eBay 2005 Annual Report Download - page 34

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We are subject to intellectual property and other litigation.
In April 2001, two of our European subsidiaries, eBay GmbH and eBay International AG, were sued by
Montres Rolex S.A. and certain of its affiliates in the regional court of Cologne, Germany. The suit
subsequently was transferred to the regional court in Dusseldorf, Germany. Rolex alleged that our subsidiaries
were infringing Rolex's trademarks as a result of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought an order enjoining the sale of Rolex-branded
watches on the website as well as damages. In December 2002, a trial was held in the matter and the court
ruled in favor of eBay on all causes of action. Rolex appealed the ruling to the Higher Regional Court of
Dusseldorf, and the appeal was heard in October 2003. In February 2004, the court rejected Rolex's appeal
and ruled in our favor. Rolex has appealed the ruling to the German Federal Supreme Court, and a hearing is
expected in December 2006. In September 2004, the German Federal Supreme Court issued its written
opinion in favor of Rolex in a case involving an unrelated company, ricardo.de AG, but somewhat comparable
legal theories. Although it is not yet clear what the ultimate effect of the reasoning of the German Federal
Supreme Court's ricardo.de decision will have when applied to eBay, we believe the Court's decision has
resulted in an increase in similar litigation against us in Germany, although we do not currently believe that it
will require a significant change in our business practices.
In September 2001, MercExchange LLC filed a complaint 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 consignment 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,
effectively 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 finding that eBay had willfully infringed one and Half.com had willfully infringed both of the patents
in the suit, awarding $35 million in compensatory damages. Both parties filed post-trial motions, and in
August 2003, the court entered judgment for MercExchange in the amount of approximately $30 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 filed 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.
In March 2005, the U.S. Court of Appeals for the Federal Circuit issued a ruling in the appeal of the
MercExchange patent litigation suit which, among other things (1) invalidated all claims asserted against
eBay and Half.com arising out of the multiple database search patent and reduced the verdict amount by
$4.5 million; (2) upheld the electronic consignment system patent; (3) affirmed the district court's refusal to
award attorneys' fees or enhanced damages against us; (4) reversed the district court's order granting
summary judgment in our favor regarding the auction patent; and (5) reversed the district court's refusal to
grant an injunction and remanded that issue to the district court for further proceedings. In May 2005, the
Court of Appeals for the Federal Circuit granted our petition to stay the mandate in the case in order to allow
us to petition the U.S. Supreme Court for review on certain issues. We filed our petition for review with the
U.S. Supreme Court in July 2005, and on November 28, 2005, the Court granted our petition for review. Oral
arguments in the case are scheduled for March 29, 2006. In parallel with the federal court proceedings, at our
request, the U.S. Patent and Trademark Office is actively reexamining each of the patents in suit, having
found that substantial questions exist regarding the validity of the claims contained in them. In January 2005,
the Patent and Trademark Office issued an initial ruling rejecting all of the claims contained in the patent that
related to online auctions; in March 2005, the Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to electronic consignment systems; and in May 2005, the
Patent and Trademark Office issued an initial ruling rejecting all of the claims contained in the patent that
related to multiple database searching. Even if successful, our litigation of these matters will continue to be
costly. In addition, as a precautionary measure, we have modified certain functionality of our websites and
business practices in a manner which we believe would avoid any further infringement. For this reason, we
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