eBay's Next Big Challenge May Be a Legal One

The first case was filed last year on behalf of PayPal customers who accused the company of illegally freezing their accounts and restricting access to funds held within them. PayPal officials have said that they restricted accounts as part of an effort to combat fraud on the site.

The online payments company has already suffered a setback in the case. Although PayPal's user agreement calls for customers to settle their disputes with the company through arbitration, a federal judge last fall called that provision unenforceable and rejected PayPal's attempt to force customers into arbitration.

The plaintiffs in the case have until June to ask for class-action status in the case, said Daniel Girard, an attorney with San Francisco-based Girard and Gibbs, who represents the PayPal customers. The two sides are not involved in any substantive settlement talks, Girard said.

"We're very mindful of the fact that reaching a resolution is going to have to work for consumers," Girard said. "We're not anxious to settle the case if it's not going to deal with the problems that we've heard of from the beginning."

The case has just entered the discovery process, so it's difficult to estimate the damages suffered by the plaintiffs, Girard said.

Even if it prevails in the suit, the case could prove damaging, eBay warned in its quarterly report.

The other PayPal suit could prove to be just as dangerous, eBay has said. The case, filed last fall by First USA, charges eBay with violating a patent held by First USA. The patent covers the use of an alias and PIN to preclude the need for having a credit card in hand when completing a transaction.

By the end of the year, the court is scheduled to hold a hearing on the validity of the claims made in the patents and on motions for summary judgment, said Ted Johnson, an attorney with The Bayard Firm in Wilmington, Del., who represents First USA. At the moment, the case has begun the discovery process, Johnson said.