eBay Patent Wars

MercExchange filed a lawsuit against eBay in 2001 for patent infringement. One aspect of that case is going before the Supreme Court on March 29, 2006 - whether or not there should be an injunction against eBay's Buy It Now feature. Here is a guide to "the eBay Patent Wars."

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What the Supreme Court Is Reviewing
A jury ruled in 2003 that eBay willfully infringed MercExchange's patents. However, the judge denied MercExchange's motion for a permanent injunction against eBay for using its patent. In 2005, the Appeals Court reversed the lower court's denial of injunction. eBay petitioned the Supreme Court, arguing that District Court judges should be allowed to use their discretion in determining whether to grant injunctions in patent cases, calling the Appeals Court ruling an "automatic injunction rule."

eBay argued to the Supreme Court that the Appeals Court did not consider the four factors traditionally considered in deciding whether to issue an injunction: irreparable injury; inadequacy of legal remedies; balancing of parties' hardships; and whether an injunction would adversely affect the public interest.

In an amicus brief, the United States government stated that, "although the Court of Appeals did not invoke the traditional four-factor test, it correctly recognized that the District Court had improperly relied on inappropriate considerations, which amounted to an abuse of discretion, and the court of appeals therefore properly reversed the District Court's denial of MercExchange's request for an injunction."

A key factor in the case before the Supreme Court is whether it should overrule its 1908 decision that a federal court may grant a patentee an injunction even if that patentee does not practice its own invention, decided in the "Continental Paper Bag Co. v. Eastern Paper Bag Co." case.

It appears the high-tech industry generally supports eBay's stance, and the pharmaceutical industry generally supports MercExchange's stance. An article in the San Jose Mercury News newspaper stated, "If eBay prevails, pharmaceutical companies might find it harder to persuade courts to halt infringements of their patents. Tech companies, on the other hand, worry that a tougher stance on injunctions would require them to modify their products because of companies or individuals who file opportunistic patent suits." (http://www.mercurynews.com/mld/mercurynews/13281956.htm)

 Argument in Support of eBay
eBay supporters believe the Appeals Court has created an "automatic injunction rule" that goes beyond the Patent Act, which allows district courts to use their discretion in granting injunctions in patent cases. Supporters express concern that the specifics of this case would have ramifications outside of this case that would harm many companies.

The threat of an injunction causes manufacturers to settle with patent holders because, "Defendants are paying holdup money to avoid the threat of injunctive relief," according to an amici brief filed by 35 intellectual property professors filed in support of eBay's petition to the Supreme Court.

The Business Software Alliance and other high-tech associations stated in their amici brief that "Technology products typically consist of hundreds or thousands of patented components...." They state, "Because an injunction will issue automatically upon a finding of infringement - even if the claim relates to only an insignificant part of the product - the target of the claim is forced to pay an extortionate settlement in order to preserve its business."

Argument in Support of MercExchange
Susman Godfrey LLP's amicus brief filed in support of MercExchange said some companies, like Intel, Micron and IBM, recognize the importance of injunctive relief - so long as they are the ones seeking it. If a key factor in whether to grant an injunction against a patent infringer is whether the patentee makes a product, it would diminish the incentive to innovate and amount to a "Heads, I win; tails, you lose" system and would create institutionalized unfairness, according to Susman Godfrey.

"Some amici,...would have this Court create a balancing test that turns on factors that correspond to their operations, thereby enabling themselves to obtain injunctive relief while making it more difficult for independent investors to obtain injunctions against them."

A Wall Street Journal editorial by Alan Murray on March 22, 2006, said "patent trolls" are getting a bad rap. Most U.S. research universities fit the definition of a patent troll. "Does anyone think Stanford University deserves less patent protection than, say, Microsoft, because it doesn't make or sell product?" he asks. Murray says the problem "isn't companies that don't commercialize their own patents. Rather, it is bad patents. In part, that happens because the Patent and trademark Office is understaffed and overwhelmed." (http://online.wsj.com/article/SB114298577458004598.html)

A Washington Post column, "Big Firms Caught with their Patents Down," by Steven Pearlstein states, "The high-tech industry is full of companies that boast entire business units dedicated to licensing their patent portfolios. It is pure hypocrisy for the industry to argue that this is somehow illegitimate when done by small inventors." (http://digbig.com/4gxap)

Index to Briefs
Dennis Crouch, a patent attorney with McDonnell Boehnen Hulbert & Berghoff LLP, has been following the case and has compiled a summary with links to briefs on his blog at: http://patentlaw.typepad.com/patent/2006/03/ebay_v_mercexch.html

The eBay Patent Wars: Timeline

April 1995 Woolston files patents

Date unknown Woolston creates company called Fleanet

Date unknown Woolston changes name of Fleanet to MercExchange

September 1995 Pierre Omidyar develops AuctionWeb as a hobby while working at General Magic

Fall 1996 Omidyar quits his job and moves eBay into office space

Summer 1997 eBay seals deal with Benchmark Capital venture capital firm

October 1997 eBay hires first lawyer, Brad Handler of Cooley Godward, an intellectual property lawyer*

March 1998 Meg Whitman joins eBay as President & CEO

September 1998 eBay goes public

December 1998 First patent issued to MercExchange

January 1999 MercExchange gets first licensee

1999 MercExchange gets $10 million funding

2000 MercExchange says its General Counsel John Phillips meets with eBay's Tod Cohen for lunch and topic of MercExchange patents arises

2000 MercExchange has trouble gaining traction in the marketplace, lays off all 40 employees

June 2000 MercExchange and eBay enter discussions about patents

July 2000 eBay acquires Half.com, a fixed-price marketplace

November 2000 eBay launches Buy It Now feature

2001 MercExchange wins $4 million patent infringement settlement against GoTo.com Inc.

September 2001 MercExchange files lawsuit against eBay, Half.com and ReturnBuy for patent infringement

October 2002 District Court Judge Friedman issues Markham ruling and ruled the '051 auction patent invalid for lack of enablement. Stage is set for trial to move forward with '176 and '265 patent.

April 24, 2003 Trial commences in U.S. District Court, Norfolk, Virginia, MercExchange v. eBay

May 27, 2003 Jury rules eBay guilty of willful infringement of MercExchange patents and awards $35 million in damages

June 12, 2003 MercExchange files motion for entry of a permanent injunction order

August 7, 2003 Judge Rules on post-trial motions in eBay patent lawsuit, commenting that the trial was possibly the most contentious case he had ever presided over. He denies MercExchange's motion for an injunction against eBay's Buy It Now feature: "If the court did enjoin the defendants here, the court would essentially be opening a Pandora's box of new problems," but also said that if eBay continues to infringe MercExchange's patents, "the court will be more inclined to award enhanced damages for any post-verdict infringement."

June 4, 2004 USPTO orders a reexamination of MercExchange patents on eBay's request.

June 2004 uBid agrees to license MercExchange patents for Internet-based auctions.

March 16, 2005 Decision announced by U.S. Court of Appeals for the Federal Circuit:

  • Held that the claims of the '176 patent are invalid for anticipation and reverses judgement for Half.com on the '176 patent.
  • Affirmed the jury's verdict regarding infringement and validity of the '265 patent.
  • Reversed the denial of permanent injunction.
  • Reversed summary judgement of invalidity of the '051 (auction) patent.

July 25, 2005 eBay files petition for Writ of Certiorari with Supreme Court in objection to the Appeals Court ruling reversing the denial of permanent injunction.

September 26, 2005 MercExchange files response to Supreme Court petition certiorari

November 28, 2005 Supreme Court grants certiorari. In addition to the question presented by the petition, the Supreme Court directs the parties to brief and argue the following question: "Whether this Court should reconsider its precedents, including Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405 (1908), on when it is appropriate to grant an injunction against a patent infringer."

December 2005 MercExchange reaches agreement with USPTO in reexam of '051 patent. USPTO accepts MercExchange's clarifying amendments to the claims of the patent, and has agreed that these claims are a patentable innovation.

December 2005 Forbes reports that MercExchange got funding from hedge firm Altitude Capital.

March 10, 2006
United States government files amicus brief in support of MercExchange

March 29, 2006 Supreme Court hears oral arguments. Carter Phillips (Sidley Austin Brown & Wood LLP for eBay), Seth Waxman ( WilmerHale for MercExchange), and Jeffrey Minear (Government) divide up the sixty-minute argument period (http://www.supremecourtus.gov/oral_arguments/argument_transcripts/05-130.pdf).

May 15, 2006 Supreme Court vacates a U.S. Appeals Court decision that favored MercExchange's request for an injunction against eBay's Buy It Now feature (http://www.supremecourtus.gov/opinions/05pdf/05-130.pdf).

July 10, 2006 U.S. Court of Appeals remands case back to the District Court.

August 28, 2006 MercExchange files a motion for a permanent injunction, eBay files motion to stay proceedings in view of the ongoing patent office reexamination proceedings.

September 25, 2006 eBay files a motion to strike new and irrelevant evidence from the plaintiff's renewed request for a permanent injunction, and files a motion for leave to file motion to enforce the court's protective order.

October 10, 2006 eBay files a motion with memorandum in support to strike the Nahan declaration or for leave to submit declaration in reply.

October 10, 2006 Motion for permanent injunction referred to Judge Jerome B. Friedman.

November 17, 2006 Motion hearing in District Court before Judge Friedman.

December 18, 2006 District Court ruling on secondary motions

June 12, 2007
Motion hearing set before District Judge Friedman http://www.auctionbytes.com/cab/abn/y07/m04/i18/s00

July 27, 2007 Judge rules eBay may continue to use its Buy It Now
feature, read more: http://www.auctionbytes.com/cab/abn/y07/m07/i30/s02

December 11, 2007 District Court enters final judgment on damages in
patent lawsuit.

February 28, 2008 Case settled, eBay acquires MercExchange patents.

*Adam Cohen writes in his book about eBay, "The Perfect Store," that Brad Handler was "particularly pained" when he joined the company in 1997 that eBay hadn't filed any patents. "Patents on eBay's most important innovations would have been enormously lucrative, and would have made it far more difficult for rivals to move into the online auction space." See more on p. 89-92 of "The Perfect Store" by Adam Cohen

 The Key Patents

'176 - Method and Apparatus for Using Software Search Agents to Locate Items in Electronic Markets. (Affects Half.com.)

'265 - Consignment Nodes. (Fixed-price patent).

'051 - Method and apparatus for conducting person-to-person online auctions. (Auction patent.)

MercExchange patent portfolio: http://www.mercexchange.com/solutions.htm

At Issue: eBay's "Buy It Now" Feature

eBay introduced the Buy It Now feature in November 2000. It allowed sellers to list an auction with an option for buyers to purchase the item right away if they agreed to the "Buy It Now" price. On June 18, 2002, eBay introduced Buy It Now in a non-auction format. This meant eBay sellers could bypass the auction format and list items directly at a fixed-price.

In early 2002, less than 20 percent of eBay's Gross Merchandise Sales were generated by Buy It Now listings, and that number reached 34 percent by the end of 2005. eBay introduced seller fees for using the Buy It Now feature in 2002.

The Buy It Now feature increases the velocity of trading on eBay since buyers do not have to wait for auctions to end in order to make a purchase. The BIN feature has been increasingly important as eBay has shifted from mostly collectibles to mostly "practicals" on its site. In 1999, collectibles made up 60 percent of eBay's Gross Merchandise Sales. by 2003, it made up only 13 percent of Gross Merchandise Sales. Consumers shopping for practicals, such as consumer electronics items, DVDs and components, are less patient than consumers hunting for collectibles.

 Wrinkles in the Case

Pandora's Box:

District Court Judge Friedman said an injunction against eBay's Buy It Now feature would open a Pandora's Box of new problems. Nevertheless, once the Supreme Court rules, the case goes back to the District Court, which will have to deal with issues such as whether eBay continues to infringe. eBay said it made a design workaround so it is no longer infringing on the patent, MercExchange said this isn't so.

Auction listings on eBay:
The Appeals Court reversed the District Court summary judgement of invalidity of the '051 (auction) patent. MercExchange has cleared the patent with the US Patent & Trademark office and says it will proceed with the lawsuit against eBay on the '051 patent, covering auction listings.

International ramifications of the case:
Patent expert Harold C. Wegner, a partner at Foley & Lardner and professor at George Washington University Law School, says eBay's petition to the Supreme Court is in conflict with TRIPS, the Trade Related Aspects of Intellectual Property. In his article, "Injunctive Relief: A Charming Betsy Boomerang," Wegner talks more about this and the problems in the patent system.


Who's Who

U.S. District Judge Jerome B. Friedman
Presided over 5-week trial MercExchange v. eBay in April - May 2003.

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Tom Woolston, Founder of MercExchange
Born in Michigan, Tom Woolston was raised in Ohio. When he was 18, he enlisted in the Air Force. When he got out of the service, he started going to evening school at the University of Maryland, studying computer science, then transferring to George Washington University in Washington, D.C., where he studied electrical engineering. Later Woolston went on to get a law degree. He worked at the Central Intelligence Agency, National Security Agency, and practiced law at Hunton & Williams, Howrey & Simon and Fish & Richardson PC.

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Pierre Omidyar, Founder and Chairman of the Board, eBay

Born in Paris in 1967 and moved to Washington DC at the age of 6. Pierre Omidyar graduated from Tufts University in 1988 with a Bachelor of Science in computer science. When Omidyar launched eBay as a hobby, his "day job" was conducting developer relations for General Magic. Prior to General Magic, he co-founded Ink Development Corp., which was renamed eShop and acquired by Microsoft, making him a millionaire in his twenties. His career began in the software engineering business as a developer for Claris, a subsidiary of Apple Computer, where he worked on consumer applications. Omidyar is CEO of Omidyar Network, a mission-based investment group he established with his wife, Pam, in June 2004. In addition to his roles with eBay and Omidyar Network, Omidyar serves as a Trustee of Tufts University and Santa Fe Institute, and a Director of Meetup Inc.

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Meg Whitman, President and CEO, eBay Inc.
Raised on Long Island, New York, Meg Whitman received a Bachelor of Economics from Princeton University in 1977 and a Master of Business Administration from Harvard Business School. Joined eBay March 1998. Prior to eBay, Whitman was general manager of Hasbro Inc.'s Preschool Division, responsible for global management and marketing of Playskool and Mr. Potato Head. From 1995 to 1997, Whitman was president and chief executive officer of Florists Transworld Delivery (FTD). Before FTD, she served as president of the Stride Rite Corporation's Stride Rite Division. Whitman spent 1989 to 1992 at the Walt Disney Company, highlighted by her work as senior vice president of marketing for the Disney Consumer Products Division. Whitman also worked for eight years at Bain & Company’s San Francisco office where she was a vice president. Whitman began her career at Procter & Gamble in Cincinnati where she worked in brand management from 1979 to 1981. Whitman is on the Board of Directors of Procter & Gamble and DreamWorks Animation

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Michael Jacobson,
Senior Vice President and General Counsel, eBay
Earned a Bachelor of Arts in Economics, Magna Cum Laude, in 1975 from Harvard College and a law degree from Stanford University in 1981. Joined eBay in 1998. Responsibilities include overseeing eBay's legal department, its risk management program, and its policy group. He is responsible for interactions with content regulators, law enforcement, contracts, SEC compliance, and other legal matters. Prior to eBay, Jacobson was a partner with Cooley Godward LLP where he was recognized as an expert in securities law. His responsibilities included corporate and securities transactions, including mergers and acquisition transactions, public offerings, and venture capital financing.


Key MercExchange Lawyers

Scott L. Robertson, Hunton & Williams LLP

Jennifer A. Albert, Hunton & Williams LLP

Brian M. Buroker, Hunton & Williams LLP

Gregory N. Stillman, Hunton & Williams LLP

David M. Young, Hunton & Williams LLP

Seth Waxman, WilmerHale


Key eBay Lawyers

Jay Monahan, eBay Inc.

Jeffrey G. Randall, Skadden, Arps, Slate, Meagher & Flom LLP

Donald R. Dunner, Finnegan, Henderson, Farabow, Garrett & Dunner, L.L.P.

Timothy S. Teter and Lori Ploeger, Cooley Godward LLP

Allan M. Soobert, Skadden, Arps, Slate, Meagher & Flom LLP

Carter G. Phillips, Sidley Austin Brown & Wood LLP

Books about eBay

"eBoys: the True Story of the Six Tall Men Who Backed eBay and Other Billion-Dollar Start-Ups," by Randall E. Stross


"The Perfect Store: Inside eBay," by Adam Cohen

"The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth," by Eric Jackson