Competitors, the shaky economy and technical troubles haven't derailed eBay's ( EBAY - Get Report) rapid growth. The online auctioneer reported record earnings and profits last week and looks to be fulfilling its promises of rapid growth. But there are a few unknowns that could be speed bumps on eBay's highway -- a trio of lawsuits that the online auctioneer has been unable to dodge. The suits cover significant pieces of eBay's businesses; two of the three suits have survived early legal challenges. Also bothersome is that it's difficult to assess their potential for cutting into earnings, though the lawsuits so far have escaped much notice from those who follow the company. One of the suits, a patent dispute, is scheduled for trial in April. Two more suits that take aim at the company's fast-growing PayPal unit are proceeding, with important court dates later this year. eBay plans to defend itself vigorously against the suits, but even if it manages to win them or settle them out of court, it could end up paying significant legal fees or royalty payments. If eBay were to lose, each of the suits could force it to either change the way it operates or pay significant damages. "Any such result could materially harm our business," the company warned in its quarterly report filed in November. eBay representatives did not return calls seeking comment on the company's various legal disputes. Outside the legal arena, eBay has had little to worry about lately. Last week, for instance, the San Jose, Calif.-based company
reported record earnings and revenue for its fourth quarter. eBay also raised its earnings and revenue guidance for the first quarter and the year. Boosted by the report, eBay shares hit a 52-week high on Friday. Despite the down market on Tuesday, shares again rose, setting another 52-week high and closing up 91 cents to $75.76. In the legal arena, eBay has been somewhat less of a success.
The company faces an April trial date in its dispute with MercExchange, which holds three of founder Tom Woolston's patents. In a suit filed in 2001, MercExchange charged eBay with violating three of those patents, which cover online auction technology, shopping search engines and a system for creating an electronic marketplace. Although the judge in the case has thrown out some of the claims made in the patents, MercExchange has thus far fended off numerous attempts by eBay to dismiss the case altogether. Meanwhile, MercExchange has gotten some validation for its patents lately. Last month, ReturnBuy, an online liquidator partially owned by eBay that also was charged in the suit,
agreed to settle the case and license MercExchange's patents. Erstwhile eBay partner AutoTrader, which severed its ties with the auction giant last month to set up a competing automobile auction site, also recently agreed to license MercExchange's patents. eBay and MercExchange are not engaged in any serious settlement talks, said Woolston. Meanwhile, the AutoTrader agreement "gives us the resources to see the eBay suit through to trial and back on appeal," said Woolston. "We have enough now to go the limit." Chip Perry, CEO of AutoTrader.com, declined to say how much the company paid to license MercExchange's patents. But noting that the privately held company had some $100 million in revenue last year, Perry said the upfront payment made to MercExchange was significant. "It was not a rounding error in our financials," Perry said.
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.
FirstUSA, which is a subsidiary of banking giant Bank One ( ONE - Get Report), has proposed a settlement and the case has been referred to a judge for mediation, Johnson said. A loss in the case could force eBay to "modify
PayPal's business practices," the company warned in its quarterly report.