Patent Holder Suing EBay

On a typically sultry summer afternoon in the nation’s capital, EBay Inc. attorney Andrew Kumamoto walked into a conference room to talk patents with a Virginia inventor.

That discussion, held to gauge EBay’s interest in acquiring patents held by Tom Woolston and his company, MercExchange, has led to a David-and-Goliath confrontation that some consider nothing more than an attempt to pick EBay’s pocket.

But if Woolston wins in court, the inventor just might change how the online auctioneer does business.

Woolston believes that the patents cover nearly every aspect of EBay’s operations, including the very procedure millions of people use to buy and sell everything from stuffed bears to aircraft. The technology has quickly made EBay, on paper at least, one of the Internet’s great success stories.

San Jose-based EBay believes that Woolston revised his initial claim after seeing EBay’s success, so that his patent would cover what EBay was doing.

Woolston denies any such manipulation. An electrical engineer with years of experience in the military and the CIA, he says he came up with his online auction concept while a law student, long before Pierre Omidyar, EBay’s founder, began seriously thinking about auctions and the online community.

“I was there with the technical know-how and ability to see it first,” he said bluntly. “We won’t be bullied.”

The legal drama may ultimately play out before a federal jury in Virginia, but the pretrial script already includes bitter arguments over intellectual property law, with millions of dollars at risk for EBay.

The growth of online commerce has spawned dozens of lawsuits over intellectual property. One highly publicized case involved online bookseller Amazon.com, which was granted a patent for the process that allows customers to complete purchases with a single mouse click.

Amazon sued, forcing competitor Barnesandnoble.com to add a second step--a confirmation page requiring a second click to complete online purchases.

Woolston and Kumamoto discussed his patents’ value that afternoon in June 2000. What EBay thought they were worth is unknown, and the dollar amounts they debated have not been revealed, but Woolston says EBay suggested a price in the $100-million range.

Talk of selling the patents, Woolston says, had commenced several weeks earlier, when he was approached by EBay’s Washington lobbyist, who inquired about obtaining them.

“They knew exactly what those patents were,” said Woolston, who says he gave EBay a detailed description of his invention during the meeting.

EBay officials recall the events differently.

“If there were any dollar figures mentioned they didn’t come from us,” said Jay Monahan, EBay’s associate general counsel. He says Woolston’s patents weren’t valid, so there was nothing to buy.

Monahan said Woolston approached EBay first, offering his patents as a potential legal weapon against Bidders Edge, a company EBay alleged was trespassing into EBay’s database.

“There definitely were some discussions,” Monahan said, “but any suggestion we approached him and offered to buy his patents, particularly the auction patent, is not true.”

Monahan said EBay officials discussed Woolston’s offer in detail and ultimately told him they weren’t interested.

In the weeks after the meeting, Woolston said, there were a few letters and telephone calls. Then silence.

Last September, Woolston’s company sued EBay and two subsidiaries, alleging willful patent infringement. He seeks royalties, treble damages and a permanent injunction. The trial, scheduled to begin Nov. 12, has been postponed to an unspecified date.

At the core of the dispute is one of three patents issued to Woolston in 2000 and 2001 that were spawned from an original, or “parent,” application he filed in April 1995.

That filing was several months before Omidyar launched the auction site using a combination of his own programming and software obtained for free over the Internet. Omidyar envisioned a “perfect marketplace” where fair and proper prices would be established for anything people wanted to sell.

Along with the need to have publicized the idea before anyone else, all patent applications must have two critical elements: “specifications”--a summary of what the invention is supposed to do--and “claims”--detailed descriptions of how the invention works.

Where multiple patents result from an original application, the law allows claims to be revised while the approval process is underway.

Woolston’s key patent, the last of the three, was issued March 13, 2001, covering a complex process for conducting computerized Internet auctions, virtually identical to that used by EBay.

The fight between Woolston and EBay, however, centers on whether Woolston’s patent claims were adequately described in the original application or were revised in subsequent filings.

EBay concedes the descriptions in all three patents are identical but argues that the inventor’s claims in the March 2001 patent were not contained in the original application but were added later through revisions. This is a critical distinction because an inventor who has the idea first has the strongest patent claim.

If Woolston had the idea first, EBay says, the claims contained in the 2001 patent should have been disclosed publicly in the original 1995 application. EBay said it first became aware of the patent when it was approached by Woolston.

The legal skirmishing has been intense. Attempts by EBay to move the case to California were denied, and Woolston has so far fended off EBay’s requests to have the case dismissed.

There are two remaining EBay motions to dismiss the case. One challenges Woolston’s patent by arguing that a similar auction process was described in detail by Choy Heng-Wah of Digital Equipment Corp. in a stamp-collecting newsgroup in 1994.

EBay is in this fight to win, Monahan said.

“There’s always a risk in any trial in any jurisdiction, and some companies might settle because of the cost and the risk, but we believe our defenses are very strong,” Monahan said.

For EBay, the potential cost of defeat is enormous, both in terms of money and its ability to remain the world’s No. 1 online auction house.

EBay acknowledges this, telling stockholders in its 2001 annual report and subsequent regulatory filings that losing could cost dearly and “materially harm our business.”

Woolston says he just wants “reasonable” royalties.

Whatever that amount turns out to be, it could be substantial for EBay and could put a dent in earnings that have so far made Wall Street drool.

For the six months ended June 30, EBay earned $101.8 million on revenue of $511.3 million, more than the $90.4 million it made in all of 2001.

David Pressman, a San Francisco lawyer and co-author of “Patent It Yourself,” a laymen’s guide to patent law published by Nolo Press in nearby Berkeley, said it’s hard to establish royalties and licensing fees in intellectual property cases.

“I’ve seen rates from 5% to 20%,” he said. “It’s whatever you can get.”

Analysts don’t seem to be taking the case very seriously. Several said they hadn’t even been following the litigation.

“It’s not a significant issue,” said Safa Rashtchy, an analyst with U.S. Bancorp Piper Jaffray. “In my discussions with the company, it hasn’t come up as a major factor.”

“I think they’re going to settle. I don’t think EBay will let this go to court,” said Rosalinda Baldwin, chief executive of the Auction Guild, a New York company that monitors the online auction industry and has been an EBay critic.

“Reading over the patents Tom has, there might be some argument in EBay’s favor, but he’s definitely covered everything EBay is doing,” she said. “I think he might win. Who knows what the courts will do.”