From handbags to diamonds, eBay a target, but safe

By Alexandria Sage - Analysis

SAN FRANCISCO (Reuters) - A French court dealt eBay Inc (EBAY.O) a blow for selling fake luxury goods, but while the Internet auctioneer's business model is unlikely to change, further legal setbacks could shave its margins.

In the near term, the biggest damage could be to the eBay brand, which promises shoppers the widest range of goods in a marketplace that connects millions of buyers and sellers.

EBay has already upped its spending on people and technology to try to keep counterfeit items off its site, and further investments prompted by unfavorable court rulings would be mostly incremental at this point, analysts say.

"Does that destroy the business model or fundamentally change it?" asked Global Crown Capital analyst Martin Pyykkonen. "No, not really. It incrementally puts more pressure on margins ... to constantly police this and add headcount to their trust division."

A French court ordered eBay on Monday to pay $61 million to LVMH (LVMH.PA), parent of the Louis Vuitton and Dior brands, for failing to properly monitor auctions.

In the United States, a federal judge is due to rule on whether it is the responsibility of eBay or plaintiff Tiffany & Co (TIF.N) to police the site for fake Tiffany diamonds.

Legal experts were not predicting the outcome of the eBay-Tiffany case, which will decide the ground rules of doing business in cyberspace and whether traditional notions of trademark and copyright protections deserve greater protection on the Web.

Although the lawsuits are a distraction for San Jose, California-based eBay, the bigger issue for investors is how the company revives stalled growth. Adjusted operating margins have stayed stable in the mid-30s due to cost controls, said Pyykkonen, but expansion will rely on sales growth.

"Unless they can accelerate the growth in their core business, all this other stuff is minor," said Pacific Crest analyst Steve Weinstein. "(The Tiffany lawsuit) is not what's going to drive the stock."

Shares of eBay are down 18 percent since January as the company has made dozens of changes to improve how its core auction business works on behalf of buyers and sellers.

"Courts still go, 'We don't have a clear definitive ruling from high enough courts to know if there is potential for trademark liability,'" said J. Michael Huget, head of the intellectual property practice at the law firm Butzel Long.

Sally Abel, a lawyer who chairs Silicon Valley law firm Fenwick & West's trademark group, said U.S. courts have been siding with a more open, "buyer-beware" marketplace. She cited recent cases where Google Inc (GOOG.O) has prevailed in lawsuits challenging its practice of letting rivals bid for trademarked search terms in its ads.

RESPONSIBILITY OF MIDDLEMEN?

Huget countered that eBay's core defense -- which it already provides sufficient trademark protections for brands willing to work with it to identify counterfeits -- took a beating from the French court and could do so again in the United States.

"The more you start getting hit for this, I don't care where it is, it makes it harder to justify this defense. I see that becoming more and more of a problem for them," Huget said. "I would be sweating this one a little bit."