In a move that could pressure eBay ( EBAY), an online liquidator partially owned by the auction giant has agreed to settle a troublesome patent dispute over who owns online auction technology.

ReturnBuy, which helps manufacturers and retailers dispose of returned and excess inventory through its Web site and via eBay, has agreed to license a patent owned by privately held MercExchange. In exchange, MercExchange has agreed to dismiss its claims against the Ashburn, Va.-based company. That leaves eBay and its wholly owned subsidiary, Half.com, as the remaining defendants in the suit.

MercExchange claims the settlement validates its claim that eBay's auction system is a knockoff of the process it patented in 1995. MercExchange's move to settle with ReturnBuy may be an attempt to get eBay to the negotiating table, said Carl Oppedahl, an intellectual property lawyer with Dillon, Colo.-based Oppedahl & Larson.

"So much of this is psychology, not even law: What does it take to get them back to the table," Oppedahl said. "Now that they have one defendant signed as a licensee, it can be a conversational focus."

MercExchange filed suit against eBay, Half.com and ReturnBuy last year, charging the companies with collectively infringing on three of its patents. The patents cover online auction technology, shopping search engines and a system for creating an electronic marketplace. MercExchange accused ReturnBuy of violating only the patent covering an electronic marketplace, No. 5,845,265 .

MercExchange founder Tom Woolston filed for that patent, which provides the basis for the other two patents in the suit, in April 1995. That was some five months before Pierre Omidyar launched eBay.

eBay has previously said that the case, which was filed in the U.S. District Court for the Eastern District of Virginia, poses a threat to its operations, saying in its most recent 10-Q that losing the case could cost the company "significant damages and licensing fees" and could cause the auctioneer to change or even halt its business in the U.S.

eBay representatives did not return calls seeking comment on ReturnBuy's decision to settle the case.

The settlement must still be filed by the court. MercExchange and ReturnBuy are expected to file the settlement documents this week. Details are confidential, but both sides claimed satisfaction with the terms.

ReturnBuy's move comes as the patent case, filed last year, edges closer to trial, with a scheduled start date in April.

Walt Shill, ReturnBuy's CEO, said he was pleased with the settlement. Shill declined to say whether eBay agreed with ReturnBuy's decision to settle the case.

eBay invested in ReturnBuy as part of the company's $15 million second round of funding. Shill declined to say how much eBay has invested in the company or what its percentage stake is.

"We're happy to be partners with MercExchange," Shill said.

Woolston said he too was pleased with the settlement, calling it a "milestone" in the case.

"It's an important development for us to have a large member of the eBay community license us on fair and reasonable terms," Woolston said. "It can only help the cause for us to vindicate our rights."

eBay is not the only big name company MercExchange has accused of infringing its patents. Overture Services ( OVER) paid the company an undisclosed sum to settle a patent lawsuit MercExchange filed against it in 2000. Meanwhile, MercExchange is awaiting a decision on an administrative action it filed against Priceline.com ( PCLN) in 1998.

MercExchange counts Overture and Overture spinoff Channel Advisor among its licensees.