|Fri Sept 10 2010 13:43:21|
eBay Wins Craigslist Lawsuit? Not So Fast
By: Ina Steiner
If you've read news reports about the eBay v Craigslist lawsuit ruling issued yesterday, you'd come away thinking eBay scored a major win. But break out the calculator and read through the judge's ruling, and you may form a different opinion, and discover that eBay's lawyers probably made a pretty big mistake in their approach to the case.
There are two major issues at stake: 1) Does eBay own 28.4% or 24.85% of Craigslist, and 2) does eBay get a seat on the board of Craigslist, which gives it access to confidential data.
What eBay Won
In the first issue, the judge ruled in favor of eBay and rescinded the Rights Plan adopted by Craigslist board members Craig Newmark and Jim Buckmaster that had diluted eBay's shares from 28.4% to 24.85%.
The Financial Times said that based on the terms of the initial investment, the 3.55 per cent eBay gained back would be worth at least $4 million, "but Craigslist has grown substantially over the past six years." Whatever that 3.55% may be worth today, it's a drop in the bucket to eBay.
In addition, some day, if Craig Newmark dies and Jim Buckmaster dies, eBay may be able to take over control of Craigslist.
What eBay Lost
The second issue is whether eBay regains a seat on the board of Craigslist. The ruling basically says no, that Buckmaster and Newmark were within their rights to move to a staggered board. In fact, the judge seems to chastise eBay when he wrote:
"By challenging the Staggered Board Amendments in this litigation, eBay, not Jim and Craig, seeks to obtain a benefit it was not able to obtain under the Shareholders' Agreement. In trying to undo the staggered board, and thereby protect its mathematical ability to fill a board seat, eBay is doing exactly what it accuses Jim and Craig of doing."
By losing its seat on the board, eBay has lost knowledge of and the ability to influence Craigslist's strategic decisions, as well as detailed confidential information it had previously been privy to.
Mistake in eBay Legal Strategy
Judge Chandler said he was puzzled because eBay did not bring a breach of contract claim or a claim for breach of the implied covenant, but rather tried to prove Buckmaster and Newmark breached their fiduciary duties. It's possible the judge is hinting that would have ruled differently had eBay claimed a breach of contract.
At minimum, that mistake cost eBay its legal fees. eBay had asked the Court to order Buckmaster and Newmark to reimburse Craigslist for all of the legal fees incurred in the lawsuit and for the legal fees relating to the 2008 Board Actions, and to award eBay the legal fees it incurred.
The judge wrote, "eBay is not entitled to fees under Section 9.8 of the Shareholders' Agreement because eBay did not bring a claim for breach of the Shareholders' Agreement or for breach of the implied covenant of good faith and fair dealing inherent in the Shareholders' Agreement."
He also said he believed Buckmaster and Newmark acted in good faith when adopting the Rights Plan.
More Litigation: Craigslist v eBay
The Judge wrote that he personally appreciated and admired Buckmaster's and Newmark's desire to be of service to communities. He said eBay and Craigslist were like oil and water, and compared them to David (Craigslist) and Goliath (eBay).
More litigation is ahead - Craigslist sued eBay, alleging that eBay engaged in unfair competition, misappropriation of trade secrets, false advertising, trademark infringement, and other wrongs.
Judge Chandler wrote, "In the California action, craigslist seeks, among other things, to have eBay restore the craigslist shares it owns to craigslist. Whether the California action is the proverbial stone in craigslist's sling that will fell the giant eBay remains to be seen."
Certainly eBay is Goliath when it comes to public relations. To bypass mainstream media's superficial take on the ruling and form your own opinion, take half an hour to read the ruling for yourself - you'll find it on this page on the Craigslist blog
I personally suspect the judge was taken aback at the cavalier manner in which eBay's representatives on Craigslist's Board of Directors admitted using confidential Craigslist data to launch eBay's own competing site, a practice with which then-CEO Meg Whitman seemed familiar.
The next trial is bound to be as interesting - and likely much more important - than the Delaware trial. Stay tuned!