AT&T (NYSE:T) is suing eBay (NASDAQ:EBAY), claiming the company's PayPal division violates a patent filed in 1991 related to secure third-party transactions. The suit claims patent rights over electronic transactions between two parties that use an intermediary (in this case, PayPal) to make the transaction trustworthy and easy. AT&T was granted the patent -- called "Mediation of Transactions by a Communication System" -- in 1994.
Reportedly, AT&T approached eBay about this issue more than a year ago, demanding licensing fees on the $400 million in annualized revenue now generated by PayPal, as well as back fees involving claims against eBay's now-defunct Billpoint payment system. eBay refused to pay, pushing AT&T to file suit. eBay calls the suit "meritless."
The claim comes on the heels of a $29-million judgment against eBay in August when a single inventor sued the firm for patent infringement on "buy-it-now," or fixed-price, technology. eBay is appealing that case, and history shows that such cases -- as well as the AT&T case -- are more likely to be found in the defendent's favor than not.
Patent suits are difficult to prove, especially during times of rapid innovation. During such periods, many similar but different ways to skin a cat -- or conduct a transaction, in this case -- can be "invented." On the smallest distinction, eBay attorneys may show that the auctioneer's system is not addressable under the patents in question, and might point to eBay's own patent applications, if applicable.
Given the ubiquity of online transactions of all kinds, and how third parties have been involved in electronic transactions (credit cards, for instance, at small retailers) for years, eBay should have plenty of wiggle room. Arguments were probably stronger when Amazon.com (NASDAQ:AMZN) and barnesandnoble.com (NASDAQ:BNBN) battled over Amazon's 1-click technology. That patent suit was filed in 1999 and settled outside court last year for undisclosed terms.
eBay has faced other lawsuits, most from individuals, but AT&T is certainly a more serious challenge. The fact that it's AT&T, however, does not make the patent violation any easier to prove. Odds and time are in eBay's favor, even if legal fees are not.
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