updated 3/16/2005 6:21:53 PM ET 2005-03-16T23:21:53

In a decision that could force eBay Inc. to alter some of its auctions, a federal appeals court ruled Wednesday that the e-commerce powerhouse infringed on a patent owned by a small Virginia business.

The U.S. Court of Appeals for the Federal Circuit said eBay’s fixed-price auctions and some of its online payment methods violate a patent obtained by Great Falls, Va.-based MercExchange Inc., which sued eBay in September 2001.

A lower court jury in Virginia ruled in May 2003 that eBay infringed on two MercExchange patents, and a judge ordered the company to pay MercExchange president Thomas Woolston $29.5 million in lost licensing fees and damages.

The Washington, D.C., appeals court agreed Wednesday that eBay infringed on the patent involving no-haggle sales but invalidated a second MercExchange patent involving an online comparison shopping tool that Woolston said was worth $4.5 million.

As a result, the ruling could force eBay to pay $25 million in damages.

Woolston’s attorneys said they’d ask for an injunction within several weeks that requires eBay to pay Woolston for use of the patent or stop using online sales techniques that infringe on it. Many patent experts had expected San Jose-based eBay to prevail.

Woolston, who is working closely with Chicago-based auction company UBid.com, hailed the ruling as a major victory for inventors and small business owners.

“We’re trying to build a better, faster eBay, and this could make it easier for us to compete against the company that has 95 percent of the market,” he said.

MercExchange had 40 workers when Woolston sued in September 2001. It has since shrunk to three employees. EBay is predicting 2005 sales between $4.25 billion and $4.35 billion.

EBay said in a statement that it was “pleased” that the comparison shopping tool patent was invalidated and said the infringement ruling wouldn’t hurt earnings.

“Looking forward, we believe that any injunction that might be issued by the district court with respect to the other patent will not have an impact on our business because of changes we have made following the district court’s original verdict,” eBay stated. “We are confident in our position against MercExchange.”

Investors have largely disregarded the case because it does not involve eBay’s tremendously popular auctions and is not expected to affect the millions of competing bids that eBay processes each day.

Nor is it expected to significantly impact PayPal, a bill payment division that has generated hundreds of millions of dollars for eBay.

Instead, the case hinges on the way eBay sells fixed-price merchandise, which accounts for roughly 35 percent of eBay’s total sales. Some analysts say the case may end up affecting as little as 5 percent of eBay’s sales.

If the U.S. District Court for the Eastern District of Virginia grants the injunction, eBay may have to add extra steps to eBay’s no-bid sales, including the “Buy It Now” feature. The feature offers a single price — typically far above the opening bid — so people who dislike haggling can simply click and buy.

The case mirrors another lawsuit by Seattle-based Amazon.com, which sued online bookstore rival Barnesandnoble.com in 1999. Amazon.com alleged that Barnesandnoble.com had illegally copied its patented “1-Click” system, which theoretically allows pre-registered customers to purchase items with only one click of the mouse.

The two companies settled out of court in 2002 and would not disclose the terms.

Scott Robertson, an attorney in Washington, D.C., with Hunton & Williams LLP, which is representing MercExchange, said the $25 million in damages covers licensing through May 2003.

Woolston may seek as much as $100 million in additional damages for subsequent infringements, he said.

“EBay always claimed they didn’t infringe, and now we know it wasn’t true,” Robertson said. “They thought Tom’s small company couldn’t stand up against them.”

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