eBay 2003 Annual Report Download - page 18

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.
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-02-2777). 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 tentatively reached agreement as to the
monetary terms for settlement of the disputes and we fully accrued for this tentative settlement amount in
our income statement for the three months and year ended December 31, 2003. The parties have notiÑed
the court that they need time to negotiate and 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 PayPal merger in July 2002, three purported class action
complaints were Ñled in the 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
16