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Friday, November 21, 2003 - Page updated at 12:00 A.M.

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AT&T sues eBay over PayPal

By Rachel Konrad
The Associated Press

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SAN JOSE, Calif. — AT&T reached out and smacked eBay with a patent-infringement lawsuit yesterday, claiming the online auction company has been using a payment system that the telecommunications giant developed more than a decade ago.

The case, filed in federal court in Delaware, comes on the heels of an August verdict in which a Virginia judge ordered eBay to pay $29.5 million to an inventor who accused the company of stealing his ideas for fixed-price-sales formats. eBay is appealing that case.

AT&T's suit demands that eBay pay an undisclosed amount in licensing fees because its lucrative PayPal division functions as a "trusted intermediary" between buyers and sellers who may not know each other.

The system — widely regarded as critical to eBay's gangbuster growth and a boon to e-commerce in general — lets buyers provide credit-card or bank-account information to a reliable third party instead of individual sellers.

AT&T says three senior engineers working for the phone company filed for a patent in 1991 for exactly such a process, which they called "Mediation of Transactions by a Communication System." The patent was granted in 1994, AT&T said.

eBay spokesman Chris Donlay dismissed the lawsuit as "meritless," and he said customers should count on continuing to use PayPal.

The online auction company acquired PayPal in October 2002, and the division immediately became an engine of profits. More than 11 million people used PayPal to conduct transactions from July to September, according to eBay's most recent earnings statement.

AT&T spokesman Gary Morgenstern said the lawsuit is the result of more than a year of negotiations between the two companies. eBay refused to pay any licensing fees, he said.

"AT&T invests hundreds of millions of dollars every year in our research and development efforts, which have yielded a sizable portfolio of patents — that's what we're vigorously protecting here," Morgenstern said. "eBay and PayPal have refused to compensate us for patented technology, and so we're forced to take this to the courts."

Numerous inventors and small companies have sued or threatened to sue eBay, and legal experts have been skeptical of many such claims. But some said the newest plaintiff's heft gives the AT&T lawsuit the credibility that cases brought by obscure inventors and operators of now-defunct dot-coms lacked.

"To be sure, AT&T's involvement makes this case different from others," said Neil A. Smith of the San Francisco-based law firm Howard, Rice, Nemerovski, Canady, Falk & Rabkin. "AT&T's a well-respected company that doesn't just wave around patent lawsuits unless there's some merit."

Others, however, said that AT&T is unlikely to even force a settlement — which is the way and resolved what might have been the last such high-profile legal skirmish over Internet sales strategies. That case, involving Amazon's "one-click" checkout method, was filed in 1999 and settled last year. The companies have refused to disclose the terms.


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