eBay Turns Attention to the Other Gavel

By now it is a familiar story: eBay (EBAY Quote) has emerged as the winner of the dot-com sweepstakes.

With strong profits, a loyal and growing clientele and no serious competitors, eBay has marked itself as the rare tech success story of the postbubble era. It has distinguished itself as perhaps the best-managed New Economy company.

The San Jose, Calif., company's success in meeting its ambitious growth projections -- last year, eBay famously set a 2005 target of $3 billion in annual revenue, implying 50% annual growth over a five-year stretch -- has kept it popular with investors even as the economy sinks into recession.

In coming years, however, the company's primary challenge may exceed even its own formidable managerial powers, observers say. That's because the challenge will come not from competitors or users but in the courthouse, both domestically and overseas.

(For a look at how some smaller users are unhappy with some changes at eBay, click here.)

It is a threat that executives readily acknowledge. "I'm confident that the law will come down on our side," CEO Meg Whitman told a public forum this year in New York, shortly after a judge dismissed a $100 million class action brought by sports memorabilia collectors over phony autographs sold on eBay. But "obviously, you can't control every variable."

Yet with the company's stock trading at a rich premium to the market, investors are expecting eBay to do just that. And despite eBay's impressive success so far on the legal front -- the company has ultimately prevailed in every action brought against it -- the potential for an apple cart-upsetting legal defeat can't be completely discounted, observers say.

"The issues are not settled," says Ian Ballon, an e-commerce law expert at California law firm Manatt Phelps Phillips, who has written about eBay for the legal newsletter Cyberspace Lawyer. "They are still vulnerable."

What It's Up Against

The legal issues eBay faces are familiar. Some plaintiffs have sought to hold eBay responsible for fraudulent goods, such as phony autographs, listed on the site. The company has won such suits, and U.S. law appears firmly in its corner, legal experts say. But eBay soon will face the same charges in a European court, where the law is less settled.

Leading Edge eBay outperforming Nasdaq through thick and thin

Second, technology and legal experts expect a slew of cases over so-called smart software, which taps into Web sites to compile data. The issue is whether Web sites, such as eBay, can stop this. A loss could force eBay to more tightly monitor its site -- and thus boost costs -- or lose control of its data. And just as Microsoft's dominance attracted the attention of government regulators, so has eBay's success.

Some legal experts are particularly keen on seeing how international courts rule. eBay could be more vulnerable to lawsuits in Europe, say some observers, because of differences in laws and conventions between the Continent and the U.S.

Next month, eBay lawyers will appear in a German court for an oral hearing in a lawsuit filed in April by watchmaker Rolex, which claims that fake Rolexes have been sold on eBay's German site. eBay has said that it isn't liable in such cases because it makes no claims for the authenticity of goods traded on its sites. eBay's view has prevailed in suits filed in the U.S., but the Rolex dispute will mark the company's first skirmish in a European court.

In a nearly identical case filed by Rolex against German online auction house Ricardo, a judge ruled in Rolex's favor -- a momentary indication that European judges may take a view different from their U.S. counterparts.

But last week that case was overturned on appeal. "That certainly bodes well for our case," says Jay Monahan, associate general counsel for intellectual property at eBay.

Bigger Fish?

As the Rolex case awaits its hearing, a second issue could potentially put eBay back in U.S. courts. This issue involves whether eBay can stop Web sites from using bots -- smart software that crawls the Internet and compiles data -- to access eBay's site for price comparisons or email addresses. Last year eBay won a preliminary injunction when a judge applied trespass law to stop auction aggregator Bidder's Edge from tapping eBay's database. Later the companies settled, with Bidder's Edge paying eBay an undisclosed fee before going out of business.

Good Record Some notable eBay legal cases
Case	Issue	Verdict
Bidder's Edge	eBay sues to prevent co. from accessing its site to compile price comparisons	eBay wins as Bidder's Edge settles
Sports memorabilia dealers	A $100 million class action suit seeks to hold eBay responsible for allegedly fake sports memorabilia sold on the site	eBay wins; case dismissed
Reverse Auction	eBay sues, alleging ReverseAuction was harvesting email addresses on its site and spamming members	Case settled out of court; ReverseAuction pays eBay $1.2 million
Rolex	Rolex sues in Germany over allegedly fake watches sold on eBay's European sites	Oral hearing scheduled for December
Source: Legal documents, news reports, eBay

In another case, a judge opted not to apply the same standards and denied Ticketmaster's trespass claim against Tickets.com, which had tapped into Ticketmaster's site to compile concert information. The judge praised the injunction in the Bidder's Edge case but said it didn't apply, because Tickets.com didn't excessively visit Ticketmaster's site. (At one time, Bidder's Edge was tapping eBay 100,000 times a day and occupied about 1.8% of the capacity of its list servers.)

The Bidder's Edge case grabbed the attention of the Clinton Justice Department, whose antitrust division opened an inquiry into eBay's dealings with auction aggregators. eBay first disclosed the investigation in a March 2000 Securities and Exchange Commission filing, but in its most recent quarterly report, it strengthened the language, saying any action could harm the company by resulting in "negative publicity, the costs of action, possible private antitrust lawsuits, the diversion of management time and effort and penalties we might suffer if we ultimately were not to prevail."

A Justice Department spokesman described the inquiry as an "ongoing investigation."

"A year ago we received an inquiry from DOJ staff," says eBay's Monahan. "We were happy to respond, and we haven't heard anything since."

Further lawsuits over whether sites can use software to tap into other sites, such as eBay, to compile data are likely, say experts. That would result in more costs to eBay to fight such suits, and a defeat could mean a loss of control over how its data are used.

"Almost everyone in this field believes it is likely we will see future cases," says Michael Geist, an e-commerce law expert and professor at the University of Ottawa. "Most people see a future increase in software that aggregates data on the Web. The question is whether someone can stop that."

Given its track record, it appears eBay certainly will try.