eBay's Next Big Challenge May Be a Legal One

FirstUSA, which is a subsidiary of banking giant Bank One ONE, has proposed a settlement and the case has been referred to a judge for mediation, Johnson said. A loss in the case could force eBay to "modify [PayPal's] business practices," the company warned in its quarterly report.

How Much to Fear the Unknown

Despite the stern warnings from eBay, these legal threats are ones that Wall Street analysts have either ignored or had a difficult time assessing thus far. They represent an "unquantifiable risk," said Jeff Fieler, who covers the company for Bear Stearns.

"If you could tell me how it turns out, I would tell you what it means," Fieler said. "I think at this point, it's something that lurks out there. It's tough for investors to get their arms around them."

Bear Stearns does not have any investment banking business with eBay.

Part of the problem for eBay and investors is that business method patents, such as those in dispute in the First USA and MercExchange cases, cover somewhat new ground. Such patents didn't gain acceptance by the courts until the late 1990s.

Without a wealth of case law or public royalty agreements to rely on, it's difficult to assess what such patents are worth, said Frank Bernstein, managing partner of the Menlo Park, Calif., office of Sughrue Mion.

"It's hard to say what a reasonable amount would be," Bernstein said.

In trying to determine how much eBay would have to pay, courts and negotiators would weigh such items as its profitability, lost profits by its adversaries and the possibility that eBay could switch to a non-infringing technology coming into play, Bernstein said. Another factor is the possibility that eBay would have to license and pay royalties on other technologies.

"Generally, it's not going to pay a royalty that's going to make it unprofitable," he said.

But that doesn't mean it would be meaningless.