AT&T Corp. filed suit against PayPal and eBay on Thursday. AT&T alleges that PayPal and eBay are infringing its U.S. patent covering "transactions in which a trusted intermediary securely processes payments over a communications system such as the Internet." The use of a trusted intermediary ensures that one party will not have to disclose sensitive information, such as a credit card number or bank account number, to the other party.

AT&T's patent was originally filed with the U.S. Patent and Trademark Office in 1991. In July of 1994, the Patent and Trademark Office granted AT&T U.S. Patent No. 5,329,589.

AT&T said it notified both PayPal and eBay more than a year ago that they were using technology covered by AT&T's patent in the PayPal and BillPoint payment systems, and that it offered to license the patented technology to each of the companies.

PayPal is a popular online payment system used by online auction buyers and sellers. eBay acquired PayPal in October 2002 and phased out its own BillPoint payment service.

PayPal continues to dominate payment services in the online auction industry. Last month, PayPal launched PayPal UK, its first international Web site. Meanwhile, CitiGroup shuttered its c2it payment service this month.

AT&T spokesperson Michael Dickman would not reveal whether other companies have licensed the '589 patent, explaining that most licensing agreements are confidential.

AT&T can expect a contentious battle if the courtroom drama plays out like that of the recent patent lawsuit filed by MercExchange against eBay. In discussing the scheduling of a hearing in the case, the Judge said he would rather have chosen an appointment for a root canal than the hearing. "The only reason I didn't take the root canal was, I couldn't get an appointment." After the trial, Judge Friedman said the it was "one of the more, if not the most, contentious cases that this court has ever presided over."

eBay lost the patent infringement lawsuit in May 2003 after a jury found eBay willfully infringed the plaintiff's patents. eBay was ordered to pay MercExchange $29.5 million in damages.

PayPal may be close to settling another suit. Three plaintiffs filed the lawsuit last year over PayPal's customer service and handling of fraud complaints, particularly its practice of freezing customer accounts while investigating complaints. According to court documents filed Monday, the plaintiffs and PayPal have reached an agreement in principle on a proposed settlement.

In May 2002, a company called Certco agreed to drop a patent infringement suit that it had asserted against PayPal involving a "non-consequential payment and mutual releases." And last month, Bank One and PayPal agreed to settle two patent lawsuits the companies had filed against each other.

In its freshly filed lawsuit, AT&T seeks compensation for PayPal and eBay's unauthorized use of its patented technology, and a permanent injunction preventing eBay and PayPal from infringing the '589 patent.