EcommerceBytes-NewsFlash, Number 1441 - December 29, 2006     2 of 3

eBay Patent Wars: Judge Wonders about Design Workaround

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MercExchange will have 3 months to put together a new brief in support of its motion for permanent injunction against eBay's Buy It Now feature, which generates 34 percent of eBay's Gross Merchandise Sales on the eBay platform. Likewise, eBay will have until March 16, 2007, to prepare a final brief for its motion for a stay of proceedings in light of the ongoing U.S. Patent Office reexamination of MercExchange's patents, which are at the heart of the legal wrangling.

On December 18, Judge Friedman issued an order and opinion on four secondary motions he heard last month. He denied eBay's motion to strike new evidence and motion to strike the Nahan declaration, permitting the parties to investigate the fraud alleged by MercExchange with respect to eBay's meeting with Kenneth Nahan and the introduction of "the Newman video" (see http://www.auctionbytes.com/cab/abn/y06/m11/i20/s02 for more about the videotape.) However, Friedman appeared unimpressed with evidence surrounding the videotape, calling some of it inadmissible hearsay.

In his order, Judge Friedman discussed eBay's claim that it had designed around the patent it was found guilty of infringing, the '256 patent. "Although eBay has offhandedly referred to its purported design around both in court and in its briefs, eBay appears to have failed to advance any evidence nor even make the express, yet uncorroborated, claim that it has in fact designed around the '265 patent." It's not clear whether the judge expects eBay to address this issue in its March 16th brief.

The judge will reopen the record, but only relating to developments subsequent to the court's initial injunction ruling in August 2003, and only for matters that are relevant to MercExchange's motion for an injunction and eBay's motion to stay the proceedings.

eBay will be allowed to depose uBid, MercExchange, and possibly Altitude Capital, the hedge firm that invested "substantial millions" in MercExchange for recapitalization a year ago (http://digbig.com/4fmwy).

During last month's hearing, eBay's lawyer had said, "If you're going to allow the uBid evidence on basis that may provide irreparable harm, I'd like to do discovery on uBid, Altitude Capital, and Mr. Woolston," he said. Tom Woolston is MercExchange founder and CEO.

However, Judge Friedman said he saw "minimal relevance" in exploring details of Altitude Capital's alleged capitalization of MercExchange, stating in his December 18th order that it would appear to have little impact on the determination of whether or not an injunction should arise.

It will be 4 years in April since the patent trial kicked off, concluding with a jury ruling that found eBay guilty of willful infringement of MercExchange patents.

Both parties appealed the judge's rulings on their initial post-trial motions, pushing the case up to the U.S. Court of Appeals for the Federal Circuit and finally to the Supreme Court. The case called into question how judges should apply the traditional four-factor equitable test in granting injunctions in cases of patent infringements.

Judge Friedman must now interpret and apply the Supreme Court's ruling, which vacated the Appeals Court decision favoring MercExchange's request for an injunction against eBay's Buy It Now feature. Judge Friedman had originally denied MercExchange's motion for permanent injunction.

In originally denying injunction, Judge Friedman considered the four factor test, which states that the party seeking an injunction must show it has suffered an irreparable injury, and that other remedies are inadequate.

Judge Friedman reprimanded MercExchange for introducing new testimony that attempts to "recast the prior record." He stated, "MercExchange may argue that this court was legally incorrect in concluding a willingness to license or lack of commercial activity suggests that an injunction is not warranted; however, it may not attempt to argue that it was never willing to license or that it never had a lack of commercial activity practicing the patents."

He also stated in a footnote, "the court will afford little weight to exhibits espousing categorical rules or seeking to highlight the woes of the small patent holder while ignoring this court's prior findings."

However, Judge Friedman denied eBay's motion to strike new evidence, such as MercExchange's negotiations with eBay competitor uBid. Friedman stated, "Evidence regarding uBid is not backfill of the record, but rather, is precisely the type of evidence updating the court on recent developments that is vital to the court's injunction calculus." Friedman stated that the court must "consider the facts as they exist at the time of remand and not as they existed several years in the past." He also pointed out that eBay's motion to stay "relies almost exclusively upon recent factual developments," referring to the PTO reexam.

Friedman put to rest eBay's argument that the terms of MercExchange's prior license would preclude it from granting an exclusive license to uBid. He said that a nearly exclusive license appears to have the same effect and value as an exclusive license in this case. eBay will be permitted to perform depositions and further investigate the MercExchange - uBid business relationship.

Because the court is considering factual developments that occurred after 2003, Judge Friedman will permit limited discovery "in order to afford the parties the traditional protections of the adversarial system." He is putting strict limits on discovery, however. The court will limit each party to five depositions, lasting no longer than six hours each, and all depositions must be concluded by March 2, 2007.

Judge Friedman also granted in part and denied in part eBay's substantive protective order motion. As a result, the court is prohibiting MercExchange's trial experts from future involvement in the PTO reexamination. Those experts are under a March 2002 protective order that allowed them to view eBay confidential business information but prohibited them from using or disclosing any confidential information except for purposes explicitly allowed by the order.

The eBay Patent Wars and Timeline:
http://www.auctionbytes.com/cab/pages/patent


About the author:

Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com.


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