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AT&T Corp. reached out and smacked eBay Inc. with a patent infringement lawsuit, claiming the online auction company has been using a payment system that the telecommunications giant developed more than a decade ago. The case, filed Thursday 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 around the world. Buyers merely have to trust PayPal, and they don’t have to worry about disreputable sellers using sensitive financial data for fraudulent purposes. 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. EBay acquired PayPal in October 2002, and the division immediately became an engine of profits for San Jose, Calif.-based eBay, one of the few Silicon Valley companies to emerge unscathed from the dot-com collapse. PayPal produced $106.4 million in revenue in the third quarter of 2003, nearly twice what it generated in the same period last year. More than 11 million people used PayPal to conduct transactions from July to September, according to eBay’s most recent earnings statement. Before PayPal, eBay relied on a similar system called Billpoint, which is also named in the lawsuit. 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 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. David Pressman, a San Francisco patent lawyer and author of “Patent It Yourself,” said at least half of all patent infringement lawsuits are won by the defense or eventually dropped before reaching the courtroom. And Greg Aharonian, San Francisco-based patent expert, said eBay could get the case dismissed if it finds a company or institution that developed its own “trusted intermediary” or similar electronic payment system even before AT&T researchers filed for their patent. “The question is, did anyone else have trusted third parties in the 1980s? My gut reaction is that they existed,” said Aharonian, publisher of the daily Internet Patent News Service newsletter. “Some university professor could have written an article on this, but no one paid attention and no banks adopted it. Something like that could invalidate the lawsuit completely.” Copyright 2003 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.

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