EBay, Craigslist battle heads to court

Wed Dec 2, 2009 4:45pm EST

* Trial set to begin Dec. 7 in Delaware

* Case hinges on size of eBay's minority stake

* Craigslist cites threat from eBay

By Alexandria Sage

SAN FRANCISCO, Dec 2 (Reuters) - It's a story fraught with accusations of broken promises, backroom deals and deception, leaving an established Internet giant fighting to preserve its valuable stake in a well-loved classified advertising website.

A lawsuit filed by EBay Inc (EBAY.O) against Craigslist heads to a Delaware state courtroom next Monday, for a trial that promises to reveal the inner workings of two benchmark Web companies and bring to the witness stand two Internet pioneers: former eBay Chief Executive Meg Whitman and Craigslist founder Craig Newmark.

The twice-delayed trial will likely underscore the glaring differences in the companies' approaches to business.

EBay, one of the high-flyers in the dot-com boom, pioneered online auctions and spurred millions of people around the world to sell and buy on the Web.

Despite generating $8.5 billion of revenue in 2008 and employing thousands of people, the San Jose-based company has been forced to broaden its market to better compete and expand beyond its traditional online auctions.

In contrast, privately held Craigslist, with only a few dozen employees, is now the top U.S. online classifieds site, beloved for its mostly-free service to help people find homes, adopt pets or sell junk from their garages.

Craigslist executives say they are driven by community, not a lust for profit.

At issue is eBay's minority ownership in San Francisco's Craigslist, a company that eBay says could potentially be worth several billion dollars.

In its April 2008 lawsuit, eBay claimed that Newmark and Chief Executive James Buckmaster hatched a "coercive plan" in 2007 and conducted "clandestine transactions" that diluted eBay's stake to 24.85 percent from 28.4 percent.

Because eBay's ownership fell below 25 percent, it lost its seat on Craigslist's board.

EBay said an original shareholder agreement to be produced in court clearly outlined each party's rights and responsibilities.

"We are very confident we acted properly throughout the relationship," Deputy General Counsel Mary Huser said in an interview. "We were open and honest regarding what we were doing and our intentions."

A Delaware Chancery Court judge in October dismissed two eBay charges, but five counts including breach of fiduciary duty and issues related to the dilution of eBay's stake remain.

UNCLEAN HANDS?

Craigslist, in a separate lawsuit, filed in San Francisco Superior Court a month after eBay sued in Delaware, charged eBay with unfair competition, misappropriation of proprietary information, false advertising, trademark infringement and other deceptive practices.

In both cases, Craigslist claims that eBay used its seat on the board to obtain information and expertise to launch a competing classified advertising business, all the while denying that was its intention.

In the run-up to the trial of the Delaware lawsuit, which is expected to last two weeks, Craigslist has depicted its larger rival in an unsavory light.

"EBay has unclean hands," fueled by a frustrated desire to own Craigslist outright, Craigslist said in a pretrial brief.

Craigslist claimed that after eBay in 2004 bought shares from one of Craigslist's original investors, worried perhaps that a rival such as Google Inc (GOOG.O) might swoop in if it tarried, Whitman maintained that eBay had no designs on the company, and that Craigslist would become its "play in classifieds."

But Craigslist said eBay never revealed that it was developing its own classified site, Kijiji, which it launched internationally in 2005 and in the United States in 2007.

"If it could not own Craigslist, eBay would exploit its position as an insider and use Craigslist's confidential information, experience, skill and innovations against Craigslist," Craigslist wrote.

Whitman is now a Republican candidate to succeed Arnold Schwarzenegger as governor of California. Her spokesman declined to comment, referring questions to eBay.

STEALING CUSTOMERS?

Craigslist also claims that eBay used deceptive tactics to direct traffic away from its site.

Legal briefs show online ads allegedly paid for by eBay used Craigslist's name but diverted users to Kijiji or eBay.

Craigslist also contended that eBay, through its board seat, obtained confidential information such as traffic and listings data, and passed it to Kijiji executives. Former eBay board member Josh Silverman spearheaded the Kijiji launch, it said.

Current eBay Chief Executive John Donahoe is not expected to testify. He has tried to play down the significance of the trial, saying it is simply an issue of whether eBay owns 25 percent or 28 percent of Craigslist. He calls eBay's stake in the company a "nice investment."

The Delaware case is eBay Domestic Holdings Inc v Newmark, et al, Delaware Chancery Court, No. 3705-CC. (Editing by Steve Orlofsky) ((alexandria.sage@thomsonreuters.com, +1-415-677-3923; Reuters Messaging: alexandria.sage.reuters.com@reuters.net)) ((See blogs.reuters.com/shop-talk/ for Shop Talk -- Reuters' retail and consumer blog.))

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