eBay 2008 Annual Report Download - page 27

our company grows larger. We have in the past been forced to litigate such claims. We may also become more
vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act, the Lanham Act and the
Communications Decency Act are interpreted by the courts and as we expand geographically into jurisdictions
where the underlying laws with respect to the potential liability of online intermediaries such as ourselves are either
unclear or less favorable. Any claims or regulatory actions against us, whether meritorious or not, could be time
consuming result in costly litigation, damage awards, injunctive relief, or increased costs of business through
adverse judgment or settlement, require us to change our business practices in expensive ways, require significant
amounts of management time, result in the diversion of significant operational resources, or otherwise harm our
business.
Failure to deal effectively with fraudulent transactions and customer disputes would increase our loss rate
and harm our business.
Beginning in October 2008, buyers who pay for transactions on eBay.com with PayPal are protected on
eligible transactions for the full amount of an item’s purchase price if the buyer does not receive the goods they
purchased or if the goods differ significantly from what was described by the seller. Furthermore, U.S. sellers on
eBay.com have received improved seller protection for eligible transactions in which the seller is paid with PayPal,
in that they are covered against payment reversals due to buyer claims of an unauthorized payment or an item that
was not received, so long as the seller follows specified shipping and handling practices. We also enhanced our
buyer and seller protections in certain eBay international marketplaces. These changes to PayPal’s buyer protection
program could result in future increases and fluctuations in our Payments transaction loss rate. For the fiscal years
ended December 31, 2007 and December 31, 2008, our Payments transaction losses (including both direct losses
and buyer protection payouts) totaled $139.3 million and $171.5 million, representing 0.29% and 0.29% of our
net Total Payment Volume in each period, respectively.
PayPal’s highly automated and liquid payment service makes PayPal an attractive target for fraud. In
configuring its service, PayPal continually strives to maintain the right balance of appropriate measures to promote
both convenience and security for customers. Identity thieves and those committing fraud using stolen credit card or
bank account numbers can potentially steal large amounts of money from businesses such as PayPal. We believe
that several of PayPal’s current and former competitors in the electronic payments business have gone out of
business or significantly restricted their businesses largely due to losses from this type of fraud. While PayPal uses
advanced anti-fraud technologies, we expect that technically knowledgeable criminals will continue to attempt to
circumvent PayPal’s anti-fraud systems using increasingly sophisticated methods. In addition, PayPal’s service
could be subject to employee fraud or other internal security breaches, and PayPal may be required to reimburse
customers for any funds stolen as a result of such breaches. Merchants could also request reimbursement, or stop
using PayPal, if they are affected by buyer fraud.
PayPal incurs substantial losses from merchant fraud, including claims from customers that merchants have
not performed or that their goods or services do not match the merchant’s description. PayPal also incurs losses from
claims that the customer did not authorize the purchase, from buyer fraud, from erroneous transmissions, and from
customers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition to the
direct costs of such losses, if they are related to credit card transactions and become excessive, they could result in
PayPal losing the right to accept credit cards for payment. If PayPal were unable to accept credit cards, the velocity
of trade on eBay could decrease and result in corresponding decreases in our net Total Payment Volume, in which
case our business would further suffer. Bill Me Later is similarly subject to the risk of fraudulent activity associated
with merchants, users of the Bill Me Later service and third parties handling its user information, which could
increase our exposure to transaction losses and reduce the profitability of Bill Me Later’s business. Our Payments
business has taken measures to detect and reduce the risk of fraud, but these measures need to be continually
improved and may not be effective against new and continually evolving forms of fraud or in connection with new
product offerings. If these measures do not succeed, our business will suffer.
eBay faces similar risks with respect to fraudulent activities on its websites. eBay periodically receives
complaints from users who may not have received the goods that they had purchased. In some cases individuals have
been arrested and convicted for fraudulent activities using our websites. eBay also receives complaints from sellers
who have not received payment for the goods that a buyer had contracted to purchase. Non-payment may occur
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