The deal with MercExchange of Great Falls, Va., gives eBay control of three disputed patents, including the "Buy It Now" feature that enabled shoppers to buy items at a fixed price with a click of the mouse.
MercExchange founder Tom Woolston declined to say what his company will do next.
Neither company disclosed terms of the confidential deal. However, eBay said the settlement was small enough that it would not affect the $7.7 billion company's 2007 results or 2008 projections.
EBay General Counsel Mike Jacobson said the San Jose company was "pleased" to reach a deal. "In addition to resolving the litigation, this settlement gives us access to additional intellectual property that will help improve and further secure our marketplaces."
The MercExchange case was closely watched in Silicon Valley because tech companies often incorporate hundreds or even thousands of patents in products -- and sometimes unknowingly infringe them. The Supreme Court ruled unanimously in 2006 that patent-holders are entitled to damages but cannot count on automatic injunctions that halt a company's manufacturing or business lines.
"That's really important, particularly in the electronics industry where so many devices and services on the Internet pile inventions on top of one another," said Paul Goldstein, a Stanford law professor who wrote "Intellectual Property." "Often, they won't know if they're infringing."
MercExchange founder Woolston, an attorney, filed three patent applications in 1995 for programs and procedures to operate an Internet-based auction. MercExchange sued eBay in 2001, setting in motion a six-year legal battle.
In 2003, a jury ordered eBay to pay nearly $30 million in damages but did not order eBay to stop using the "Buy It Now" feature. But when an appellate court reversed the decision in 2005, eBay took its case to the Supreme Court, where it prevailed.
As the legal battle dragged on, MercExchange cut its workforce from more than 40 employees to just three. Woolston also was derided as a "patent troll" -- inventors who use the threat of injunctions to extract hefty legal settlements for violating patents of dubious value.
Patent-holders still can seek damages and attorney fees, and judges have discretion to multiply them, but the MercExchange case presents a setback in patent cases where Davids are suing Goliaths, Goldstein said.
"This is trench warfare when you get down to it," Goldstein said.