October 25, 2002 3:41 PM PDT

eBay patent case moves closer to trial

A patent dispute in which eBay is mired appears to be heading to trial, albeit later than originally expected.

U.S. District Court Judge Jerome Friedman issued a series of rulings over the past week that clarify the issues in the case and that allow eBay to firm up its defense, but that reject its attempts to throw out the claims made in the disputed patents. Originally scheduled for November, the case is now set for trial in April of next year in the U.S. District Court for the Eastern District of Virginia.

"My view is that the court has now cleared this case for trial," said Scott Robertson, an attorney with Hunton & Williams who is representing MercExchange, the company that sued eBay. "eBay has done everything it can to try to derail the case. They've taken their best shots and failed."

eBay representatives did not return calls seeking comment about the rulings or the case.

At the heart of the eBay-MercExchange fight is a series of patents that MercExchange founder Tom Woolston began applying for in the spring of 1995, some five months before eBay founder Pierre Omidyar launched the Web site. Woolston's three patents cover methods of creating and searching online marketplaces and auctions.

MercExchange, a Great Falls, Va.-based company that holds and licenses a portfolio of e-commerce-related patents, sued eBay last year. The company charged that the online auction giant and two of its subsidiaries had infringed three of its patents covering methods for holding and searching online auctions. eBay has acknowledged in regulatory filings that if MercExchange prevails in the case, eBay could suffer "material harm" and be forced to significantly change its business practices.

Despite the potential threat to eBay, the companies are not currently involved in settlement talks, Robertson said.

"We'd be willing to sit down and discuss a reasonable resolution of this matter at any time," he said.

The dispute is one of a growing number involving business method patents. Since the federal courts legitimized such patents in 1998, companies such as Amazon.com, Priceline.com, Expedia and Barnesandnoble.com have either tried to enforce such patents--or tried to defend their businesses against them.

Disagreeing to disagree
eBay has been actively defending itself against MercExchange's claims. As part of what's known as a Markman hearing, the companies sparred over the meaning of nearly every term used in the three MercExchange patents that are at issue in the case, annoying the court in the process.

"The court realized that not only did the parties disagree as to what the claims mean, but they also disagreed as to what claims were in dispute," Judge Friedman wrote in his Markman decision, which helps define the disputed terms for a jury. "As a result of the parties' inability to cooperate at all, this court has been forced to expend an incredible amount of time and resources handling this case."

A Markman ruling can serve as an omen for the eventual outcome of a patent case by either disallowing certain patent claims or allowing a broad interpretation of them. British Telecommunications' efforts to enforce a patent on hyperlinks, for example, were dealt a deathblow by a Markman ruling in March that threw out many of its claims.

The Markman ruling in the eBay-MercExchange case was not so clear-cut, patent experts say. Although the judge clearly narrowed the scope of the case, in some instances he ruled in favor of eBay and in others he sided with MercExchange.

The decision was "inconclusive," said Neil Smith, a patent attorney with San Francisco's Howard, Rice, Nemerovski, Canady, Falk & Rabkin, who is not affiliated with either side of the case.

"We'll have to wait till it goes to trial. I don't think you can read a lot into it at this point," Smith said.

As part of his Markman decision, Friedman ruled that the term "auction" as used in MercExchange's patents means a "trusted network or...intermediary." Although MercExchange argued against the interpretation, Robertson said it will work in the company's favor. The ruling puts eBay in the position of having to argue that it is not a trusted network, he said.

"If we're going have trial on whether eBay's a trusted venue, and eBay's position is that they are not to be trusted, I like the odds," he said.

The claims stay
Meanwhile, in a separate decision, Friedman ruled on eBay's efforts to throw out some of MercExchange's patent claims. Earlier this summer, Friedman denied two similar motions. This week, he denied one more, filed by Half.com, while partially granting another one.

Half.com had argued that many of the claims made by MercExchange in a patent that covers a system of searching online marketplaces should be thrown out because they were preceded by a previous invention. But Friedman disagreed with Half.com's interpretation.

"There exists a genuine dispute over whether the (previous) system anticipated each and every element of the claims of (MercExchange's patent)," Friedman wrote. "As such, Half.com's motion...is denied."

Friedman looked somewhat more kindly on eBay's efforts to dismiss claims made in MercExchange's patent that covers online auctions. eBay charged that the claims made in the patent were not adequately described in Woolston's original patent application, which was filed in 1995. Instead, eBay argued that Woolston amended his application years later, after he'd seen eBay's system in action.

While sidestepping the issue of Woolston's motivation, the court ruled that he hadn't adequately described some claims involving charging fees or commissions to a seller's account. Friedman's ruling takes away one of the primary claims made in the patent.

"This is not a good development for the plaintiff," said Jeffrey Neuburger, a intellectual property attorney with Brown Raysman Millstein Felder & Steiner in New York, who has no affiliation with the contestants. "When a court throws out some of your claims right out of the bat, it narrows some of the claims against the defendant and takes some of wind out of your sails."

But Woolston took the development in stride. Woolston noted that the ruling only takes away 20 out of the 52 claims of one of his patents. Meanwhile, the other two patents will be going to trial intact.

"The three patents are going forward to trial. Their motion to dismiss the case for the most part failed," he said.

Finally, Friedman also ruled that eBay will be able to defend itself by charging MercExchange and its attorneys essentially with fraud. One of MercExchange's patent applications was denied due to a prior invention. eBay has argued that MercExchange's attorneys were required to provide information about the prior invention to the patent office when it considered MercExchange's applications for a patent on online auctions. If they had provided that information, the patent office would have denied its online auction patent, eBay argued.

Friedman didn't rule on whether MercExchange was guilty of fraud, only that eBay would be able to defend itself with that accusation. Using such a defense is common in patent trials and can be very effective, Neuburger said.

"It's a good tactic to use," he said. "It puts the plaintiff on the defensive."

But Robertson called it a mark of desperation on eBay's part.

"It is unfortunate that rather than engage in the merits, eBay now resorts to name-calling. But I guess desperate times call for desperate acts," he said.

 

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