If you follow online auction industry news closely, you're probably familiar with the ongoing legal battle between industry giant eBay and MercExchange, the company that has sued eBay for infringing on patents covering several aspects of the online auction business. Next week, the two companies will meet in Federal Appeals Court in Washington, DC.

MercExchange was founded by Tom Woolston, who filed for the patents back in 1994. Woolston has been quoted in the media occasionally as the situation progresses – the most recent development being a Norfolk, VA jury verdict awarding him $29 million, finding in his favor. But although it's become the stuff of legend to many how eBay founder Pierre Omidyar created eBay's predecessor site, AuctionWeb, over Labor Day weekend 1995, much less is known about Woolston and his company.

Who is Tom Woolston, and how did his own online auction site evolve?

AuctionBytes sat down with Woolston near his home in Great Falls, Virginia to hear more about his personal and business story.

In many ways, Woolston had the perfect background for a person who would patent ideas relating to online commerce: an undergraduate degree in electrical engineering, a law degree, and then experience with networks when working for the National Security Agency (NSA) and the Central Intelligence Agency (CIA).

Born in Michigan, Woolston was raised in Ohio. When he was 18, he enlisted in the Air Force, where he received an introduction to technical training. But, about six weeks into it, "I knew it wasn't my cup of tea," explained Woolston. When he got out of the service, he started going to evening school at the University of Maryland, studying computer science, then transferred to George Washington University in Washington, D.C., where he studied electrical engineering. Later Woolston went on to get a law degree.

The Birth of "Fleanet"

In 1994, while Woolston was at the CIA, the Internet was transitioning from being solely a government entity to a commercial one as well. "I thought, wow, you could create a system to do online markets and auctions."

If the mythology of eBay's roots is entwined forever with the Pez dispenser, it was baseball cards for MercExchange. "It was the baseball strike in '94 - the World Series," recalled Woolston. "I heard on the radio a story about a baseball card store in McLean, VA that was going out of business, and thought, wow, my electronic markets and auctions idea could really help this small company." The idea intrigued Woolston, who saw the collectibles market as a sort of arbitrage system. A Cal Ripken baseball card would be worth more on the East coast than in California, and the Internet opened up the market for small businesses by removing geographical boundaries.

Woolston saw that to do business online, companies that build a reputation up over time needed "a system to bridge or broker trust across the Internet." On the Internet at the time, you could "just put up a web page - they wouldn't know you from boo,...it was like, how good were your graphics? That has nothing to do with how legitimate you were as a business," said Woolston.

It took Woolston eight months to take those ideas and "gel it into a technical document that could actually perform the concept," he said. He filed his patent applications in April of 1995. "I was pretty naïve then. What you do when you have an idea is you file a patent application to protect your rights, and then you try to raise money. So we organized a company: it was called fleanet."

(In the "dark days" of the company, according to Woolston, they abandoned the domain name. Today when you type "fleanet.com" into a browser, it brings up a list of flea control products for pets).

Woolston's early business partners did not care for the fleanet name, and the company became MercExchange.

Bumps in the Business Road

Now it was time for venture capital. MercExchange was in talks with DC-area venture capital firm Novak Biddle, but that didn't last long. "Biddle and I disintegrated into a screaming match, with Biddle screaming at me that no one will ever buy an antique or collectible over the internet, and I was insane," laughed Woolston.

But then, in December of 1998, MercExchange had its first patent issued. "It was like magic…within six weeks, we had our first licensee; and within six months, I'd been lured out of the legal profession into the dot-com world," said Woolston.

By 1999, MercExchange successfully raised funding, this time out of Omaha, Nebraska, with an Internet incubator company called Aden Enterprises, controlled by Michael Luther. They started hiring "all these good people… I was recruiting guys out of SAIC (Science Applications International Corp.), out of Naval Research labs...we had top-drawer programmers...we had great general counsel…we brought in directors who had been in charge of public companies before...so we were rolling with a pretty decent crew of guys," recalled Woolston.

And then, another setback. According to Woolston, Aden was not focused and Luther didn't want to rein in its chaotic activity, and that wound up being a deal-breaker. "We basically blew it up, and unwound the investment transaction," said Woolston. "And of course, we were also facing by that time extreme economic pressure from all the startups who were funded out of California…now we're in late '99, early 2000…there were so many companies founded in the auction space that you couldn't give the stuff away."

At the time, MercExchange considered its core competitor to be a company called Bidland, "which was more an infrastructure play…but it was an ASP [application service provider] model too," said Woolston. "I thought it was a good hybrid between running a kind of centralized market like eBay, but also running private label auctions with ASP in it."

Talks with eBay

MercExchange's relationship with eBay began in a venue much friendlier than a courtroom: a restaurant. "My general counsel, John Phillips, went to law school with their [eBay's] lobbyist, Tod Cohen. eBay had launched their Bidder's Edge lawsuit. eBay wanted to halt auction aggregation. There were three auction aggregators at the time, we were building one, there was one called AuctionRover, one called AuctionWatch, and one called Bidder’s Edge."

The lunch was friendly, according to Woolston. "Somehow it came up that we had patent rights pending to auction aggregation. And Cohen basically said (I'm paraphrasing because I wasn't privy to this conversation), 'You know, eBay would be interested in taking a look at that."

According to Woolston, eBay expressed interest in buying MercExchange's patent portfolio. At the time, "it was working out for us, because our company was falling apart," recalled Woolston.

"They sent outside litigators to come look at our patents," said Woolston. "Red flag #1 was, why are you sending litigators to look at patents…why aren’t you sending patent attorneys to look at patents?" But, he said, they went ahead and gave their presentation about all the pending patents, and where they all stood in the patent office. "They [eBay's attorneys] said 'Wow, we're really interested.' I think the guy said, 'This is it; we can put the top back on the Genie’s bottle,' I think were his words."

Then, according to Woolston, eBay's attorneys demanded that MercExchange send all the confidential patent files to Silicon Valley. "It would appear to us that they had no intention to actually purchase the patents...that was a ruse to get a jump on this and litigation," said Woolston. "They were looking for ways to kill the patents instead of buying them."

Talks with eBay then died out. Woolston says that within three months of the conversations dying out, "eBay was infringing every patent we had." MercExchange now has four patents, according to Woolston, and says that eBay was infringing on three of them.

From there, any talks that MercExchange would have with eBay moved from the conference room to the courtroom.

"After they broke off conversations and they started infringing on all three of the patents," said Woolston, "you have two options: a), you give up; or b), you enforce your patent rights. And we chose option b."

MercExchange's case against eBay went to trial in Norfolk, VA, in May of 2003, and the jury ruled in MercExchange's favor, awarding the company $35 million in damages (later reduced to $29.5 million by the judge). eBay is appealing the verdict, and the two companies will meet again in court, this time in the U.S. District Court of Appeals in Washington, D.C., on October 5.

Meantime, eBay has asked the U.S. Patent Office to reexamine MercExchange's patents, a process that may take about 18 months (http://www.auctionbytes.com/cab/abn/y04/m06/i17/s01).

What will be the next chapters in the story of MercExchange, and indeed, arguably, online auction commerce as we know it? Stay tuned for the next courtroom drama.