PayPal Sued Over Payment Patents

Online payment service PayPal Inc. infringed on patented methods of completing Internet transactions, according to a lawsuit filed in federal court by a leading credit card issuer.

First USA Bank, owned by Bank One Corp., alleged that PayPal is using technology protected by two of its patents.

PayPal’s “wrongful conduct” has caused First USA, the nation’s third-largest credit card company, “to suffer irreparable harm resulting from the loss of its lawful patent rights,” according to the suit filed Friday in Delaware. It asks for unspecified damages.

PayPal executives did not respond to requests for comment.

PayPal, most heavily used on Internet auction sites, acts as a middleman for online transactions, allowing a buyer to make instant payments even if the seller is not an authorized credit card merchant. PayPal, founded in 1999, is being acquired by auctioneer EBay Inc. for $1.5 billion in stock.

Tensions between PayPal and credit card issuers have been growing because the electronic service--which used to involve credit cards in almost all of its transactions--is now using bank transfers and other non-credit card payments nearly half the time.

“PayPal represents the biggest threat to the credit card industry out there right now,” said Avivah Litan, head of research for Gartner.

Instead of credit cards, PayPal increasingly is using the automated clearinghouse network, an electronic funds transfer system governed by the Electronic Payments Assn., which represents more than 12,000 financial institutions.

The automated clearinghouse “costs them just pennies as opposed to the higher fees the credit card companies charge,” Litan said. The pending sale to EBay has only increased tensions.

“A lot of people in the business are thinking that it will make PayPal ever more powerful,” Litan said. “EBay is a richer company and can take PayPal further.”

PayPal shares rose 95 cents Monday to $22.73 in Nasdaq trading. Shares of Chicago-based Bank One rose 93 cents to $40.30 on the New York Stock Exchange.

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Bloomberg News was used in compiling this report.