eBay Must Relitigate Patent Injunction - TheStreet

eBay's

(EBAY) - Get Report

thorny patent-infringement tussle with inventor Thomas Woolston took another turn Wednesday as a U.S. federal appeals court issued a decision that, while substantially changing the previous ruling by a district court, leaves things as murky and uncertain as before.

In short, the three judges on the appeals court cleared eBay of a portion of the $29.5 million damages awarded to Woolston and his company

MercExchange

in 2003. But potentially more worrisome to eBay is the threat of a permanent injunction that the lower court denied. The appeals judges reversed that denial and remanded the case.

In September 2001, MercExchange sued eBay and its Half.com unit, alleging infringement of three patents relating to online auction technology, multiple database searching and electronic consignment systems. The following year, the district court dismissed the online-auction infringement claim.

In 2003, a jury ruled that eBay and Half.com infringed on the other two patents, awarding $35 million in damages. The court set aside $5.5 million of the award and denied MercExchange's motion for a permanent injunction.

On Wednesday, the appeals court agreed that the $5.5 million award wasn't appropriate, and it also reversed the district court's judgment of another patent that was the basis of a $19 million award. It's unclear how much of that award will remain intact. The appeals court affirmed an infringement ruling that was the basis of a $10.5 million award.

In addition to reversing the denial of a permanent injunction, the appeals court vacated the 2002 summary judgment of the online-auction claim, opening the door to more patent-related litigation for the company.

As was the case throughout the past three and a half years, the two companies saw the decision in starkly contrasting terms. MercExchange trumpeted it as a success of David vs. Goliath. "The appeals court drove a stake through the heart of eBay's claims," said Woolston, an engineer-turned-lawyer who once developed network technology to help the CIA track terrorists.

MercExchange, which says it once ran e-commerce and auction sites that went out of business, is licensing its patents to other companies like

Ubid

, a one-time eBay rival in which Woolston now controls an undisclosed stake. Asked if MercExchange would license its technology to eBay, Woolston gave an emphatic no. "I don't give a damn about what eBay does next," he says.

eBay, meanwhile, issued a statement downplaying any impact of the decision on its business. The statement said that an injunction "will not have an impact on our business because of changes we have made following the District Court's original verdict. The U.S. Patent and Trademark Office is actively re-examining all of MercExchange's patents, having found that substantial questions exist regarding the validity of MercExchange's claims. The Patent and Trademark office has already initially rejected all of the claims of one of MercExchange's patents."

Niether company would say whether it would further appeal the decision. MercExchange declined to say also whether it would pursue an injunction.

In terms of damages, the ruling is likely to have a slightly positive impact on eBay's earnings. In 2003, eBay took a $30 million charge to post a bond while it appealed the case.

But an injunction could have a longer-term impact. The extreme scenario, although highly unlikely, is that an injunction could shut down eBay's servers until the case is resolved. More likely is the prospect of a daisy chain of costly legal battles around the injunction and the online-auction patent. At this stage of many patent cases, companies often choose to settle. But given the contentious nature of this lawsuit, a settlement seems unlikely.