Patent Troll Targets eBay -- But Might Tar Whitman As Well

Last Updated Jul 14, 2010 6:41 PM EDT

Yesterday, a company called XPRT Ventures filed a patent infringement and trade secret misappropriation suit against eBay (EBAY) for $3.8 billion. The company claims that eBay "unfairly stole the idea and method of payment used in eBay's PayPal and similar electronic payment systems" from two inventors who were granted six patents in the area. This may become a serious issue for the auction and online payment company, but as is true with many such cases, the actual story is far more complex than David Meets Goliath. Unfortunately for California gubernatorial candidate Meg Whitman, it could bring up considerable corporate ugliness at a time when she was CEO of eBay.

For eBay to be involved in legal disputes is hardly new. Ironically, in a patent infringement suit -- eBay v. MercExchange -- that went to the Supreme Court a few years ago, a unanimous decision put an end to the idea that a finding of infringement of a valid patent should automatically lead to a permanent injunction. And then there is the ongoing legal spat between eBay and Craigslist in which eBay admitted to using confidential information to compete with the online classifieds site.

The complaint states that in 2001, eBay had a credit card-based payment service called Billpoint. The inventors listed on the patents approached eBay and offered "an exclusive opportunity ... to review the applications under confidence before they were publicly available," saying that their approach could offer significant economic and technical improvement. A lawyer who said he represented eBay replied, agreed to review the documents confidentially.

XPRT then says eBay "surreptitiously began work on an acquisition of PayPal" two months after hearing from the inventors. After months of trying to reach eBay, the inventors learned that it planned to acquire PayPal and integrate it in a way that would infringe the patent claims.

In September 2002, another law firm contacted the inventors, saying that it represented eBay in the matter. The inventors sent a non-disclosure agreement that they had signed. Finally in March 2003, the inventors received an NDA with an effective date of March 2002. They signed and returned it.

Six weeks later, and the same day that eBay filed its own online payment patent application, "Emily Ward, eBay's Senior Patent Counsel, crossed out [the law firm attorney's] name and title and signed the NDA, unilaterally changing the effective date from 'March __, 2002' to April 30, 2003." The NDA prohibited eBay from providing confidential information to "any engineers, consultants or agents of eBay that were involved with the design, development, or maintenance of eBay's website." XPRT further claims that eBay did not disclose the existence of the patent applications in question in its own filing, "in clear violation of disclosure to the USPTO [U.S. Patent and Trademark Office]."

According to the filed complaint, XPRT is based in Connecticut and registered in Delaware. Checking the incorporation papers, I learned that the group that started XPRT in 2007 was not the pair of inventors listed on the patents -- both of whom happen to be patent attorneys -- but Berkowitz, Trager & Trager, a Connecticut law firm, whose web site says that it specializes in corporate, tax, and real estate law.

The firm's manager, Paul Berg, signed the incorporation papers but said through his administrative assistant that he was not authorized to speak to the media about the subject. When I told the woman that someone in the firm must be able to authorize permission to speak, she said that she didn't know who would have it, and "regardless, he's not going to speak to the media."

I was able to speak with Steve Moore, a partner with Kelley Drye & Warren, the law firm handling the suit for XPRT. Moore says that the USPTO rejected eBay's application multiple times. "Many of the claims where rejected based on XPRT's patent applications," the very applications that XPRT says that it revealed to eBay under NDA.

The patents offer what appears to be some broad coverage. One of them, patent number 7,483,856, is titled System and method for effecting payment for an electronic auction commerce transaction, with the following as the first patent claim:

A method for effecting payment for a purchaser of at least one item offered for an electronic auction sale by a seller via an electronic auction web site maintained by at least one computing device of an electronic auction system, said method comprising the steps of: maintaining an electronic database of a plurality of electronic auction payment accounts corresponding to a plurality of users, including the purchaser, of said electronic auction web site and a payment segment of said electronic auction web site by an electronic auction payment system integrated with said electronic auction system, each of said plurality of electronic auction payment accounts storing funds therein and each capable of being used for user transactions in the electronic auction system; performing at least one payment-related activity by at least one processor of said electronic auction payment system for effecting payment for said purchaser, said at least one payment-related activity selected from the group consisting of debiting an electronic auction payment account corresponding to the purchaser of the at least one item and maintained by said electronic auction payment system, and withdrawing funds from at least one account storing funds therein and not corresponding to at least one of the plurality of users, wherein at least one payment source corresponding to the purchaser is used to obtain funds for storing within the electronic auction payment account corresponding to the purchaser prior to debiting the electronic auction payment account corresponding to the purchaser; and crediting by said at least one processor at least one account corresponding to the seller to effect payment for the at least one item offered for the electronic auction sale via the electronic auction web site.
Remember that when the lawyers filed this application in January 2001, eBay did not yet own PayPal and had to rely either on Billpoint or checks or money orders. Even if these patents were originally the brainchildren of patent attorneys who ultimately sold them to a law firm that wanted to get money from eBay, there's a chance that they are still valid and that XPRT could prevail. This is not a simple case of a troll finding an obscure patent that could be stretched to cover an intended target.

XPRT has based the damages it seeks on a six percent royalty rate, eBay's own statements as to how much the payment division has made, and an estimate of what it is likely to make throughout the life of the patent, given an assumed 11.5 percent growth rate in that part of the business. A good thing for eBay: Given the requirements for a permanent injunction, set in that previous patent infringement case during which the court found eBay to have infringed a patent, it's unlikely that XPRT could shut down the company's payment operations.

For its part, yesterday, eBay released the following statement: "We are reviewing the complaint filed today. We believe it is without merit, and intend to defend ourselves vigorously."

Little good any of this does Whitman. It's the second look behind eBay's closed doors with allegations of unethical and illegal behavior, and it provides fodder for opponents who want to attack her business reputation.

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Photo: Meg Whitman For Governor 2010. Editing: Erik Sherman
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.