The case has been remanded to a lower court to consider the validity of another MercExchange patent.
The ruling also asks the District Court to consider whether an injunction should be imposed on eBay's fixed price and "Buy It Now" sales – which account for around one-third of its current revenues, according to reports.
The dispute between eBay and MercExchange has been running since October 2001, and hinges on an auction site patent application that was filed a few months before eBay was launched in 1995.
The dispute relates to the "Buy It Now" service on the eBay site, which deals with fixed price sales, and a facility to search other on-line auction houses. In May 2003, a jury decided that these services did infringe Woolston's patents, and ordered the on-line auction leader to pay $35 million in damages.
The case then went back to the trial judge, who had the option of increasing the damages awarded – up to three times the existing award – and issuing a permanent injunction against the company, preventing eBay from using the patented technology.
In the end he did neither, and in August last year he reduced the award to $29.5 million and refused to grant an injunction.
EBay appealed, and it is this ruling that was issued on Wednesday, removing the damages imposed on eBay in respect of the comparison shopping patent, but upholding the jury's infringement verdict on the "Buy It Now" patent.
The Appeals Court also raised the spectre of a permanent injunction against that service, and reversed the District Court's earlier invalidation of another MercExchange patent. These issues will now be reconsidered by the District Court.
"This decision sends a clear message to the marketplace," said Scott Robertson, who argued the case before the court as part of the Hunton & Williams law firm team that represents MercExchange. "Intellectual property owners have rights, and the value of intellectual property will be respected in court."
EBay announced that it was pleased with the ruling, and the reduction of damages.
"Looking forward," it said in a statement, "we believe that any injunction that might be issued by the District Court with respect to the other patent will not have an impact on our business because of changes we have made following the District Court's original verdict."
EBay stressed that the US Patent and Trademark Office was reviewing all of the MercExchange patents, and had already initially rejected all of the claims of one of the patents.