Eric was deeply distracted. He's been closely following Penny's interaction with Kelso and it seemed obvious to him that his cousin was flirting with Kelso. He initially thought about telling someone. Maybe he would warn Jackie, or tell Kelso to watch out, or just tell Donna, but he realized Penny would just deny it and everyone would think he's just jealous of all the attention his cousin was getting.
He then thought that it wasn't his problem and he shouldn't do anything. However, he remembered how hurt Jackie was when Kelso cheated on her with his sister. Surely he couldn't let Jackie get hurt like that again. He hoped Kelso would never hurt Jackie like that again, but he knew how susceptible Kelso was around attractive girls.
After a few days he decided he wouldn't do anything. He didn't want to give Penny the satisfaction of getting under his skin. He just pretended not to be bothered.
As the gang was wrapping up another afternoon in his basement everyone was lining up to leave. Jackie was the last one to leave but just as she was about to close the door behind her she turned around.
"Hey Eric?"
"Yeah?"
"Do you think there ah…maybe something going on between Michael and your cousin?"
"What do you mean?'
"Well she's always flirting with him, so I don't know…"
"Kelso loves you very much, Jackie."
"I know but it's hard to trust him again, you know, after he cheated on me with Laurie."
"He won't hurt you like that again."
"Yeah, I really wanna believe it. You'll tell if you suspect anything, right?"
"Sure Jackie", he replied.
She approached him and kissed him on the cheek. "Thanks Eric, you're a good guy, Donna is a very lucky girl."
Jackie left and Eric was now deeply concerned.