Supreme Court Hears EBay Patent Dispute

The Supreme Court debated the rights of inventors Wednesday, weighing in on a dispute between eBay (EBAY) and a small Virginia patent holder.

The case's outcome could mean millions of dollars for inventors working in their garages or in large pharmaceutical labs — including those who develop a product and those who opt only to patent ideas.

The dispute between eBay, the Web-based marketplace, and MercExchange is one of several high-profile legal battles that are calling attention to the nation's patent laws, which some critics — including (AMZN), Yahoo! (YHOO) and Xerox Corp. (XRX) — say need updating to keep up with rapidly changing technology.

Justices won't decide whether eBay stole MercExchange's idea for selling goods over an electronic network. Rather, the high court is being asked whether trial judges must automatically issue orders prohibiting use of an idea after juries find a patent violation.

EBay and other high-tech companies warn that patent-holding companies could use the threat of court injunctions to coerce larger firms into settling lawsuits for huge sums of money.

Lawyers for the two sides traded barbs during the argument, with MercExchange accusing eBay of stealing its idea for selling goods in cyberspace and eBay calling the Virginia firm a "patent troll," a company that hoards patents for products it never develops.

"Is the troll the scary thing under the bridge," asked Justice Anthony M. Kennedy, "or is it a fishing technique?"

"For my client," attorney Carter Phillips said, "it's the scary thing under the bridge."

Phillips, who represents eBay, urged the court to level a playing field that he said favors patent-holders who sit on inventions and file lawsuits when someone stumbles across similar ideas.

The eBay lawyer also complained that patent-holders file lawsuits in certain parts of the country, such as Marshall, Texas, where they know they are likely to win big-money verdicts against larger companies.

"Everybody's in this for money," said Justice Antonin Scalia. "Why can't we let the market take care of the problem?"

Scalia also said the high court shouldn't rewrite patent laws "because we have renegade jurisdictions."

Chief Justice John Roberts signaled his concern for protecting "the guy in his garage" who can't — or doesn't want to — build his invention. But he also seemed perplexed by the idea covered in patents that eBay and MercExchange are fighting over.

MercExchange's founder, patent lawyer Thomas Woolston, came up with the idea of using an electronic network of consignment stores that would ensure legitimacy of sales by taking possession of goods being offered. EBay's system was based on the belief that buyers and sellers could trust each other and deal directly.

A jury sided with MercExchange, finding that its business method patents had been infringed, and awarded the patent-holder $35 million.

A trial judge later reduced the award by $5.5 million and refused to grant a permanent injunction, ruling that MercExchange would not suffer because it had not used its inventions commercially and had expressed an interest in licensing its patents to eBay.

MercExchange lawyer Seth Waxman told Roberts he was not a "software developer" and could not explain the technical aspects of the disputed patents, adding, "I have reason to believe neither is your honor."

Roberts conceded as much. But displaying pictures of goods for people to pick what they want to buy didn't strike the chief justice as anything special.

"I might have been able to do that," he said.

Earlier this month, a $612 million settlement by Research in Motion Ltd. (RIMM), maker of the BlackBerry wireless e-mail device, occurred under threat of an injunction that could've barred use of technology that is essential to the popular device's operation.

"Under such circumstances, injunctions do not serve the goal of the patent system to promote innovation but turn that system on its head," lawyers for Time Warner Inc. (TWX),, Xerox and others wrote in a friend-of-the-court filing.

The high-tech companies hold thousands of patents, so they know what it's like to be on MercExchange's side of an infringement case, their lawyers said.

But the high-tech companies don't want judges to be forced to issue injunctions for minor patent violations that could force a manufacturer to shut down completely to retool a technological component.

Pharmaceutical and biotechnology companies disagree.

In court filings, their lawyers said developers of drugs or technology need protection not only for their ideas but also to recoup costs of their investments in developing new medicines.

If judges are not required to impose permanent injunctions, such a ruling would "significantly undermine the confidence of innovators," lawyers for the Pharmaceutical Research and Manufacturers of America wrote.

The case is eBay Inc. v. MercExchange, 05-130.