eBay 2003 Annual Report Download - page 117

eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
damages for willful infringement). In October 2002, the court granted in part our summary judgment
motion, eÅectively invalidating the patent related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case. Trial of the matter began on April 23, 2003.
In May 2003, the jury returned a verdict Ñnding that eBay had willfully infringed one and Half.com had
willfully infringed both of the patents in the suit, awarding $35.0 million in compensatory damages. Both
parties Ñled post-trial motions, and in August 2003, the court entered judgment for MercExchange in the
amount of $29.5 million, plus pre-judgment interest and post-judgment interest in an amount to be
determined. We have appealed the judgment and MercExchange has Ñled a cross-appeal. We continue to
believe that the verdict against us in the trial was incorrect and intend to continue to defend ourselves
vigorously. However, even if successful, our defense against this action will continue to be costly. In
addition, as a precautionary measure, we have modiÑed certain functionality of our websites and business
practices in a manner which we believe makes them non-infringing. Nonetheless, if we are not successful
in appealing the court's ruling, we might be forced to pay signiÑcant additional damages and licensing fees.
Any such results could materially harm our business. While it is not possible to predict the ultimate legal
and Ñnancial implications of this lawsuit, in the light of the court's judgment, we have reassessed the
likelihood of a favorable outcome in accordance with SFAS No. 5, ""Accounting for Contingencies.'' Based
on this reassessment, we have taken an operating charge in the amount of $30.0 million, reÖecting the
$29.5 million judgment, together with our estimate for pre-judgment interest of $0.5 million. The charge
and the related estimated tax beneÑt of $12.1 million were reÖected in our operating results as patent
litigation expense in the second quarter of 2003.
In August 2002, Charles E. Hill & Associates, Inc. Ñled a lawsuit in the U.S. District Court for the
Eastern District of Texas (No. 2:02-CV-186) alleging that we and 17 other companies, primarily large
retailers, infringed three patents owned by Hill generally relating to electronic catalog systems and methods
for transmitting and updating data at a remote computer. The suit seeks an injunction against continuing
infringement, unspeciÑed damages, including treble damages for willful infringement, and interest, costs,
expenses, and fees. In January 2003, the case was transferred to the U.S. District Court for the Southern
District of Indiana. After pending in Indiana for almost a year, the case was transferred back to the
U.S. District Court for the Eastern District of Texas in December 2003. We are currently awaiting the
judge's scheduling order in the case. We believe that we have meritorious defenses and intend to defend
ourselves vigorously.
In February 2002, PayPal was sued in California state court (No. CV-805433) in a purported class
action alleging that its restriction of customer accounts and failure to promptly unrestrict legitimate
accounts violates California state consumer protection laws and is an unfair business practice and a breach
of PayPal's User Agreement. This action was re-Ñled with a diÅerent named plaintiÅ in June 2002
(No. CV-808441), and a related action was also Ñled in the U.S. District Court for the Northern District
of California in June 2002 (No. C-022777). In March 2002, PayPal was sued in the U.S. District Court
for the Northern District of California (No. C-02-1227) in a purported class action alleging that its
restrictions of customer accounts and failure to promptly unrestrict legitimate accounts violates federal and
state consumer protection and unfair business practice laws. The federal court has denied PayPal's motion
to compel individual arbitration as required by the PayPal User Agreement and has invalidated that
provision of the User Agreement. PayPal has appealed that decision to the U.S. Court of Appeals for the
Ninth Circuit. The two federal court actions have been consolidated into a single case, and the state court
action has been stayed pending developments in the federal case. In September 2003, the plaintiÅs Ñled
their motion for class certiÑcation. In November 2003, the parties reached agreement as to the monetary
terms for settlement of the disputes among them, and we fully accrued for this tentative settlement
amount in our income statement for the three months and year ended December 31, 2003 as the amounts
are considered both probable and reasonably estimable. The amount was not material to our results of
operations or cash Öows. The parties have notiÑed the court that they need time to negotiate and
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