Popular Internet trading sites PayPal and eBay face legal action from US telecoms giant AT&T, which is suing the companies for patent infringement.

The suit relates to the way the eBay/PayPal payment systems work. These use a trusted intermediary to process payments. This third party safeguards payment details such as credit card numbers. AT&T claims this infringes its patent 5,329,589 awarded in July 1994 for "mediation of transactions by a communications system."

eBay and PayPal refused to license the patented technology, so "AT&T has been forced to bring the matter to court," the company said.

eBay dismissed the lawsuit: "We haven't seen the complaint yet, but based on what we know about it we believe the suit is without merit and we plan to defend ourselves vigorously," eBay spokesman Chris Donlay said.

AT&T is chasing unspecified damages and permanent injunctions barring eBay and PayPal from using the Billpoint and PayPal payment systems, which would seriously affect their business, said industry observers.

Lawyer David Schlitz said: "The danger is really an injunction: if the court finds that there is infringement and they have to change their system, that can have a real adverse effect on their business," he said.

He added: "This lawsuit is just the opening act in a long play. This will not be resolved through a trial for another year or more. Of course, after that, there can be an appeal," he said.

eBay reported third-quarter net income of $103.3 million, on revenue of $530.9 million and said it had a record 85.5 million registered users at the end of the quarter.