eBay ( EBAY) will square off against a coalition of huge pharmaceutical and industrial companies this week when its long-running patent dispute is heard at the Supreme Court. The question to be decided is whether a court should immediately be required to issue an injunction once it finds infringement of a patent. Last year, a federal court denied MercExchange's request for a court order to prevent eBay from using its patent in the auction giant's Buy It Now service. The injunction orders are routinely granted, though eBay and MercExchange disagree as to whether this should be done as a matter of course. The Supreme Court probably will split the difference, according to a patent expert. "I believe that the Supreme Court will loosen the reins somewhat and give trial courts more discretion in whether to grant an injunction," says Dennis Crouch, a patent attorney who runs the blog Patently-O. "However, the Court is unlikely to change the strong presumption that a patent confers a right to exclude others from the market." Investors will be watching closely the developments in the case, which began in 2001, though until now it hasn't had much impact on eBay's stock price. Buy It Now, in which users purchase goods directly instead of through auctions, accounted for about one-third of the value of the goods sold on eBay last year. The company has set aside sufficient reserves for the case and believes it can work around MercExchange's patents if it doesn't prevail in court. "Nonetheless, if we are not successful in appealing or modifying the court's ruling, and if the modifications to the functionality of our Web sites and business practices are not sufficient to make them non-infringing, we would likely be forced to pay significant additional damages and licensing fees and/or modify our business practices in an adverse manner," eBay said last month in a 10-K filing with the Securities and Exchange Commission.
High-tech companies have long complained that the often Byzantine patent process unfairly rewards companies known as "patent trolls" that have no intention of manufacturing products. Earlier this year, Research In Motion ( RIMM) agreed to pay patent-holding company NTP $612 million to settle their dispute, which threatened to shut down its BlackBerry service. "The federal circuit has made patents more potent, easier to get and assert, and available for an unlimited range of subject matters," the Computer & Communications Industry Association wrote in a friend of the court brief. "In addition, the PTO's (Patent & Trademark Office) own bureaucratic incentives have led it to grant patents in increasing number, and arguably decreasing quality." For the pharmaceutical industry, which spent $39.4 billion last year on discovering and developing new medicines, the stakes are much higher, according to the Pharmaceutical Research and Manufacturers of America (PhRMA), whose members include Bristol-Myers Squibb ( BMY) and Amgen ( AMGN). The group argues that the courts need to protect the rights of patent holders. "Limiting the availability of an injunction after a judge or jury have found a patent to be valid and infringed would severely undermine the patent system and drive up the cost of innovation," PhRMA says in its friend of the court brief. General Electric ( GE), DuPont ( DD), 3M ( MMM), Johnson & Johnson ( JNJ) and Procter & Gamble ( PG) also urged the Court to rule in favor of MercExchange. The Bush administration and the American Bar Association also are backing MercExchange. eBay's supporters include Yahoo! ( YHOO), Microsoft ( MSFT), Time Warner ( TWX), Intel ( INTC) and Oracle ( ORCL). Shares of eBay rose 8 cents to $37.38 in trading Monday. They have dropped 13% this year.