The decision could force the auction house to drop its discount E-market and "Buy It Now" service

InformationWeek Staff, Contributor

March 4, 2003

3 Min Read

NORFOLK, Va. (AP) -- A federal jury has ruled that eBay's model for selling fixed-price merchandise violates a patent filed by a Virginia attorney, a ruling that could force the online auction house to shed as much as a third of its total business.

Tuesday's $35 million award did not involve eBay's primary auction business.

But patent law experts said it may force eBay to drop, a discount E-market, and "Buy It Now," which offers fixed-price options on eBay's main auction site. About a third of the company's merchandise can be purchased for a fixed price.

"If it's upheld that the patents were violated, then the court could issue an injunction against practicing the patents," said San Francisco patent attorney Neil Smith.

Experts say that would hurt the company much more than the damage award of $35 million, which Smith called a "drop in the bucket to eBay."

EBay said in a statement that it would ask the judge to set aside the verdict, and would appeal if he does not. "The verdict is still very much in dispute, and the battle is still far from over," said Jay Monahan, eBay's deputy general counsel.

Jurors ruled for MercExchange, based in Great Falls, which had claimed that its founder, Thomas G. Woolston, filed three patent applications for programs and procedures to operate an Internet-based auction.

MercExchange sued in September 2001, accusing eBay of using Woolston's ideas without permission. "They just started infringing," Woolston said.

EBay countered that the company's procedures didn't infringe Woolston's patents, and that those patents are unenforceable anyway because other people had proposed similar systems and methods before Woolston filed his applications.

After deliberating for three days, jurors found eBay had acted "willfully," meaning U.S. District Judge Jerome B. Friedman can choose to triple the damages to $105 million.

Friedman is expected to rule later on whether eBay must change any of its practices.

If upheld, eBay would have to drop and "Buy it Now," or seek a license to use the patents claimed by Woolston.

"And I'm sure it would cost considerably more" than the jury award, said Norm Beamer, a partner in the Palo Alto, Calif., national intellectual property specialty firm Fish & Neave. "Probably in the end they're going to need a lot of money to win a license."

Woolston said he already has talked to prospective buyers and would not rule out a sale to eBay.

"I'm walking on sunshine," said Woolston, a former CIA agent. "We are thankful that a small company got its day in court and was vindicated by a jury."

The core of the dispute is one of three patents issued to Woolston in 2000 and 2001 that were spawned from an original, or "parent," application he filed in April 1995.

The 1995 filing was several months before eBay founder Pierre Omidyar launched the auction site using a combination of his own programming and software obtained for free over the Internet.

Ebay, based in San Jose, Calif., is one of the Internet's great business successes, and one of the last remaining winners from the dot-com bubble. Its stock has gained more than 40 percent this year and it reported a first-quarter profit last month of $104.2 million, more than double the amount it earned in the same period last year.

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