eBay 2004 Annual Report Download - page 119

eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
In September 2001, a complaint was Ñled by MercExchange LLC against us, our Half.com subsidiary
and ReturnBuy, Inc. in the U.S. District Court for the Eastern District of Virginia (No. 2:01-CV-736)
alleging infringement of three patents (relating to online auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent injunction and damages (including treble damages
for willful infringement). In October 2002, the court granted in part our summary judgment motion,
eÅectively invalidating the patent related to online auction technology and rendering it unenforceable. This
ruling left only two patents in the case. Trial of the matter began in April 2003. In May 2003, the jury returned
a verdict Ñnding that eBay had willfully infringed one and Half.com had willfully infringed both of the patents
in the suit, awarding $35.0 million in compensatory damages. Both parties Ñled post-trial motions, and in
August 2003, the court entered judgment for MercExchange in the amount of $29.5 million, plus pre-
judgment interest and post-judgment interest in an amount to be determined, while denying MercExchange's
request for an injunction and attorneys' fees. We appealed the verdict and judgment in favor of MercExchange
and MercExchange Ñled a cross-appeal of the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys' fees. Oral arguments for the appeals were heard on
October 5, 2004. The U.S. Patent and Trademark OÇce recently granted our request that it reexamine the
three patents at suit, and on January 26, 2005, the Patent and Trademark OÇce issued a ruling rejecting all of
MercExchange's claims under the patent that related to online auctions. We continue to believe that the
verdict against us in the trial was incorrect and intend to continue to pursue our appeal and defend ourselves
vigorously. However, even if successful, our appeal of and defense against this action will continue to be costly.
In addition, as a precautionary measure, we have modiÑed certain functionality of our websites and business
practices in a manner which we believe makes them not infringe the two patents that we were found to have
infringed. Nonetheless, if we are not successful in appealing the court's ruling, we might be forced to pay
signiÑcant additional damages and licensing fees or modify our business practices in an adverse manner. We
recorded an operating charge in the amount of $30.0 million, reÖecting the $29.5 million judgment, together
with our estimate for pre-judgment interest of $0.5 million. The charge and the related estimated tax beneÑt of
$12.1 million were reÖected in our consolidated statement of income as patent litigation expense in the year
ended December 31, 2003.
In August 2002, Charles E. Hill & Associates, Inc. Ñled a lawsuit in the U.S. District Court for the
Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies, primarily large
retailers, infringed three patents owned by Hill generally relating to electronic catalog systems and methods for
transmitting and updating data at a remote computer. The suit seeks an injunction against continuing
infringement, unspeciÑed damages, including treble damages for willful infringement, and interest, costs,
expenses, and fees. In January 2003, the case was transferred to the U.S. District Court for the Southern
District of Indiana. After pending in Indiana for almost a year, the case was transferred back to the
U.S. District Court for the Eastern District of Texas in December 2003. A scheduling conference was held in
November 2004 and a preliminary trial date has been set for February 2006. The case is currently in fact
discovery and claim construction discovery. We believe that we have meritorious defenses and intend to
defend ourselves vigorously.
In February 2002, PayPal was sued in California state court (No. CV-805433) in a purported class action
alleging that its restriction of customer accounts and failure to promptly unrestrict legitimate accounts violates
California state consumer protection laws and is an unfair business practice and a breach of PayPal's User
Agreement. This action was re-Ñled with a diÅerent named plaintiÅ in June 2002 (No. CV-808441), and a
similar action was also Ñled in the U.S. District Court for the Northern District of California in June 2002
(No. C-02-2777). In March 2002, PayPal was sued in the U.S. District Court for the Northern District of
California (No. C-02-1227) in a purported class action alleging that its restrictions of customer accounts and
failure to promptly unrestrict legitimate accounts violates federal and state consumer protection and unfair
business practice laws. The two federal court actions were consolidated into a single case, and the state court
action was stayed pending developments in the federal case. In June 2004, the parties announced that they had
117