney with McDonnell, Boehnen, Hulbert & Berghoff LLP, in an E-mail.

Or eBay could license the MercExchange patents--if the owner will let it. "We're not looking to license the patents to anybody else," says Woolston, who's working with online-auction site Ubid.com, a direct competitor of eBay. Ubid licenses Woolston's patents.

--John Soat