In a lawsuit filed last week, First USA alleged that PayPal is using online transaction technologies that are already patented by First USA.
In its complaint, First USA said PayPal's use of its "cardless payment system" processes infringe on the patents because PayPal allows customers to make or collect online payments without having to enter their confidential bank account or credit card information each time.
The mechanism uses a database to securely store user account information so it does not have to be entered each time. Instead it uses a personal identification number or other identification marker, under two patents First USA said it holds.
The patents were issued to inventor Kurt Campisano in May 2001 and January 2002, according to the complaint. First USA is the assignee of the patents.
Vince Sollitto, a spokesman for PayPal, said his company "does not believe we infringed on the patents".
"The suit is without merit," he said. "We will defend ourselves vigorously."
The suit asks for unspecified monetary damages and asks that PayPal be permanently barred from using the transaction processes that allegedly infringe on the First USA patents.
First USA is the credit card arm of Bank One and has 53 million cardholders. It is the third-largest credit card company in the US.
PayPal, which began operations in 1999, provides a way for online buyers and sellers to make secure transfers of money worldwide. The company serves online auctions such as eBay, which purchased PayPal last July in a deal worth about $1.5bn (£0.96bn).