eBay 2003 Annual Report Download - page 118

eBay Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (CONTINUED)
document other terms of any resulting agreement, and the class certiÑcation hearing has been rescheduled
for March 29, 2004. If PayPal is unable to prevail in these lawsuits or settle them on acceptable terms, it
may have to pay substantial damages and change its anti-fraud operations in a manner that will harm its
business. Even if PayPal's defense is successful, the litigation could damage PayPal's reputation, require
signiÑcant management time, and require changes to its customer service and operations that could
increase its costs and decrease the eÅectiveness of its anti-fraud program.
Following the announcement of the merger in July 2002, three purported class action complaints were
Ñled in the court of Delaware Court of Chancery by PayPal stockholders. These three cases have since
been consolidated into a single action. Two additional purported class action complaints were Ñled in the
Superior Court of the State of California by PayPal stockholders. The two California state court actions
were consolidated and stayed. All of the complaints named as defendants PayPal and each member of its
board of directors as well as eBay. The complaints were purported class actions that alleged that, among
other things, eBay controlled PayPal prior to the execution of their merger agreement, the defendants
breached Ñduciary duties they assertedly owed to PayPal's stockholders in connection with PayPal entering
into the merger agreement, and the exchange ratio in the merger was unfair and inadequate. The plaintiÅs
sought, among other things, an award of unspeciÑed compensatory damages. In January 2004, the plaintiÅs
in the consolidated Delaware actions voluntarily dismissed these actions without prejudice. The
consolidated California actions remain pending, but there has been no activity in them for over a year and
the plaintiÅs have indicated their intent to dismiss these actions.
In September 2002, Bank One Delaware (formerly known as First USA Bank, N.A.) Ñled a
complaint against PayPal in the U.S. District Court for District of Delaware (No. 02-CV-1462) alleging
infringement of two First USA patents relating to assigning an alias to a credit card so as to eliminate the
need for the physical presence of the card in a Ñnancial transaction. In September 2003, PayPal Ñled a
complaint against Bank One Corp., Bank One Delaware's parent, in the same district court alleging
infringement of a PayPal patent relating to a process that allows Internet users to make secure payments
and authenticated transactions over a computer network. On October 20, 2003, the parties Ñnalized the
terms of an agreement to dismiss both lawsuits. The terms of the settlement agreement are conÑdential
and did not have a material impact on our consolidated Ñnancial position, results of operations or cash
Öows.
In November 2003, AT&T Corporation Ñled a lawsuit against eBay and PayPal in the U.S. District
Court for the District of Delaware (No. 03-1051) alleging infringement of a patent entitled ""Mediation of
Transactions by a Communication System.'' AT&T claims that PayPal's and Billpoint's payment services
infringe its patent, and seeks monetary damages and injunctive relief. On December 24, 2003, eBay and
PayPal answered the complaint, denied infringement of AT&T's patent, and Ñled counterclaims. The case
is at a very early stage, with trial currently scheduled for April 2005. We believe that we have meritorious
defenses to this suit and intend to defend ourselves vigorously. Even if our defense is successful, the
litigation could be costly and require signiÑcant management time.
In May 2002, Tumbleweed Communications Corporation Ñled a complaint against PayPal alleging
infringement of two patents relating to electronic document delivery. Tumbleweed subsequently amended
the complaint to add eBay as a defendant, and later amended the complaint to add a third related patent.
On December 19, 2003, the parties entered into a settlement agreement dismissing the lawsuit, including
counterclaims Ñled by PayPal, and entered into a patent cross-licensing agreement. The settlement and
patent cross-licensing agreements did not have a material impact on our consolidated Ñnancial position,
results of operations or cash Öows.
Other third parties have from time to time claimed, and others may claim in the future, that we have
infringed their intellectual property rights. We have been notiÑed of several potential patent disputes, and
expect that we will increasingly be subject to patent infringement claims as our services expand in scope
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