eBay Loses Patent Suit

Updated from May 27

eBay (EBAY) lost a patent suit and is now on the hook to pay $35 million in damages, according to MercExchange, which filed the suit two years ago.

MercExchange, a privately held company, has accused eBay and its fixed-price subsidiary Half.com of violating three of its patents related to online auction technology, shopping search engines, and a system for creating an electronic marketplace. The suit focused on the third patent.

The penalty of $35 million is a sizeable chunk of change, equivalent to 14% of eBay's profit last year of $249.5 million. But one financial analyst said a bigger concern than the one-time payout is whether eBay will have to make ongoing payments in the future to license MercExchange's patents. Tuesday's jury decision in the U.S. District Court for the Eastern District of Virginia was "a little bit of a surprise" for eBay, said the analyst, who requested anonymity.

"It's not over just because the jury comes in with a verdict, but I'd certainly give the first round to MercExchange," said Neil Smith, an attorney at Law, Howard Rice Nemerovski Canady Falk & Rabkin.

eBay plans to file several post-trial motions, asking the court to reverse the jury's verdict and reduce the damages award, company officials said in a statement issued Tuesday night. "This issue is far from over," said Jay Monahan, eBay's deputy general counsel. "We believe that the weight of the evidence presented during the trial did not justify the jury's verdict."

"Thirty-five million is not big as eBay goes or even as patent cases go," noted Smith. "The difficulty is if the patent is upheld and is broad enough to cover the auctions on the Internet or some of the things important to eBay, there's a risk the court will grant an injunction and prevent eBay from practicing the invention. If it's broad, that could have a major effect on its business. If it's narrowly drawn, maybe there are other ways to run auctions."

A spokesman for eBay was not immediately available, but the company in the past has denied that it violated the patents, according to press reports.

Tuesday's decision included a finding by the jury that the violation was willful, according to MercExchange founder Tom Woolston. That means eBay could be liable for trebled damages, pending a judge's approval of the verdict.

"I'm incredibly thankful that a small guy can get his day in court and be vindicated by a jury," Woolston said.

eBay is simultaneously battling two other lawsuits. Last fall, it warned in a quarterly report that losing any of the three cases could "materially harm" its business.

Even before Tuesday's decision, MercExchange could claim some progress in its patent disputes. Last December a company partly owned by eBay, online liquidator ReturnBuy, agreed to license MercExchange's patents. Also, former eBay partner AutoTrader began licensing MercExchange's patents.

eBay shares closed regular trading Wednesday down $1.87, or 1.8%, to $101.18.