eBay is currently defending itself before the Supreme Court in a patent-infringement suit which not only threatens the company's business model and that of many other e-commerce giants, but also potentially threatens innovation and growth of business across the Internet.

If this sounds alarmist, consider what is at stake: eBay is being sued for patent infringement by a small company called MercExchange who entered the online auction world in 1995, and failing to make an impact, closed down its auctions in 2000. Along the way, MercExchange filed for and received two minor patents — one for online auctions and another for direct-buy software that allowed buyers to log on to a site and purchase items at a fixed price. This should sound familiar to anyone who has used the eBay feature "Buy It Now," which, according to eBay spokesperson Hani Durzy, accounts for nearly a third of all eBay sales by dollar volume.

The online auction patent was thrown out, but a direct buy-related patent was upheld. In 2003 a District Court judge found in MercExchange's favor against eBay; then the company filed for an injunction to prevent eBay (and other online companies,) from using the "Buy It Now," feature. Following a series of appeals, eBay and MercExchange are squaring off in the Supreme Court, mainly over the issue of injunctions in patent cases, but also over what some term the liberal granting of software patents and ensuing 'frivolous' lawsuits.

The issue is similar to the lawsuit that nearly shut down Research In Motion's Blackberry e-mail service over the winter, only larger, and promising a greater impact on business.

The stakes are enormous, according to Todd Dickinson, a former head of the U.S. Trade and Patent Office and currently a Vice President in charge of intellectual properties at General Electric: "You could even say it's the most important commercial law case before the Supreme Court so far this century."

The chronology begins in early 1995 when Thomas Woolston, the founder of MercExchange, filed paperwork on the two patents, five months before Labor Day weekend when eBay founder Pierre Omidyar created the first working model of eBay.

By 1998 Woolston was granted his first patents. A month later Woolston was suing Priceline.com attempting to have Priceline's patent on its "Name your own price" business feature thrown out because it infringed on the process he patented. (The dispute is still pending before the patent office.)

In 2000, after MercExchange had failed as an online auction site, eBay contacted Woolston about buying his patents. The talks went nowhere; eBay kept using its "Buy It Now" model, and in 2001 the patent infringement issue went to the courts, where in 2003 a Federal circuit court in Norfolk decided in MercExchange's favor, awarding the company $29.2 million in damages from eBay for patent infringement, later reduced to $25 million.

However, the judge refused to issue an injunction against eBay to stop using the "Buy It Now" feature. The court argued that an injunction was basically a money issue and that MercExchange could be paid for the injuries caused by the infringement at the end of the lawsuit, rendering an injunction unnecessary. Then, an appeals court reversed that decision, setting in motion a legal test that could make such injunctions virtually routine — threatening many online businesses.

eBay applied for a writ of certiorari, or appeal before the Supreme Court which rejects the vast majority of such petitions for review. The Supreme Court agreed to hear the case, to the surprise of some, but not all onlookers. Opening arguments were heard on March 29, 2006.

The case promises to have blockbuster implications for a wide spectrum of business issues.

First, judges often issue injunctions against companies found guilty of patent infringement while their cases are on appeal. eBay is petitioning the Court to question this practice on the grounds that it cripples high-tech companies; other large companies have filed briefs with the Supreme Court supporting eBay's petition.

Then there is the issue of patent reform: some 20,000 new software patents are granted each year, and many question whether that much innovation is actually occurring in the 20+ year old software industry. eBay points out that the patent office has already thrown out one MercExchange patent and is currently reconsidering the patent for the direct-buy software, though at this time, it remains in effect.

MercExchange's apparent strategy in seeking an injunction would be to extract a bigger settlement from eBay and other companies should it win the case. The New York Times, in an editorial on March 28, 2006, in support of eBay, argued that if the courts give patent holders a near automatic right of injunction, it will lead to 'patent trolling,' giving patent holders: "the power to extract windfall payments from companies that are caught in their net."

"Patent trolling" has become a new term in the business lexicon, referring to those who acquire patents with no intention to use them other than to extract huge settlements out of companies who might infringe on the patents. "In the past," says Mathew Powell of the law firm Weil, Gotshal & Manges, who represents Microsoft, Cisco Systems and Intel in patent litigation cases, "you didn't have patent trolls who were buying up patents for $25,000 then asking $5 billion." The issue is major for companies whose products contain hundreds of patentable components.

Further, reacting to the growing clamor for patent reform, on April 5, 2006, Congressman Howard Berman (California,) and Rick Boucher (Virginia) introduced the Patents Depend on Quality Act of 2006 (the PDQ Act) intended to upgrade the entire patent process. "It is clear that the problems with the patent system have been exacerbated by a decrease in patent quality and an increase in litigation abuses," says Boucher.

eBay feels which ever way the Supreme Court rules, the decision should not affect the company's users. eBay claims to have a workaround for its "Buy It Now" feature that does not infringe on the MercExchange patent. However, should the Court decide in favor of MercExchange to the extent of protecting the concept of 'Buy It Now,' it may be a different story. Also, patent owners, whether possessing patents of high or dubious quality, will be able to troll the Internet with the leverage to threaten companies large and small from a 'pay-up or else it's court' position.

Further, and to many a larger issue in the long run, a decision in favor of MercExchange it's felt would hurt everyone in that it would have a chilling effect on technology and general e-commerce by inhibiting innovation on the Internet.

Conversely, some software companies argue that should the Supreme Court side with eBay, it would give too much power to infringing companies.

In any case a decision from the Supreme Court is not expected for several months, so stay tuned.

Frank Fortunato is a contributor to ECommerce-Guide.com and an avid eBay seller.