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Item 1:
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Legal Proceedings
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In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex’s trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolex’s appeal
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and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court, and a hearing is expected in
December 2006. In September 2004, the German Federal Supreme
Court issued its written opinion in favor of Rolex in a case
involving an unrelated company, ricardo.de AG, but somewhat
comparable legal theories. Although it is not yet clear what the
ultimate effect of the reasoning of the German Federal Supreme
Court’s ricardo.de decision will have when applied to eBay,
we believe the Court’s decision has resulted in an increase
in similar litigation against us in Germany, although we do not
currently believe that it will require a significant change in
our business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No.
2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). In October 2002, the court granted in part our
summary judgment motion, effectively invalidating the patent
related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case.
Trial of the matter began in April 2003. In May 2003, the jury
returned a verdict finding that eBay had willfully infringed one
and Half.com had willfully infringed both of the patents in the
suit, awarding $35 million in compensatory damages. Both
parties filed post-trial motions, and in August 2003, the court
entered judgment for MercExchange in the amount of approximately
$30 million plus pre-judgment interest and post-judgment
interest in an amount to be determined, while denying
MercExchange’s request for an injunction and
attorneys’ fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys’ fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district court’s
refusal to award attorneys’ fees or enhanced damages
against us; (4) reversed the district court’s order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district court’s refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the
U.S. Supreme Court for review on certain issues. We filed
our petition for review with the U.S. Supreme Court in July
2005, and in November 2005, the Court granted our petition for
review. Oral arguments in the case were heard by the Court in
March 2006, and the Court’s decision is expected in the
second quarter of 2006. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that substantial questions exist regarding the
validity of the claims contained in them. In January 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to online
auctions; in March 2005, the Patent and Trademark Office issued
an initial ruling rejecting all of the claims contained in the
patent that related to electronic consignment systems; and in
May 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to multiple database searching. In March 2006, the
Patent and Trademark Office affirmed its earlier ruling
rejecting the claims contained in the patent that related to
electronic consignment systems. Even if successful, our
litigation of these matters will continue to be costly. In
addition, as a precautionary measure, we have modified certain
functionality of our websites and business practices in a manner
which we believe would avoid any further infringement. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if we are not successful in appealing or modifying
the court’s ruling, and if the modifications to the
functionality of our websites and business practices are not
sufficient to make them non-infringing, we would likely be
forced to pay significant additional damages and licensing fees
and/or modify our business practices in an adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed 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
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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, unspecified
damages, including treble damages for willful infringement, and
interest, costs, expenses, and fees. The case was transferred to
the U.S. District Court for the Southern District of
Indiana in January 2003, but was transferred back to the
U.S. District Court for the Eastern District of Texas in
December 2003. A claim construction hearing was held in August
2005. In February 2006, we entered into and paid for a
settlement agreement with the plaintiffs in the case under which
we will be licensed under all of the patents at issue.
In February 2002, PayPal was sued in California state court (No.
CV-805433) in a purported class action alleging that its
limiting access to customer accounts and failure to promptly
restore access to 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-filed
with a
different named plaintiff in June 2002
(No.
CV-808441),
and a similar action was also filed 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 limiting access to
customer accounts and failure to promptly restore access to
legitimate accounts violates federal and state consumer
protection and unfair business practice laws. The two federal
court actions were consolidated into a single case, and the
state court action was stayed pending developments in the
federal case. In June 2004, the parties announced that they had
reached a proposed settlement. The settlement received approval
from the federal court on November 2, 2004, and the state
court action was dismissed with prejudice in March 2005. In the
settlement, PayPal does not acknowledge that any of the
allegations in the case are true. Under the terms of the
settlement, certain PayPal account holders are eligible to
receive payment from a settlement fund of $9.25 million,
less administrative costs and the amount awarded to
plaintiffs’ counsel by the court. That sum is being
distributed to class members who have submitted timely claims in
accordance with the settlement’s plan of allocation. The
plan of allocation for the portion of the settlement fund that
remains undistributed was approved by the District Court in
March 2006. Substantially all of the cost associated with the
settlement was reserved in 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay engaged
in improper billing practices as the result of problems with the
rollout of a new billing software system in the second and third
quarters of 2004. The lawsuit sought damages and injunctive
relief. An amended complaint was filed in January 2005, dropping
one plaintiff, changing the capacity of the other plaintiff to
that of representative plaintiff, and adding seven additional
eBay users as plaintiffs. The amended complaint expanded its
claim to include numerous alleged improper billing practices
from September 2003 until the present. In February 2005, eBay
filed a motion to strike and a demurrer seeking to dismiss the
complaint. In April 2005, the court sustained portions of the
demurrer, but granted the plaintiffs leave to amend their
complaint. The plaintiffs filed a second amended complaint,
dropping the last original plaintiff and again adding new
plaintiffs. We filed a motion to strike and a demurrer regarding
the plaintiffs’ second amended complaint. In July 2005, the
court again sustained a portion of the demurrer and again
granted the plaintiffs leave to amend their complaint, and the
plaintiffs filed a third amended complaint. In December 2005,
the plaintiffs filed a fourth amended complaint, dropping
several plaintiffs. In April 2006, the court approved a
settlement agreement entered into by the parties. Under the
terms of the settlement, the plaintiffs agreed to dismiss the
lawsuit and release eBay from all claims, and eBay agreed to
make a $250,000 payment primarily directed to charity. The
estimated settlement was accrued in our consolidated income
statement for the three months ended March 31, 2006.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute “shill bidding” for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of California’s
Auction Act, California’s Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint, and a hearing on the demurrer was held
in February 2006. In March 2006, the parties reached tentative
agreement on the terms of a settlement. The court must approve
the terms of the
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settlement in order for it to become final. The estimated
settlement was accrued in our consolidated income statement for
the year ended December 31, 2005.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPal’s Buyer Protection
Policy, users’ chargeback rights, and the effects of
users’ choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court
(No.
05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. Following
several mediation sessions, the parties reached a tentative
settlement in December 2005 and executed a Memorandum of
Understanding in March 2006. The parties are engaged in the
process of finalizing the settlement documentation. The court
must approve the terms of the settlement in order for it to
become final. The estimated settlement was accrued in our
consolidated income statement for the year ended
December 31, 2005.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
Communications businesses. 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 like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
Risk Factors That May Affect Results of Operations and
Financial Condition
The risks and uncertainties described below are not the only
ones facing us. Other events that we do not currently anticipate
or that we currently deem immaterial also may affect our results
of operations and financial condition.
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Our operating results may fluctuate.
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Our operating results have varied on a quarterly basis during
our operating history. Our operating results may fluctuate
significantly as a result of a variety of factors, many of which
are outside our control. Factors that may affect our operating
results include the following:
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our ability to retain an active user base, to attract new users,
and to encourage existing users to list items for sale, purchase
items through our websites, or use our payment service or
communication software and products;
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the volume, size, timing, and completion rate of transactions
using our websites or technology;
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the amount and timing of operating costs and capital
expenditures relating to the maintenance and expansion of our
businesses, operations, and infrastructure;
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our ability to integrate, manage, and profitably expand our
newly-acquired Skype business;
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our ability to successfully integrate and manage other recent
and prospective acquisitions;
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regulatory actions imposing obligations on our businesses
(including Skype) or our users;
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the actions of our competitors, including the introduction of
new sites, services, and products;
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consumer confidence in the safety and security of transactions
using our websites or technology;
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the cost and availability of online and traditional advertising,
and the success of our brand building and marketing campaigns;
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new laws or regulations, or interpretations of existing laws or
regulations, that harm the Internet, electronic commerce, online
payments or communications, or our business models;
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our ability to comply with the requirements of entities whose
services are required for our operations, such as credit card
associations;
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our ability to upgrade and develop our systems, infrastructure,
and customer service capabilities to accommodate growth and to
improve our websites at a reasonable cost while maintaining 24/7
operations;
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technical difficulties or service interruptions involving our
websites or services provided to us or our users by third
parties;
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the costs and results of litigation that involves us;
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our ability to expand PayPal’s product offerings outside of
the U.S. (including our ability to obtain any necessary
regulatory approvals);
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our ability to increase the acceptance of PayPal by online
merchants outside of the eBay marketplaces;
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our ability to develop product enhancements at a reasonable cost
and to develop programs and features in a timely manner;
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our ability to manage PayPal’s transaction loss and credit
card chargeback rates and payment funding mix;
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the success of our geographic and product expansions;
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our ability to attract new personnel in a timely and effective
manner and to retain key employees;
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the continued financial strength of our technology suppliers and
other parties with whom we have commercial relations;
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continued consumer acceptance of the Internet as a medium for
commerce and communication in the face of increasing publicity
about fraud, spoofing, viruses, and other dangers of the
Internet;
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general economic conditions and those economic conditions
specific to the Internet and
e-commerce
industries; and
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geopolitical events such as war, threat of war, or terrorist
actions.
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The increased variety of services offered on our websites makes
it difficult for us to forecast the level or source of our
revenues or earnings accurately. In view of the rapidly evolving
nature of our business and our limited operating history, we
believe that
period-to
-period
comparisons of our operating results may not be meaningful, and
you should not rely upon them as an indication of future
performance. We do not have backlog, and substantially all of
our net revenues each quarter come from transactions involving
sales or payments during that quarter. Due to the inherent
difficulty in forecasting revenues it is also difficult to
forecast income statement expenses as a percentage of net
revenues. Quarterly and annual income statement
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expenses as a percentage of net revenues may be significantly
different from historical or projected rates. Our operating
results in one or more future quarters may fall below the
expectations of securities analysts and investors. In that
event, the trading price of our common stock would almost
certainly decline.
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We may not maintain our level of profitability or rates of
growth.
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We believe that our continued profitability and growth will
depend in large part on our ability to do the following:
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attract new users, keep existing users active on our websites,
and increase the activity levels of our active users;
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react to changes in consumer use of the Internet and develop new
sources of monetization for some of our services;
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manage the costs of our business, including the costs associated
with maintaining and developing our websites, customer support,
transaction and chargeback rates, and international and product
expansion;
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maintain sufficient transaction volume to attract buyers and
sellers;
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increase the awareness of our brands; and
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provide our customers with superior community, customer support,
and trading and payment experiences.
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We invest heavily in marketing and promotion, customer support,
and further development of the operating infrastructure for our
core and recently acquired operations. Some of this investment
entails long-term contractual commitments. As a result, we may
be unable to adjust our spending rapidly enough to compensate
for any unexpected revenue shortfall, which may harm our
profitability. In addition, we are spending in advance of
anticipated growth, which may also harm our profitability.
Growth rates in our most established markets, such as Germany
and the U.S., have declined over time and may continue to do so
as the existing base of users and transactions becomes larger.
The expected future growth of our PayPal, Skype and Shopping.com
businesses may also cause downward pressure on our profit margin
because those businesses have lower gross margins than our eBay
trading platforms.
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There are many risks associated with our international
operations.
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Our international expansion has been rapid and we have only
limited experience in many of the countries in which we now do
business. Our international business, especially in Germany, the
U.K., and South Korea, has also become critical to our revenues
and profits. Net revenues outside the United States accounted
for approximately 46% of our net revenues in the first quarter
of 2005 and 2006. Expansion into international markets requires
management attention and resources and requires us to localize
our service to conform to local cultures, standards, and
policies. The commercial, Internet, and transportation
infrastructure in lesser-developed countries may make it
difficult for us to replicate our business model. In many
countries, we compete with local companies who understand the
local market better than we do, and we may not benefit from
first-to
-market
advantages. We may not be successful in expanding into
particular international markets or in generating revenues from
foreign operations. For example, in 2002 we withdrew our eBay
marketplace offering from the Japanese market. Even if we are
successful, we expect the costs of operating new sites to exceed
our net revenues for at least 12 months in most countries.
As we continue to expand internationally, including through the
expansion of PayPal, Skype, and Shopping.com, we are subject to
risks of doing business internationally, including the following:
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regulatory requirements, including regulation of Internet
services, auctioneering, professional selling, distance selling,
communications, banking, and money transmitting, that may limit
or prevent the offering of our services in some jurisdictions,
prevent enforceable agreements between sellers and buyers,
prohibit the listing of certain categories of goods, require
product changes, require special licensure, subject us to
special taxes, or limit the transfer of information between eBay
and our affiliates;
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legal uncertainty regarding our liability for the listings and
other content provided by our users, including uncertainty as a
result of less Internet-friendly legal systems, unique local
laws, and lack of clear precedent or applicable law;
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difficulties in integrating with local payment providers,
including banks, credit and debit card associations, and
electronic fund transfer systems;
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differing levels of retail distribution, shipping, and
communications infrastructures;
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different employee/employer relationships and the existence of
workers’ councils and labor unions;
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difficulties in staffing and managing foreign operations;
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longer payment cycles, different accounting practices, and
greater problems in collecting accounts receivable;
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potentially adverse tax consequences, including local taxation
of our fees or of transactions on our websites;
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higher telecommunications and Internet service provider costs;
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strong local competitors;
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different and more stringent consumer protection, data
protection, and other laws;
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cultural ambivalence towards, or non-acceptance of, online
trading;
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seasonal reductions in business activity;
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expenses associated with localizing our products, including
offering customers the ability to transact business in the local
currency;
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laws and business practices that favor local competitors or
prohibit foreign ownership of certain businesses;
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profit repatriation restrictions, foreign currency exchange
restrictions, and exchange rate fluctuations;
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volatility in a specific country’s or region’s
political or economic conditions; and
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differing intellectual property laws.
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Some of these factors may cause our international costs of doing
business to exceed our comparable domestic costs. As we expand
our international operations and have additional portions of our
international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in
collecting accounts receivable and risks relating to foreign
currency exchange rate fluctuations. The impact of currency
exchange rate fluctuations is discussed in more detail under
“We are exposed to fluctuations in currency exchange
rates,” below.
We are continuing to expand PayPal’s services
internationally. We have limited experience with the payments
business outside of the U.S. In some countries, expansion
of PayPal’s business may require a close commercial
relationship with one or more local banks or a shared ownership
interest with a local entity. We do not know if these or other
factors may prevent, delay, or limit PayPal’s expansion or
reduce its profitability. Any limitation on our ability to
expand PayPal internationally could harm our business.
We maintain a portion of Shopping.com’s research and
development facilities and personnel in Israel, and as a result,
political, economic and military conditions in Israel affect
those operations. Increased hostilities or terrorism within
Israel or armed hostilities between Israel and neighboring
states could make it more difficult for us to continue our
operations in Israel, which could increase our costs. In
addition, many of Shopping.com’s employees in Israel could
be required to serve in the military for extended periods of
time under emergency circumstances. Shopping.com’s Israeli
operations could be disrupted by the absence of employees due to
military service, which could adversely affect its business.
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Our operations in China are subject to risks and
uncertainties relating to the laws and regulations of the
People’s Republic of China.
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Our operations in the People’s Republic of China, or PRC,
are conducted through our EachNet subsidiary and through a
PayPal subsidiary. EachNet and PayPal are Delaware corporations
and foreign persons under the laws of the PRC and are subject to
many of the risks of doing business internationally described
above in “There are many risks associated with our
international operations.” The PRC currently regulates its
Internet sector through regulations restricting the scope of
foreign investment and through the enforcement of content
restrictions on the Internet. While many aspects of these
regulations remain unclear, they purport to limit and require
licensing of various aspects of the provision of Internet
information services. These regulations have created substantial
uncertainties regarding the legality of foreign investments in
PRC Internet companies, including EachNet and PayPal, and the
business operations of such companies. In order to meet local
ownership and regulatory licensing requirements, the eBay
EachNet website is operated through a foreign-owned enterprise
indirectly owned by eBay’s European operating entity, which
acts in cooperation with a local PRC company owned by certain
local employees. The PayPal China website is operated through a
foreign-owned enterprise owned by PayPal’s International
headquarters entity, which acts in cooperation with a local PRC
company owned by certain local employees. We believe
EachNet’s and PayPal’s current ownership structures
comply with all existing PRC laws, rules, and regulations. There
are, however, substantial uncertainties regarding the
interpretation of current PRC laws and regulations, and it is
possible that the PRC government will ultimately take a view
contrary to ours. The People’s Bank of China, or PBOC, has
recently proposed guidelines for payment settlement
organizations which, may require PayPal to act in cooperation
with a different local PRC entity and obtain approval from the
PBOC. There are also uncertainties regarding EachNet’s and
PayPal’s ability to enforce contractual relationships they
have entered into with respect to management and control of the
company’s business. If EachNet or PayPal were found to be
in violation of any existing or future PRC laws or regulations,
it could be subject to fines and other financial penalties, have
its business and Internet content provider licenses revoked, or
be forced to discontinue its business entirely. In addition, any
finding of a violation by EachNet or PayPal of PRC laws or
regulations could make it more difficult for us to launch new or
expanded services in the PRC.
Although Skype does not conduct operations in the PRC directly,
it makes its product available through a joint venture and its
product is used by residents of the PRC. PRC regulations
surrounding VoIP telephony are unclear or non-existent, and the
PRC or one of more of its provinces may adopt regulations that
restrict or prohibit the use of Skype’s product.
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We are exposed to fluctuations in currency exchange
rates.
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Because we conduct a significant and growing portion of our
business outside the United States but report our results in
U.S. dollars, we face exposure to adverse movements in
currency exchange rates. In connection with its multi-currency
service, PayPal fixes exchange rates twice per day, and may face
financial exposure if it incorrectly fixes the exchange rate or
if exposure reports are delayed. PayPal also holds some
corporate and customer funds in
non-U.S.
currencies,
and thus its financial results are affected by the translation
of these
non-U.S.
currencies
into U.S. dollars. In addition, the results of operations
of our internationally focused websites are exposed to foreign
exchange rate fluctuations as the financial results of the
applicable subsidiaries are translated from the local currency
into U.S. dollars upon consolidation. If the
U.S. dollar weakens against foreign currencies, the
translation of these foreign-currency-denominated transactions
will result in increased net revenues, operating expenses, and
net income. Similarly, our net revenues, operating expenses, and
net income will decrease if the U.S. dollar strengthens
against foreign currencies. The change in weighted average
foreign currency exchange rates in the first quarter of 2006
relative to 2005 resulted in lower net revenues of approximately
$50.2 million and lower aggregate cost of revenues and
operating expenses of approximately $25.1 million. As
exchange rates vary, net sales and other operating results, when
translated, may differ materially from expectations. In
particular, to the extent the U.S. dollar strengthens
against the Euro and British Pound, our European revenues and
profits will be reduced as a result of these translation
adjustments. In addition, to the extent the U.S. dollar
strengthens against the Euro and the British Pound, cross-border
trade related to purchases of dollar-denominated goods by
non-U.S.
purchasers
may decrease,
42
and that decrease may not be offset by a corresponding increase
in cross-border trade involving purchases by U.S. buyers of
goods denominated in other currencies. While we from time to
time enter into transactions to hedge portions of our foreign
currency translation exposure, it is impossible to perfectly
predict or completely eliminate the effects of this exposure.
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Skype depends on key technology that is licensed from
third parties.
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Skype licenses technology underlying certain components of its
software from third parties it does not control, including the
technology underlying its
peer-to
-peer
architecture and firewall traversal technology, and the audio
and video compression/decompression used to provide high sound
and video quality. Both of these technologies are key to the
software Skype provides. In addition, various other technologies
used by Skype are licensed from third parties. Although Skype
has contracts in place with its third party technology
providers, there can be no assurance that the licensed
technology or other technology that we may seek to license in
the future will continue to be available on commercially
reasonable terms, or at all. The loss of, or inability to
maintain, existing licenses could result in delays, a decrease
in service quality, or a complete failure of Skype’s
product until equivalent technology or suitable alternatives can
be developed, identified, licensed and integrated. While we
believe Skype has the ability to either extend these licenses on
commercially reasonable terms or identify and obtain or develop
suitable alternative products, the costs associated with
licensing or developing such products could be high. Any failure
to maintain these licenses on commercially reasonable terms or
to license or develop alternative technologies would harm
Skype’s business.
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Acquisitions could result in operating difficulties,
dilution, and other harmful consequences.
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We have acquired a number of businesses in the past, and
completed eight acquisitions in 2005. We expect to continue to
evaluate and consider a wide array of potential strategic
transactions, including business combinations, acquisitions and
dispositions of businesses, technologies, services, products and
other assets, including interests in our existing subsidiaries.
At any given time we may be engaged in discussions or
negotiations with respect to one or more of these types of
transactions. Any of these transactions could be material to our
financial condition and results of operations. The process of
integrating any acquired business may create unforeseen
operating difficulties and expenditures and is itself risky. The
areas where we may face difficulties include:
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diversion of management time, as well as a shift of focus from
operating the businesses to issues related to integration and
administration, particularly given the large number and size and
varying scope of our recent acquisitions, and, in the case of
Skype, the complex earn-out structure associated with the
transaction;
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declining employee morale and retention issues resulting from
changes in, or acceleration of, compensation, or changes in
reporting relationships, future prospects, or the direction of
the business;
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the need to integrate each company’s accounting,
management, information, human resource and other administrative
systems to permit effective management, and the lack of control
if such integration is delayed or not implemented;
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the need to implement controls, procedures and policies
appropriate for a larger public company at companies that prior
to acquisition had lacked such controls, procedures and
policies; and
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in some cases, including in connection with PayPal’s recent
acquisition of VeriSign’s payment gateway business, the
need to transition operations, users, and/or customers onto our
existing platforms.
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Foreign acquisitions involve special risks, including those
related to integration of operations across different cultures
and languages, currency risks, and the particular economic,
political, and regulatory risks associated with specific
countries. Moreover, we may not realize the anticipated benefits
of any or all of our acquisitions. Future acquisitions or
mergers may result in a need to issue additional equity
securities, spend our cash, or incur debt, liabilities, or
amortization expenses related to intangible assets, any of which
could reduce our profitability and harm our business.
43
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System failures could harm our business.
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We have experienced system failures from time to time, and any
interruption in the availability of our websites will reduce our
current revenues and profits, could harm our future revenues and
profits, and could subject us to regulatory scrutiny.
eBay’s primary website has been interrupted for periods of
up to 22 hours, and our PayPal site suffered intermittent
unavailability over a five-day period in October 2004. Any
unscheduled interruption in our services results in an
immediate, and possibly substantial, loss of revenues. Frequent
or persistent interruptions in our services could cause current
or potential users to believe that our systems are unreliable,
leading them to switch to our competitors or to avoid our sites,
and could permanently harm our reputation and brands. These
interruptions increase the burden on our engineering staff,
which, in turn, could delay our introduction of new features and
services on our sites. Because PayPal is a regulated financial
entity, frequent or persistent site interruptions could lead to
regulatory inquiries. These inquiries could result in fines,
penalties, or mandatory changes to PayPal’s business
practices, and ultimately could cause PayPal to lose existing
licenses it needs to operate or prevent it from obtaining
additional licenses that it needs to expand. Finally, because
our customers may use our products for critical transactions,
any system failures could result in damage to our
customers’ businesses. These customers could seek
significant compensation from us for their losses. Even if
unsuccessful, this type of claim likely would be time consuming
and costly for us to address.
Although our systems have been designed around industry-standard
architectures to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or
interruption from earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, computer viruses,
computer
denial-of
-service
attacks, and similar events. Some of our systems, including our
Shopping.com and Skype websites, are not fully redundant, and
our disaster recovery planning is not sufficient for all
eventualities. Our systems are also subject to break-ins,
sabotage, and intentional acts of vandalism. Despite any
precautions we may take, the occurrence of a natural disaster, a
decision by any of our third-party hosting providers to close a
facility we use without adequate notice for financial or other
reasons, or other unanticipated problems at our hosting
facilities could result in lengthy interruptions in our
services. We do not carry business interruption insurance
sufficient to compensate us for losses that may result from
interruptions in our service as a result of system failures.
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Our growth will depend on our ability to develop our
brands, and these efforts may be costly.
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Our historical growth has been largely attributable to word of
mouth, and to frequent and high visibility national and local
media coverage. We believe that continuing to strengthen our
brands will be critical to achieving widespread acceptance of
our services, and will require an increased focus on active
marketing efforts. The demand for and cost of online and
traditional advertising have been increasing, and may continue
to increase. Accordingly, we will need to spend increasing
amounts of money on, and devote greater resources to,
advertising, marketing, and other efforts to create and maintain
brand loyalty among users. During 2004 and 2005, we
significantly increased the number of brands we are supporting,
adding Rent.com, Shopping.com, Kijiji, and Skype, among others.
Each of these brands requires its own resources, increasing the
costs of our branding efforts. Brand promotion activities may
not yield increased revenues, and even if they do, any increased
revenues may not offset the expenses incurred in building our
brands. If we do attract new users to our services, they may not
conduct transactions using our services on a regular basis. If
we fail to promote and maintain our brands, or if we incur
substantial expenses in an unsuccessful attempt to promote and
maintain our brands, our business would be harmed.
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Our business and users may be subject to sales tax and
other taxes.
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The application of indirect taxes (such as sales and use tax,
value added tax, or VAT, goods and services tax, business tax,
and gross receipt tax) to
e-commerce
businesses
such as eBay and our users is a complex and evolving issue. Many
of the fundamental statutes and regulations that impose these
taxes were established before the growth of the Internet and
e-commerce.
In many
cases, it is not clear how existing statutes apply to the
Internet or
e-commerce.
In addition, some jurisdictions have implemented or may
implement laws
44
specifically addressing the Internet or some aspect of
e-commerce.
The
application of existing, new, or future laws could have adverse
effects on our business.
Several proposals have been made at the U.S. state and
local level that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if
adopted, could substantially impair the growth of
e-commerce,
and could
diminish our opportunity to derive financial benefit from our
activities. The U.S. federal government’s moratorium
on states and other local authorities imposing access or
discriminatory taxes on the Internet is scheduled to expire in
November 2007. This moratorium does not prohibit federal, state,
or local authorities from collecting taxes on our income or from
collecting taxes that are due under existing tax rules.
In conjunction with the Streamlined Sales Tax
Project — an ongoing, multi-year effort by U.S.,
state, and local governments to require collection and
remittance of distant sales tax by
out-of
-state
sellers — bills have been introduced in the
U.S. Congress to overturn the Supreme Court’s
Quill
decision, which limits the ability of state governments to
require sellers outside of their own state to collect and remit
sales taxes on goods purchased by in-state residents. An
overturning of the
Quill
decision would harm our users
and our business.
We do not collect taxes on the goods or services sold by users
of our services. One or more states or foreign countries may
seek to impose a tax collection or reporting or record-keeping
obligation on companies such as eBay that engage in or
facilitate
e-commerce.
Such an obligation could be imposed if eBay were ever deemed to
be the legal agent of eBay sellers by a jurisdiction in which
eBay operates. A successful assertion by one or more states or
foreign countries that we should collect taxes on the exchange
of merchandise or services on our websites would harm our
business.
In July 2003, in compliance with the changes brought about by
the European Union (EU) VAT directive on
“electronically supplied services,” eBay began
collecting VAT on the fees charged to EU sellers on eBay sites
catering to EU residents. eBay also pays input VAT to suppliers
within the various countries the company operates. In most
cases, eBay is entitled to reclaim input VAT from the various
countries with regard to our own payments to suppliers or
vendors. However, because of our unique business model, the
application of the laws and rules that allow such reclamation is
sometimes uncertain. A successful assertion by one or more
countries that eBay is not entitled to reclaim VAT would harm
our business.
We continue to work with the relevant tax authorities and
legislators to clarify eBay’s obligations under new and
emerging laws and regulations. Passage of new legislation and
the imposition of additional tax requirements could harm eBay
sellers and our business. There have been, and will continue to
be, substantial ongoing costs associated with complying with the
various indirect tax requirements in the numerous markets in
which eBay conducts or will conduct business.
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Fraudulent activities on our websites and disputes between
users of our services may harm our business.
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PayPal faces significant risks of loss due to fraud and disputes
between senders and recipients, including:
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non-delivery of, or disputes over the quality of, goods and
services due to merchant fraud or inadequate merchant business
practices;
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reversal of payment by buyers both for legitimate reasons and in
cases of buyer fraud;
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unauthorized use of credit card and bank account information and
identity theft;
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the need to provide effective customer support to process
disputes between senders and recipients;
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potential breaches of system security;
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potential employee fraud; and
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use of PayPal’s system by customers to make or accept
payment for illegal or improper purposes.
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For the year ended December 31, 2005 and the first quarter
of 2006, PayPal’s transaction loss totaled
$73.8 million and $25.6 million, representing 0.27%
and 0.29% of PayPal’s total payment volume, respectively.
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Failure to deal effectively with fraudulent transactions
and customer disputes would increase PayPal’s loss rate and
harm its business.
PayPal’s highly automated and liquid payment service makes
PayPal an attractive target for fraud. In configuring its
service, PayPal faces an inherent trade-off between customer
convenience and security. 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. In addition, PayPal’s
service could be subject to employee fraud or other internal
security breaches, and PayPal would 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, in which case our
business would further suffer. PayPal has been assessed
substantial fines for excess charge-backs in the past, and
excessive charge-backs may arise in the future. PayPal has taken
measures to detect and reduce the risk of fraud, but these
measures may not be effective against new forms of fraud. If
these measures do not succeed, our business will suffer.
PayPal offers a buyer protection program that refunds to buyers
up to $1,000 in certain eBay transactions if they do not receive
the goods they purchased or if the goods differ significantly
from what was described by the seller. If PayPal makes such a
refund, it seeks to collect reimbursement from the seller, but
may not be able to receive any funds from the seller. The PayPal
buyer protection program has increased PayPal’s loss rate
and could cause future fluctuations in PayPal’s loss rate.
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 because of miscommunication, because a
buyer has changed his or her mind and decided not to honor the
contract to purchase the item, or because the buyer bid on the
item maliciously, in order to harm either the seller or eBay. In
some European jurisdictions, buyers may also have the right to
withdraw from a sale made by a professional seller within a
specified time period.
While eBay can suspend the accounts of users who fail to fulfill
their payment or delivery obligations to other users, eBay does
not have the ability to require users to make payment or deliver
goods, or otherwise make users whole other than through our
limited buyer protection programs. Other than through these
programs, eBay does not compensate users who believe they have
been defrauded by other users, although users who pay through
PayPal may have reimbursement rights from their credit card
company or bank, which in turn will seek reimbursement from
PayPal. eBay also periodically receives complaints from buyers
as to the quality of the goods purchased. We expect to continue
to receive communications from users requesting reimbursement or
threatening or commencing legal action against us if no
reimbursement is made. Our liability for these sort of claims is
only beginning to be clarified and may be higher in some
non-U.S.
jurisdictions
than it is in the U.S. Litigation involving liability for
third-party actions could be costly for us, divert management
attention, result in increased costs of doing business, lead to
adverse judgments, or otherwise harm our business. In addition,
affected users will likely complain to regulatory agencies that
could take action against us, including imposing fines or
seeking injunctions.
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Negative publicity and user sentiment generated as a result of
fraudulent or deceptive conduct by users of our eBay and PayPal
services could damage our reputation, reduce our ability to
attract new users or retain our current users, and diminish the
value of our brand names.
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Changes to credit card association fees, rules, or
practices could harm PayPal’s business.
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Because PayPal is not a bank, it cannot belong to or directly
access credit card associations, such as Visa and MasterCard. As
a result, PayPal must rely on banks or payment processors to
process transactions, and must pay a fee for this service. From
time to time, credit card associations may increase the
interchange fees that they charge for each transaction using one
of their cards. MasterCard and Visa each implemented increases
in their interchange fees for credit cards in April 2005.
PayPal’s credit card processors have the right to pass any
increases in interchange fees on to PayPal as well as increase
their own fees for processing. These increased fees increase
PayPal’s operating costs and reduce its profit margins.
PayPal is also required by its processors to comply with credit
card association operating rules, and PayPal has agreed to
reimburse its processors for any fines they are assessed by
credit card associations as a result of any rule violations by
PayPal. The credit card associations and their member banks set
and interpret the credit card rules. Some of those member banks
compete with PayPal. Visa, MasterCard, American Express, or
Discover could adopt new operating rules or re-interpret
existing rules that PayPal or its processors might find
difficult or even impossible to follow. As a result, PayPal
could lose its ability to give customers the option of using
credit cards to fund their payments. If PayPal were unable to
accept credit cards, its business would be seriously damaged. In
addition, the velocity of trade on eBay could decrease and our
business would further suffer.
PayPal is required to comply with credit card associations’
special operating rules for Internet payment services. PayPal
and its credit card processors have implemented specific
business processes for merchant customers in order to comply
with these rules, but any failure to comply could result in
fines, the amount of which would be within Visa’s and
MasterCard’s discretion. PayPal also could be subject to
fines from MasterCard and Visa if it fails to detect that
merchants are engaging in activities that are illegal or
activities that are considered “high risk,” primarily
the sale of certain types of digital content. For “high
risk” merchants, PayPal must either prevent such merchants
from using PayPal or register such merchants with MasterCard and
Visa and conduct additional monitoring with respect to such
merchants. PayPal has incurred fines from its credit card
processor relating to PayPal’s failure to detect the use of
its service by “high risk” merchants. The amount of
these fines has not been material, but any additional fines in
the future would likely be for larger amounts, could become
material, and could result in a termination of PayPal’s
ability to accept credit cards or changes in PayPal’s
process for registering new customers, which would seriously
damage PayPal’s business.
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Changes in PayPal’s funding mix could adversely
affect PayPal’s results.
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PayPal pays significant transaction fees when senders fund
payment transactions using credit cards, nominal fees when
customers fund payment transactions by electronic transfer of
funds from bank accounts, and no fees when customers fund
payment transactions from an existing PayPal account balance.
Senders funded 53% of PayPal’s payment volume using credit
cards during both 2005 and the first quarter of 2006, and
PayPal’s financial success will remain highly sensitive to
changes in the rate at which its senders fund payments using
credit cards. Senders may prefer funding using credit cards
rather than bank account transfers for a number of reasons,
including the ability to dispute and reverse charges if
merchandise is not delivered or is not as described, the ability
to earn frequent flier miles or other incentives offered by
credit cards, the ability to defer payment, or a reluctance to
provide bank account information to PayPal. PayPal has received
inquiries regarding its disclosure practices with regard to
funding mechanisms from the attorneys general of a number of
states, and in March 2005, a complaint seeking class action
status was filed alleging, among other things, that
PayPal’s disclosure regarding the effects of users’
choice of funding mechanism is deceptive. While we believe
PayPal’s disclosure is legal and accurate, any required
change to our disclosure practices could result in increased use
of credit card funding, damaging PayPal’s business.
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If PayPal were found to be subject to or in violation of
any U.S. laws or regulations governing banking, money
transmission, or electronic funds transfers, it could be subject
to liability and forced to change its business practices.
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A number of U.S. states have enacted legislation regulating
money transmitters. To date, PayPal has obtained licenses in 33
of these jurisdictions and interpretations in nine states that
licensing is not required under their existing statutes. As a
licensed money transmitter, PayPal is subject to bonding
requirements, restrictions on its investment of customer funds,
reporting requirements, and inspection by state regulatory
agencies. In July 2005, PayPal entered into a settlement
agreement and agreed to pay $225,000 to the California
Department of Financial Institutions in connection with alleged
violations of the California Financial Code relating to the use
of a receipt form for international payments that had not been
pre-approved by the Department, and incomplete reporting to the
Department. If PayPal were found to be in violation of other
money services laws or regulations, PayPal could be subject to
liability, forced to cease doing business with residents of
certain states, or forced to change its business practices. Any
change to PayPal’s business practices that makes the
service less attractive to customers or prohibits its use by
residents of a particular jurisdiction could decrease the
velocity of trade on eBay, which would further harm our
business. Even if PayPal is not forced to change its business
practices, it could be required to obtain additional licenses or
regulatory approvals that could impose a substantial cost on
PayPal.
We believe that the licensing or approval requirements of the
U.S. Office of the Comptroller of the Currency, the Federal
Reserve Board, and other federal or state agencies that regulate
banks, bank holding companies, or other types of providers of
e-commerce
services do
not apply to PayPal, except for certain money transmitter
licenses mentioned above. However, PayPal has received written
communications in the past from state regulatory authorities
expressing the view that its service might constitute an
unauthorized banking business. PayPal has taken steps to address
these states’ concerns. However, we cannot guarantee that
the steps PayPal has taken to address these regulatory concerns
will be effective in all states, and one or more states may
conclude that PayPal is engaged in an unauthorized banking
business. If PayPal is found to be engaged in an unauthorized
banking business in one or more states, it might be subject to
monetary penalties and adverse publicity and might be required
to cease doing business with residents of those states. Even if
the steps it has taken to resolve these states’ concerns
are deemed sufficient by the state regulatory authorities,
PayPal could be subject to fines and penalties for its prior
activities. The need to comply with state laws prohibiting
unauthorized banking activities could also limit PayPal’s
ability to enhance its services in the future. Any change to
PayPal’s business practices that makes the service less
attractive to customers or prohibits its use by residents of a
particular jurisdiction could decrease the velocity of trade on
eBay, which would further harm our business.
Although there have been no definitive interpretations to date,
PayPal has assumed that its service is subject to the Electronic
Fund Transfer Act and Regulation E of the Federal Reserve
Board. As a result, among other things, PayPal must provide
advance disclosure of changes to its service, follow specified
error resolution procedures and absorb losses above $50 from
transactions not authorized by the consumer. In addition, PayPal
is subject to the financial privacy provisions of the
Gramm-Leach-Bliley Act, state financial privacy laws, and
related regulations. As a result, some customer financial
information that PayPal receives is subject to limitations on
reuse and disclosure. Existing and potential future privacy laws
may limit PayPal’s ability to develop new products and
services that make use of data gathered through its service. The
provisions of these laws and related regulations are
complicated, and PayPal does not have extensive experience in
complying with them. Even technical violations of these laws can
result in penalties of up to $1,000 for each non-compliant
transaction. PayPal processed an average of approximately
1.66 million transactions per day during the first quarter
of 2006, and any violations could expose PayPal to significant
liability.
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PayPal’s status under banking or financial services
laws or other laws in markets outside the U.S. is
unclear.
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PayPal currently allows its customers with credit cards to send
payments from 55 markets, and to receive payments in 42 of
those markets. In 25 of these 42 markets, customers can
withdraw funds to local bank accounts, and in eight of these
markets customers can withdraw funds by receiving a bank draft
in the mail.
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PayPal offers customers the ability to send or receive payments
denominated in U.S. dollars, British pounds, Euros,
Canadian dollars, Japanese yen, and Australian dollars. We act
in cooperation with a local company in the People’s
Republic of China, or PRC, which offers PRC residents the
ability to send or receive payments denominated in renminbi. 25
of the 55 markets whose residents can use the PayPal service are
members of the European Union, and PayPal provides localized
versions of its service to customers in the EU through PayPal
(Europe) Ltd., a wholly-owned subsidiary of PayPal that is
licensed in the United Kingdom to operate as an Electronic Money
Institution. PayPal (Europe) implements its localized services
in EU countries through an expedited “passport”
notification process through the UK regulator to regulators in
other EU member states, pursuant to EU Directives. PayPal
(Europe) has completed the “passport” notice process
in all EU member countries. The regulators in these countries
could notify PayPal (Europe) of local consumer protection laws
that will apply to its business, in addition to UK consumer
protection law. Any such responses from these regulators could
increase the cost of, or delay, PayPal’s plans for
expanding its business. PayPal (Europe) is subject to
significant fines or other enforcement action if it violates the
disclosure, reporting, anti-money laundering, capitalization,
funds management or other requirements imposed on electronic
money institutions.
In many markets outside of the U.S. and the European Union, it
is not clear whether PayPal’s
U.S.-based
service is
subject to local law or, if it is subject to local law, whether
such local law requires a payment processor like PayPal to be
licensed as a bank or financial institution or otherwise. Even
if PayPal is not currently required to obtain a license in those
countries, future localization or targeted marketing of
PayPal’s service in those countries could require licensure
and other laws of those countries (such as data protection and
anti-money laundering laws) may apply. If PayPal were found to
be subject to and in violation of any foreign laws or
regulations, it could be subject to liability, forced to change
its business practices or forced to suspend providing services
to customers in one or more countries. Alternatively, PayPal
could be required to obtain licenses or regulatory approvals
that could impose a substantial cost on it and involve
considerable delay to the provision or development of its
product. Delay or failure to receive such a license would
require PayPal to change its business practices or features in
ways that would adversely affect PayPal’s international
expansion plans and could require PayPal to suspend providing
services to customers in one or more countries.
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The current regulatory environment for Voice over Internet
Protocol (VoIP) is unclear, and Skype’s business could be
harmed by new regulations or the application of existing
regulations to its products.
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The current regulatory environment for VoIP is unclear.
Skype’s VoIP communications products are not currently
subject to all of the same regulations that apply to traditional
telephony. VoIP companies are generally subject to different
regulatory regimes in different countries, and in some cases are
subject to lower regulatory fees and lesser regulatory
requirements. Governments may impose increased fees, taxes, and
administrative burdens on VoIP companies. Increased fees could
include interconnection fees and access charges payable to local
exchange carriers to carry and terminate traffic, contributions
to the Universal Service Fund in the United States and
elsewhere, and other charges. New laws and regulations may
require Skype to meet various emergency service requirements,
disability access requirements, consumer protection
requirements, number assignment and portability requirements,
and interception or wiretapping requirements, such as the
Communications Assistance for Law Enforcement Act. Such
regulations could result in substantial costs depending on the
technical changes required to accommodate the requirements, and
any increased costs could erode Skype’s pricing advantage
over competing forms of communication. Regulations that decrease
the degree of privacy for users of Skype’s products could
also slow its adoption. The increasing growth of the VoIP
telephony market and popularity of VoIP telephony products
heighten the risk that governments will seek to regulate VoIP
telephony and the Internet. Competitors, including the incumbent
telephone companies, may devote substantial lobbying efforts to
seek greater protection for their existing businesses and
increased regulation of VoIP. In the United States, various
state legislatures are considering legislation to impose their
own requirements and taxes on VoIP. Increased regulatory
requirements on VoIP would increase Skype’s costs, and, as
a result, our business would suffer.
Regulatory agencies may require Skype to conform to rules that
are unsuitable for VoIP communications technologies, that are
difficult or impossible to comply with due to the nature of IP
routing, or that are unnecessary or unreasonable in light of the
manner in which Skype’s products are offered to customers.
For
49
example, while suitable alternatives may be developed in the
future, the current IP network does not enable Skype to identify
the geographic origin of the traffic traversing the Internet or
to provide detailed calling information about
computer-to
-computer
communications, either of which may make complying with future
regulatory requirements, such as emergency service requirements,
difficult or impossible. If Skype were subject to regulations
that are costly or impossible for it to comply with given its
technology, its business would be adversely affected.
In many countries in which Skype operates or provides VoIP
products, the laws that may relate to its offerings are unclear.
We cannot be certain that Skype or its customers are currently
in full compliance with regulatory or other legal requirements
in all countries in which Skype is used, that Skype or its
customers will be able to comply with existing or future
requirements, or that Skype or its customers will continue in
full compliance with any requirements. Skype’s failure or
the failure of those with whom Skype transacts business to
comply with these requirements could materially adversely affect
our business, financial condition and results of operations.
New rules and regulations with respect to VoIP are being
considered in various countries around the world. Such new rules
and regulations could increase our costs of doing business or
prevent us from delivering our products and offerings over the
Internet, which could adversely affect Skype’s customer
base, and thus its revenue.
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Our businesses depend on continued and unimpeded access to
the Internet. Internet service providers may be able to block,
degrade, or charge us or our users additional fees for our
offerings.
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Our customers rely on access to the Internet to use our products
and services. In many cases that access is provided by companies
that compete with at least some of our offerings, including
incumbent telephone companies, cable companies, mobile
communications companies, and large Internet service providers.
Some of these providers have stated that they may take measures
that could degrade, disrupt, or increase the cost of
customers’ use of Skype — and possibly our other
offerings — by restricting or prohibiting the use of
their lines for our offerings, by filtering, blocking or
delaying the packets containing the data associated with our
products, or by charging increased fees to us or our users for
use of their lines to provide our offerings. These activities
are technically feasible and may be permitted in the
U.S. after recent regulatory changes, including recent
decisions by the U.S. Supreme Court and Federal
Communications Commission. In addition, Internet service
providers could attempt to charge us each time our customers use
our offerings, or could charge us for delivery of email to our
customers. Worldwide, a number of companies have announced plans
to take such actions or are selling products designed to
facilitate such actions. Interference with our offerings or
higher charges for access to our offerings, whether paid by us
or by our customers, could cause us to lose existing customers,
impair our ability to attract new customers, and harm our
revenue and growth.
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New and existing regulations could harm our
business.
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We are subject to the same foreign and domestic laws as other
companies conducting business on and off the Internet. Today,
there are still relatively few laws specifically directed
towards online services. However, due to the increasing
popularity and use of the Internet and online services, many
laws relating to the Internet are being debated at all levels of
government around the world and it is possible that such laws
and regulations will be adopted. These laws and regulations
could cover issues such as user privacy, freedom of expression,
pricing, fraud, content and quality of products and services,
taxation, advertising, intellectual property rights, and
information security. It is not clear how existing laws
governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel and
defamation, obscenity, and personal privacy apply to online
businesses. The vast majority of these laws were adopted prior
to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the
Internet and related technologies. Those laws that do reference
the Internet, such as the U.S. Digital Millennium Copyright
Act and the European Union’s Directive on Distance Selling
and Electronic Commerce have begun to be interpreted by the
courts and implemented by the EU Member States, but their
applicability and scope remain somewhat uncertain. As our
activities and the types of goods listed on our website expand,
regulatory agencies or courts may claim or hold that we or our
users are either subject to
50
licensure or prohibited from conducting our business in their
jurisdiction, either with respect to our services in general, or
in order to allow the sale of certain items, such as real
estate, event tickets, cultural goods, boats, and automobiles.
Numerous states and foreign jurisdictions, including the State
of California, where our headquarters are located, have
regulations regarding “auctions” and the handling of
property by “secondhand dealers” or
“pawnbrokers.” No final legal determination has been
made as to whether the California regulations apply to our
business (or that of our users) and little precedent exists in
this area. Several states and some foreign jurisdictions have
attempted, and may attempt in the future, to impose such
regulations upon us or our users. Attempted enforcement of these
laws against some of our users appears to be increasing and such
attempted enforcements could harm our business. In 2002,
Illinois amended its auction law to provide for a special
regulatory regime for “Internet auction listing
services,” and we have registered as an Internet auction
listing service in Illinois. Although this registration has not
had a negative impact on our business to date, other regulatory
and licensure claims could result in costly litigation or could
require us to change the way we or our users do business in ways
that increase costs or reduce revenues or force us to prohibit
listings of certain items for some locations. We could also be
subject to fines or other penalties, and any of these outcomes
could harm our business.
In addition, because our services are accessible worldwide, and
we facilitate sales of goods to users worldwide, foreign
jurisdictions may claim that we are required to comply with
their laws. For example, the Australian high court has ruled
that a U.S. website in certain circumstances must comply
with Australian laws regarding libel. As we expand and localize
our international activities, we become obligated to comply with
the laws of the countries in which we operate. Laws regulating
Internet companies outside of the U.S. may be less
favorable than those in the U.S., giving greater rights to
consumers, content owners, and users. Compliance may be more
costly or may require us to change our business practices or
restrict our service offerings relative to those in the
U.S. Our failure to comply with foreign laws could subject
us to penalties ranging from criminal prosecution to bans on our
services.
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Our business is subject to online security risks,
including security breaches and identity theft.
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To succeed, online commerce and communications must provide a
secure transmission of confidential information over public
networks. Our security measures may not prevent security
breaches that could harm our business. Currently, a significant
number of our users authorize us to bill their credit card
accounts directly for all transaction fees charged by us.
PayPal’s users routinely provide credit card and other
financial information. We rely on encryption and authentication
technology licensed from third parties to provide the security
and authentication to effect secure transmission of confidential
information, including customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of
cryptography or other developments may result in a compromise or
breach of the technology used by us to protect transaction data.
In addition, any party who is able to illicitly obtain a
user’s password could access the user’s transaction
data. An increasing number of websites have reported breaches of
their security. Any compromise of our security could harm our
reputation and, therefore, our business. In addition, a party
who is able to circumvent our security measures could
misappropriate proprietary information, or cause interruptions
in our operations, damage our computers or those of our users,
or otherwise damage our reputation and business.
Our servers are also vulnerable to computer viruses, physical or
electronic break-ins, and similar disruptions, and we have
experienced
“denial-of
-service”
type attacks on our system that have made all or portions of our
websites unavailable for periods of time. We may need to expend
significant resources to protect against security breaches or to
address problems caused by breaches. These issues are likely to
become more difficult as we expand the number of places where we
operate. Security breaches could damage our reputation and
expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits,
which may not be adequate to reimburse us for losses caused by
security breaches.
Our users, as well as those of other prominent Internet
companies, have been and will continue to be targeted by parties
using fraudulent emails to misappropriate passwords, credit card
numbers, or other personal information or to introduce viruses
through “trojan horse” programs to our users’
computers. These
51
emails appear to be legitimate emails sent by eBay, PayPal,
Skype, or a user of one of those businesses, but direct
recipients to fake websites operated by the sender of the email
or request that the recipient send a password or other
confidential information via email or download a program. We
actively pursue the parties responsible for these attempts at
misappropriation, and we have developed tools to detect, and
help users detect, fake websites and unauthorized access to
customer accounts and we encourage our users to divulge
sensitive information only after they have verified that they
are on our legitimate websites, but we cannot entirely eliminate
these types of activities.
Some businesses and security consultants have expressed concern
over the potential for Skype’s software to create security
vulnerabilities on its users’ computers. While we believe
Skype’s software is safe and does not pose a security risk
to its users, the perception that Skype’s software is
unsafe could hamper its adoption, and any actual security breach
could damage Skype’s reputation and expose us to a risk of
loss or litigation and possible liability.
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PayPal’s failure to manage customer funds properly
would harm its business.
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PayPal’s ability to manage and account accurately for
customer funds requires a high level of internal controls.
PayPal has neither an established operating history nor proven
management experience in maintaining, over a long term, these
internal controls. As PayPal’s business continues to grow,
it must strengthen its internal controls accordingly.
PayPal’s success requires significant public confidence in
its ability to handle large and growing transaction volumes and
amounts of customer funds. Any failure to maintain necessary
controls or to manage accurately customer funds could diminish
customer use of PayPal’s product severely.
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Our failure to manage growth could harm our
business.
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We are currently expanding our headcount, facilities, and
infrastructure in the U.S. and internationally. We anticipate
that further expansion will be required as we continue to expand
into new lines of business and geographic areas. This expansion
has placed, and we expect it will continue to place, a
significant strain on our management, operational, and financial
resources. The areas that are put under strain by our growth
include the following:
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Our Websites.
We must constantly add new hardware, update
software and add new engineering personnel to accommodate the
increased use of our and our subsidiaries’ websites and the
new products and features we regularly introduce. This upgrade
process is expensive, and the increased complexity of our
websites and the need to support multiple platforms as our
portfolio of brands grows increases the cost of additional
enhancements. Failure to upgrade our technology, features,
transaction processing systems, security infrastructure, or
network infrastructure to accommodate increased traffic or
transaction volume could harm our business. Adverse consequences
could include unanticipated system disruptions, slower response
times, degradation in levels of customer support, impaired
quality of users’ experiences of our services, impaired
quality of services for third-party application developers using
our externally accessible Application Programming Interface, or
API, and delays in reporting accurate financial information. We
may be unable to effectively upgrade and expand our systems in a
timely manner or smoothly integrate any newly developed or
purchased technologies or businesses with our existing systems,
and any failure to do so could result in problems on our sites.
For example, in October 2004, we experienced unscheduled
downtime on the PayPal website over a period of five days
related to system upgrades. Despite our efforts to increase site
scalability and reliability, our infrastructure could prove
unable to handle a larger volume of customer transactions. Some
of our more recently acquired businesses may be particularly
subject to this risk given their shorter histories and, in some
cases, higher growth rates. Any failure to accommodate
transaction growth could impair customer satisfaction, lead to a
loss of customers, impair our ability to add customers, or
increase our costs, all of which would harm our business.
Further, steps to increase the reliability and redundancy of our
systems are expensive, reduce our margins, and may not be
successful in reducing the frequency or duration of unscheduled
downtime.
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Customer Account Billing.
Our revenues depend on prompt
and accurate billing processes. In 2004, we completed a
significant project to enhance our billing software. Problems
with the conversion to the new billing system during the second
and third quarters of 2004 caused incorrect account balance
totals to be displayed for some users. While these problems have
been corrected and we believe that no users were overcharged,
our failure to grow our transaction-processing capabilities to
accommodate the increasing number of transactions that must be
billed on any of our websites would harm our business and our
ability to collect revenue.
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Customer Support.
We are expanding our customer support
operations to accommodate the increased number of users and
transactions on our websites and the increased level of trust
and safety activity we provide worldwide. If we are unable to
provide these operations in a cost-effective manner, users of
our websites may have negative experiences, current and future
revenues could suffer, and our operating margins may decrease.
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We must continue to hire, train, and manage new employees at a
rapid rate. If our new hires perform poorly, if we are
unsuccessful in hiring, training, managing, and integrating
these new employees, or if we are not successful in retaining
our existing employees, our business may be harmed. To manage
the expected growth of our operations and personnel, we will
need to improve our transaction processing, operational and
financial systems, procedures, and controls. This is a special
challenge as we acquire new operations with different systems.
Our current and planned personnel, systems, procedures, and
controls may not be adequate to support our future operations.
The additional headcount and capital investments we are adding
increase our cost base, which will make it more difficult for us
to offset any future revenue shortfalls by expense reductions in
the short term.
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Our business is adversely affected by anything that causes
our users to spend less time on their computers, including
seasonal factors and national events.
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Anything that diverts our users from their customary level of
usage of our websites could adversely affect our business. We
would therefore be adversely affected by geopolitical events
such as war, the threat of war, or terrorist activity, and
natural disasters, such as hurricanes or earthquakes. Similarly,
our results of operations historically have been seasonal
because many of our users reduce their activities on our
websites with the onset of good weather during the summer
months, and on and around national holidays.
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We depend on the continued growth of online commerce and
communications.
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The business of selling goods over the Internet, particularly
through online trading, is dynamic and relatively new. Concerns
about fraud, privacy, and other problems may discourage
additional consumers from adopting the Internet as a medium of
commerce. In countries such as the U.S. and Germany, where our
services and online commerce generally have been available for
some time and the level of market penetration of our services is
high, acquiring new users for our services may be more difficult
and costly than it has been in the past. In order to expand our
user base, we must appeal to and acquire consumers who
historically have used traditional means of commerce to purchase
goods. If these consumers prove to be less active than our
earlier users, and we are unable to gain efficiencies in our
operating costs, including our cost of acquiring new customers,
our business could be adversely impacted.
The success of Skype depends on continued growth in its number
of users, which in turn depends on wider public acceptance of
VoIP. The VoIP communications medium is in its early stages, and
it may not develop a broad audience. Potential new users may
view VoIP as unattractive relative to traditional telephone
services for a number of reasons, including the need to purchase
computer headsets, the need to leave a personal computer on in
order to communicate with Skype, or the perception that the
price advantage for VoIP is insufficient to justify the
perceived inconvenience. Potential users may also view more
familiar online communication methods, such as
e-mail
or instant
messaging, as sufficient for their communications needs.
Managers of some large private branch exchange, or PBX, systems
in businesses, universities, government agencies, and other
institutions may refuse to allow the use of Skype due to
concerns over security, server
53
usage, or for other reasons. If VoIP does not achieve wide
public acceptance, our Skype business will be adversely affected.
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Use of our services for illegal purposes could harm our
business.
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The law relating to the liability of providers of online
services for the activities of their users on their service is
currently unsettled in the United States and internationally. We
are aware that certain goods, such as weapons, adult material,
tobacco products, alcohol, and other goods that may be subject
to regulation, have been listed and traded on our service. We
may be unable to prevent our users from selling unlawful goods
or selling goods in an unlawful manner, and we may be subject to
allegations of civil or criminal liability for unlawful
activities carried out by users through our service. We have
been subject to several lawsuits based upon such allegations. In
December 2004, an executive of Baazee.com, our Indian
subsidiary, was arrested in connection with a user’s
listing of a pornographic video clip on that site. Similarly,
our Korean subsidiary and one of its employees were found
criminally liable for listings on the Korean subsidiary’s
website. In order to reduce our exposure to this liability, we
have prohibited the listing of certain items and increased the
number of personnel reviewing questionable items. In the future,
we may implement other protective measures that could require us
to spend substantial resources or discontinue certain service
offerings. Any costs incurred as a result of potential liability
relating to the sale of unlawful goods or the unlawful sale of
goods could harm our business. In addition, we have received
significant and continuing media attention relating to the
listing or sale of unlawful goods using our services. This
negative publicity could damage our reputation and diminish the
value of our brand names. It also could make users reluctant to
continue to use our services.
PayPal’s payment system is also susceptible to potentially
illegal or improper uses. These may include illegal online
gambling, fraudulent sales of goods or services, illicit sales
of prescription medications or controlled substances, piracy of
software and other intellectual property, money laundering, bank
fraud, child pornography trafficking, prohibited sales of
alcoholic beverages or tobacco products, and online securities
fraud. PayPal’s acceptable use policy enables PayPal to
fine users in certain jurisdictions up to $500 or take legal
action to recover its losses for certain violations of that
policy, including online gambling and illegal sales of
prescription medications. Despite measures PayPal has taken to
detect and lessen the risk of this kind of conduct, illegal
activities could still be funded using PayPal.
PayPal is subject to anti-money laundering laws and regulations
that prohibit, among other things, its involvement in
transferring the proceeds of criminal activities. Although
PayPal has adopted a program to comply with these laws and
regulations, any errors or failure to implement the program
properly could lead to lawsuits, administrative action, and
prosecution by the government. In July 2003, PayPal agreed with
the U.S. Attorney for the Eastern District of Missouri that
it would pay $10 million as a civil forfeiture to settle
allegations that its provision of services to online gambling
merchants violated provisions of the USA PATRIOT Act and further
agreed to have its compliance program reviewed by an independent
audit firm. PayPal is also subject to regulations that require
it to report suspicious activities involving transactions of
$2,000 or more and may be required to obtain and keep more
detailed records on the senders and recipients in certain
transfers of $3,000 or more. The interpretation of suspicious
activities in this context is uncertain. Future regulations
under the USA PATRIOT Act may require PayPal to revise the
procedures it uses to verify the identity of its customers and
to monitor international transactions more closely. As PayPal
localizes its service in other countries, additional
verification and reporting requirements could apply. These
regulations could impose significant costs on PayPal and make it
more difficult for new customers to join its network. PayPal
could be required to learn more about its customers before
opening an account, to obtain additional verification of
customers and to monitor its customers’ activities more
closely. These requirements, as well as any additional
restrictions imposed by credit card associations, could raise
PayPal’s costs significantly and reduce the attractiveness
of its product. Failure to comply with federal, state or foreign
country money laundering laws could result in significant
criminal and civil lawsuits, penalties, and forfeiture of
significant assets.
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We are subject to intellectual property and other
litigation.
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In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex’s trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolex’s appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court, and a hearing is expected in
December 2006. In September 2004, the German Federal Supreme
Court issued its written opinion in favor of Rolex in a case
involving an unrelated company, ricardo.de AG, but somewhat
comparable legal theories. Although it is not yet clear what the
ultimate effect of the reasoning of the German Federal Supreme
Court’s ricardo.de decision will have when applied to eBay,
we believe the Court’s decision has resulted in an increase
in similar litigation against us in Germany, although we do not
currently believe that it will require a significant change in
our business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the
U.S. District Court for the Eastern District of Virginia
(No.
2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). In October 2002, the court granted in part our
summary judgment motion, effectively invalidating the patent
related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case.
Trial of the matter began in April 2003. In May 2003, the jury
returned a verdict finding that eBay had willfully infringed one
and Half.com had willfully infringed both of the patents in the
suit, awarding $35 million in compensatory damages. Both
parties filed post-trial motions, and in August 2003, the court
entered judgment for MercExchange in the amount of approximately
$30 million plus pre-judgment interest and post-judgment
interest in an amount to be determined, while denying
MercExchange’s request for an injunction and
attorneys’ fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys’ fees.
In March 2005, the U.S. Court of Appeals for the Federal
Circuit issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district court’s
refusal to award attorneys’ fees or enhanced damages
against us; (4) reversed the district court’s order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district court’s refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the
U.S. Supreme Court for review on certain issues. We filed
our petition for review with the U.S. Supreme Court in July
2005, and in November 2005, the Court granted our petition for
review. Oral arguments in the case were heard by the Court in
March 2006, and the Court’s decision is expected in the
second quarter of 2006. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that substantial questions exist regarding the
validity of the claims contained in them. In January 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to online
auctions; in March 2005, the Patent and Trademark Office issued
an initial ruling rejecting all of the claims contained in the
patent that related to electronic consignment systems; and in
May 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to multiple database searching. In March 2006, the
Patent and Trademark Office affirmed its earlier ruling
rejecting the claims contained in the patent that related to
electronic consignment systems. Even if successful, our
litigation of these matters will continue to be costly. In
addition, as a precautionary measure, we have modified certain
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functionality of our websites and business practices in a manner
which we believe would avoid any further infringement. For this
reason, we believe that any injunction that might be issued by
the district court will not have any impact on our business. We
also believe we have appropriate reserves for this litigation.
Nonetheless, if we are not successful in appealing or modifying
the court’s ruling, and if the modifications to the
functionality of our websites and business practices are not
sufficient to make them non-infringing, we would likely be
forced to pay significant additional damages and licensing fees
and/or modify our business practices in an adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed 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, unspecified
damages, including treble damages for willful infringement, and
interest, costs, expenses, and fees. The case was transferred to
the U.S. District Court for the Southern District of
Indiana in January 2003, but was transferred back to the
U.S. District Court for the Eastern District of Texas in
December 2003. A claim construction hearing was held in August
2005. In February 2006, we entered into and paid for a
settlement agreement with the plaintiffs in the case under which
we will be licensed under all of the patents at issue.
In February 2002, PayPal was sued in California state court (No.
CV-805433) in a purported class action alleging that its
limiting access to customer accounts and failure to promptly
restore access to 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-filed with a different named plaintiff in June 2002
(No.
CV-808441),
and a similar action was also filed 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 limiting access to
customer accounts and failure to promptly restore access to
legitimate accounts violates federal and state consumer
protection and unfair business practice laws. The two federal
court actions were consolidated into a single case, and the
state court action was stayed pending developments in the
federal case. In June 2004, the parties announced that they had
reached a proposed settlement. The settlement received approval
from the federal court on November 2, 2004, and the state
court action was dismissed with prejudice in March 2005. In the
settlement, PayPal does not acknowledge that any of the
allegations in the case are true. Under the terms of the
settlement, certain PayPal account holders are eligible to
receive payment from a settlement fund of $9.25 million,
less administrative costs and the amount awarded to
plaintiffs’ counsel by the court. That sum is being
distributed to class members who have submitted timely claims in
accordance with the settlement’s plan of allocation. The
plan of allocation for the portion of the settlement fund that
remains undistributed was approved by the District Court in
March 2006. Substantially all of the cost associated with the
settlement was reserved in 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay
engaged in improper billing practices as the result of problems
with the rollout of a new billing software system in the second
and third quarters of 2004. The lawsuit sought damages and
injunctive relief. An amended complaint was filed in January
2005, dropping one plaintiff, changing the capacity of the other
plaintiff to that of representative plaintiff, and adding seven
additional eBay users as plaintiffs. The amended complaint
expanded its claim to include numerous alleged improper billing
practices from September 2003 until the present. In February
2005, eBay filed a motion to strike and a demurrer seeking to
dismiss the complaint. In April 2005, the court sustained
portions of the demurrer, but granted the plaintiffs leave to
amend their complaint. The plaintiffs filed a second amended
complaint, dropping the last original plaintiff and again adding
new plaintiffs. We filed a motion to strike and a demurrer
regarding the plaintiffs’ second amended complaint. In July
2005, the court again sustained a portion of the demurrer and
again granted the plaintiffs leave to amend their complaint, and
the plaintiffs filed a third amended complaint. In December
2005, the plaintiffs filed a fourth amended complaint, dropping
several plaintiffs. In April 2006, the court approved a
settlement agreement entered into by the parties. Under the
terms of the settlement, the plaintiffs agreed to dismiss the
lawsuit and release eBay
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from all claims, and eBay agreed to make a $250,000 payment
primarily directed to charity. The estimated settlement was
accrued in our consolidated income statement for the three
months ended March 31, 2006.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930)
in a purported class action alleging that certain bidding
features of our site constitute “shill bidding” for
the purpose of artificially inflating bids placed by buyers on
the site. The complaint alleges violations of California’s
Auction Act, California’s Consumer Remedies Act, and unfair
competition. The complaint seeks injunctive relief, damages, and
a constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint, and a hearing on the demurrer was held
in February 2006. In March 2006, the parties reached tentative
agreement on the terms of a settlement. The court must approve
the terms of the settlement in order for it to become final. The
estimated settlement was accrued in our consolidated income
statement for the year ended December 31, 2005.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPal’s Buyer Protection
Policy, users’ chargeback rights, and the effects of
users’ choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern
District of New York and the plaintiffs filed an amended
complaint in the U.S. District Court
(No.
05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. Following
several mediation sessions, the parties reached a tentative
settlement in December 2005 and executed a Memorandum of
Understanding in March 2006. The parties are engaged in the
process of finalizing the settlement documentation. The court
must approve the terms of the settlement in order for it to
become final. The estimated settlement was accrued in our
consolidated income statement for the year ended
December 31, 2005.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
Communications businesses. 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 like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
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Government inquiries may lead to charges or
penalties.
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A large number of transactions occur on our websites. We believe
that government regulators have received a substantial number of
consumer complaints about both eBay and PayPal, which, while
small as a percentage of our total transactions, are large in
aggregate numbers. As a result, we have from time to time been
contacted by various foreign and domestic governmental
regulatory agencies that have questions about our operations and
the steps we take to protect our users from fraud. PayPal has
received inquiries regarding its restriction and disclosure
practices from the Federal Trade Commission and these and other
business
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practices from the attorneys general of a number of states. If
PayPal’s processes are found to violate federal or state
law on consumer protection and unfair business practices, it
could be subject to an enforcement action or fines. If PayPal
becomes subject to an enforcement action, it could be required
to restructure its business processes in ways that would harm
its business, and to pay substantial fines. Even if PayPal is
able to defend itself successfully, an enforcement action could
cause damage to its reputation, could consume substantial
amounts of its management’s time and attention, and could
require PayPal to change its customer service and operations in
ways that could increase its costs and decrease the
effectiveness of its anti-fraud program. Both eBay and PayPal
are likely to receive additional inquiries from regulatory
agencies in the future, which may lead to action against either
company. We have responded to all inquiries from regulatory
agencies by describing our current and planned antifraud
efforts, customer support procedures, operating procedures and
disclosures. If one or more of these agencies is not satisfied
with our response to current or future inquiries, we could be
subject to fines or other penalties, or forced to change our
operating practices in ways that could harm our business.
We are subject to laws relating to the use and transfer of
personally identifiable information about our users, especially
for financial information and for users located outside of the
U.S. New laws in this area have been passed by several
jurisdictions, and other jurisdictions are considering imposing
additional restrictions. Violation of these laws, which in many
cases apply not only to third-party transactions but also to
transfers of information between ourselves and our subsidiaries,
and between ourselves, our subsidiaries, and other parties with
which we have commercial relations, could subject us to
significant penalties and negative publicity and could adversely
affect us.
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The listing or sale by our users of pirated or counterfeit
items may harm our business.
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We have received in the past, and we anticipate receiving in the
future, communications alleging that certain items listed or
sold through our service by our users infringe third-party
copyrights, trademarks and trade names, or other intellectual
property rights. Although we have sought to work actively with
the owners of intellectual property rights to eliminate listings
offering infringing items on our websites, some rights owners
have expressed the view that our efforts are insufficient.
Content owners and other intellectual property rights owners
have been active in defending their rights against online
companies, including eBay. Allegations of infringement of
intellectual property rights have resulted in litigation against
us from time to time, including litigation brought by
Tiffany & Co. and Robespierre, Inc. (doing business as
Nanette Lepore) in the U.S., Rolex S.A. in Germany, and a number
of other owners of intellectual property rights. In both the
Tiffany and Nanette Lepore cases, the plaintiffs seek to hold
eBay liable for counterfeit items listed on our sites by third
parties. Tiffany seeks, among other things, an injunction that
would require eBay to prevent sellers from listing 5 or more
Tiffany items, as well as damages. Nanette Lepore seeks, among
other things, to require eBay to block all listings offering
Nanette Lepore items, as well as damages. eBay anticipates that
a trial in the Tiffany case will be scheduled before the end of
2006. Recently, eBay successfully prevented Nanette Lepore from
obtaining a preliminary injunction. In the ruling, the court
found that eBay’s process for addressing the listing of
counterfeit items by third parties on its site was both
reasonable and adequate. While we have been largely successful
to date in defending against such litigation, more recent cases
have been based, at least in part, on different legal theories
than those of earlier cases, and there is no guarantee that we
will continue to be successful in our defense. In addition, a
public perception that counterfeit or pirated items are
commonplace on our site could damage our reputation and our
business. Litigation and negative publicity may increase as our
sites gain prominence in markets outside of the U.S., where the
laws may be unsettled or less favorable to us. Such litigation
is costly for us, could result in damage awards or increased
costs of doing business through adverse judgment or settlement,
could require us to change our business practices in expensive
ways, or could otherwise harm our business. Litigation against
other online companies could result in interpretations of the
law that could also require us to change our business practices
or otherwise increase our costs.
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We are subject to risks associated with information
disseminated through our service.
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The law relating to the liability of online services companies
for information carried on or disseminated through their
services is currently unsettled. Claims could be made against
online services companies under
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both U.S. and foreign law for defamation, libel, invasion of
privacy, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials
disseminated through their services. Several private lawsuits
seeking to impose liability upon us under a number of these
theories have been brought against us. In addition, domestic and
foreign legislation has been proposed that would prohibit or
impose liability for the transmission over the Internet of
certain types of information. Our service features a Feedback
Forum, which includes information from users regarding other
users. Although all such feedback is generated by users and not
by us, claims of defamation or other injury have been made in
the past and could be made in the future against us for content
posted in the Feedback Forum. Several recent court decisions
have narrowed the scope of the immunity provided to Internet
service providers like us under the Communications Decency Act.
This trend, if continued, may increase our potential liability
to third parties for the user-provided content on our site. Our
liability for such claims may be higher in jurisdictions outside
the U.S. where laws governing Internet transactions are
unsettled. If we become liable for information provided by our
users and carried on our service in any jurisdiction in which we
operate, we could be directly harmed and we may be forced to
implement new measures to reduce our exposure to this liability.
This may require us to expend substantial resources or to
discontinue certain service offerings, which would negatively
affect our financial results. In addition, the increased
attention focused upon liability issues as a result of these
lawsuits and legislative proposals could harm our reputation or
otherwise impact the growth of our business. Any costs incurred
as a result of this potential liability could harm our business.
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Customer complaints or negative publicity about our
customer service could diminish use of our services.
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Customer complaints or negative publicity about our customer
service could severely diminish consumer confidence in and use
of our services. Measures we sometimes take to combat risks of
fraud and breaches of privacy and security can damage relations
with our customers. These measures heighten the need for prompt
and accurate customer service to resolve irregularities and
disputes. Effective customer service requires significant
personnel expense, and this expense, if not managed properly,
could significantly impact our profitability. Failure to manage
or train our customer service representatives properly could
compromise our ability to handle customer complaints
effectively. If we do not handle customer complaints
effectively, our reputation may suffer and we may lose our
customers’ confidence.
Because it is providing a financial service and operating in a
more regulated environment, PayPal, unlike eBay, must provide
telephone as well as email customer service and must resolve
certain customer contacts within shorter time frames. As part of
PayPal’s program to reduce fraud losses, it may temporarily
restrict the ability of customers to withdraw their funds if
those funds or the customer’s account activity are
identified by PayPal’s anti-fraud models as suspicious.
PayPal has in the past received negative publicity with respect
to its customer service and account restrictions, and has been
the subject of purported class action lawsuits and state
attorney general inquiries alleging, among other things, failure
to resolve account restrictions promptly. If PayPal is unable to
provide quality customer support operations in a cost-effective
manner, PayPal’s users may have negative experiences,
PayPal may receive additional negative publicity, its ability to
attract new customers may be damaged, and it could become
subject to additional litigation. Current and future revenues
could suffer, or its operating margins may decrease. In
addition, negative publicity about or experiences with
PayPal’s customer support could cause eBay’s
reputation to suffer or affect consumer confidence in the eBay
brands as a whole.
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Problems with third parties who provide services to us or
to our users could harm our business.
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A number of parties provide services to us or to our users that
benefit us. Such services include seller tools that automate and
manage listings, merchant tools that manage listings and
interface with inventory management software, storefronts that
help our users list items, and caching services that make our
sites load faster, among others. In some cases we have
contractual agreements with these companies that give us a
direct financial interest in their success, while in other cases
we have none. In either circumstance, financial, regulatory, or
other problems that prevent these companies from providing
services to us or our users could reduce the number of listings
on our websites or make completing transactions on our websites
more difficult, and thereby harm our business. Any security
breach at one of these companies could also affect our customers
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and harm our business. Although we generally have been able to
renew or extend the terms of contractual arrangements with these
third party service providers on acceptable terms, there can be
no assurance that we will continue to be able to do so in the
future.
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We depend on key personnel.
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Our future performance depends substantially on the continued
services of our senior management and other key personnel and
our ability to retain and motivate them. The loss of the
services of any of our executive officers or other key employees
could harm our business. We do not have long-term employment
agreements with any of our key personnel, we do not maintain any
“key person” life insurance policies, and our Chief
Executive Officer and many other members of our senior
management team have fully vested the vast majority of their
equity incentives. Our new businesses all depend on attracting
and retaining key personnel. Our future success also will depend
on our ability to attract, train, retain and motivate highly
skilled technical, managerial, marketing, and customer support
personnel. Competition for these personnel is intense, and we
may be unable to successfully attract, integrate, or retain
sufficiently qualified personnel. In making employment
decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment.
Fluctuations in our stock price may make it more difficult to
retain and motivate employees whose stock option strike prices
are substantially above current market prices. Similarly,
decreases in the number of unvested stock options held by
existing employees, either because their options have vested or
because the size of follow-on option grants has declined, may
make it more difficult to retain and motivate employees.
Skype’s future success depends substantially upon the
continued services of its senior management and key personnel,
and the loss of their services could harm our business. Several
key members of Skype’s engineering team are consultants,
not full time employees, who provide services to us and third
parties. Many of Skype’s employees had equity in Skype
prior to its acquisition by eBay. Skype equity holders were
given the option of receiving their portion of the acquisition
consideration in the form of a lump-sum up-front payment or
receiving a lower up-front payment in exchange for the
possibility of receiving additional consideration in the form of
potential earn-out payments tied to the achievement of certain
performance targets prior to June 30, 2009. Several key
members of Skype’s senior management and key employees
chose to receive less up-front consideration in exchange for the
possibility of receiving the performance-based earn-out
payments. Although eligible Skype employees have also been
granted eBay stock options, the earn-out payments are not tied
to continued employment with Skype or eBay, and key Skype
employees may choose to depart because of differences in
corporate culture, because they believe the earn-out targets
will be achieved without their contributions, or because they
believe the earn-out targets are not achievable. The loss of the
services of any of Skype’s senior management or key
personnel could delay the development and introduction of new
features and products, and could harm our ability to grow
Skype’s business.
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Our industry is intensely competitive, and other companies
or governmental agencies may allege that our behavior is
anti-competitive.
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eBay’s Marketplaces businesses currently or potentially
compete with a number of companies providing both particular
categories of goods and broader ranges of goods. The Internet
provides new, rapidly evolving and intensely competitive
channels for the sale of all types of goods. We expect
competition to intensify in the future. The barriers to entry
into these channels are relatively low, and current offline and
new competitors can easily launch online sites at a nominal cost
using commercially available software or partnering with any one
of a number of successful
e-commerce
companies.
Our broad-based competitors include the vast majority of
traditional department, warehouse, discount, and general
merchandise stores (as well as the online operations of these
traditional retailers), emerging online retailers, online
classified services, and other shopping channels such as offline
and online home shopping networks. These include most
prominently: Wal-Mart, Target, Sears, Macy’s, JC Penney,
Costco, Office
60
Depot, Staples, OfficeMax, Sam’s Club, Amazon.com, Buy.com,
AOL.com, Yahoo! Shopping, MSN, QVC, and Home Shopping Network.
A number of companies have launched a variety of services that
provide new channels for buyers to find and buy items from
sellers of all sizes. We recently acquired Shopping.com Ltd., an
online shopping comparison site. Shopping.com competes with
sites such as Buy.com, Google’s Froogle, In-Store.com,
MySimon.com, Nextag.com, Pricegrabber.com, Shopzilla, and Yahoo!
Product Search, which offer shopping search engines that allow
consumers to search the Internet for specified products.
Similarly, sellers are increasingly acquiring new customers by
paying for search-related advertisements on search engine sites
such as Google and Yahoo!. We use product search engines and
paid search advertising to channel users to our sites, but these
services also have the potential to divert users to other online
shopping destinations.
We also compete with many local, regional, and national
specialty retailers and exchanges in each of the major
categories of products offered on our site. For example,
category-specific competitors to offerings in our ’Business
& Industrial’ category include Alibaba, Ariba,
Bid4Assets, BidFreight.com, Buyer Zone, Commerce One, DotMed,
DoveBid, Go Industry, Grainger, IronPlanet, labx.com,
Liquidation.com, Machinetools.com, Oracle, Partsforindustry.com,
PurchasePro.com, Ritchie Brothers Auctioneers, Testmart, Tractor
Supply Company, and VerticalNet. In addition, many competitors
have been successful at establishing online marketplaces that
cater to a particular retail category, such as vehicles,
tickets, or sporting goods.
Our international Marketplaces websites compete with similar
online and offline channels in each of their vertical categories
in most countries. In addition, they compete with general online
e-commerce
sites, such
as Quelle and Otto in Germany, Yahoo-Kimo in Taiwan, Daum and
Gmarket in South Korea, TaoBao and 1pai, a partnership between
Sina.com and Yahoo! in China, and Amazon in the U.K. and other
countries. In some of these countries, there are online sites
that have much larger customer bases and greater brand
recognition than we do, and in certain of these jurisdictions
there are competitors that may have a better understanding of
local culture and commerce than we do.
The principal competitive factors for eBay Marketplaces include
the following:
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ability to attract buyers and sellers;
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volume of transactions and price and selection of goods;
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customer service; and
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brand recognition.
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With respect to our online competition, additional competitive
factors include:
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community cohesion, interaction and size;
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system reliability;
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reliability of delivery and payment;
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website convenience and accessibility;
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level of service fees; and
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quality of search tools.
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Some current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition
in other business and Internet sectors than we do. Other online
trading services may be acquired by, receive investments from,
or enter into other commercial relationships with larger,
well-established and well-financed companies. As a result, some
of our competitors with other revenue sources may be able to
devote more resources to marketing and promotional campaigns,
adopt more aggressive pricing policies and devote substantially
more resources to website and systems development than we can.
Some of our competitors have offered services for free and
others may do this as well. We may be unable to compete
successfully against current and future competitors. In
addition, certain offline competitors may encourage
manufacturers to limit or cease distribution of their products
to dealers who sell through online channels such
61
as eBay, or may attempt to use existing or future government
regulation to prohibit or limit online commerce in certain
categories of goods or services. The adoption by manufacturers
or government authorities of policies or regulations
discouraging the sales of goods or services over the Internet
could force eBay users to stop selling certain products on our
websites. Increased competition or anti-Internet distribution
policies or regulations may result in reduced operating margins,
loss of market share and diminished value of our brand.
Conversely, other companies and government agencies have in the
past and may in the future allege that our actions violate the
antitrust or competition laws of the U.S. or other
countries, or otherwise constitute unfair competition. Such
claims, even if without foundation, typically are very expensive
to defend, involve negative publicity and diversion of
management time and effort, and could result in significant
judgments against us.
In order to respond to changes in the competitive environment,
we may, from time to time, make pricing, service or marketing
decisions or acquisitions that could harm our profitability. For
example, we have implemented a buyer protection program that
generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating at no
cost to the user. PayPal has implemented a similar buyer
protection program covering losses from selected eBay sellers up
to $1,000, with no deductible. Depending on the amount and size
of claims we receive under these programs, these product
offerings could harm our profitability. In addition, certain
competitors may offer or continue to offer free shipping or
other transaction related services, which could be impractical
or inefficient for eBay users to match. New technologies may
increase the competitive pressures by enabling our competitors
to offer a lower cost service.
Although we have established Internet traffic arrangements with
several large online services and search engine companies, these
arrangements may not be renewed on commercially reasonable terms
or these companies may decide to promote competitive services.
Even if these arrangements are renewed, they may not result in
increased usage of our services. In addition, companies that
control user access to transactions through network access,
Internet browsers, or search engines, could promote our
competitors, channel current or potential users to their
vertically integrated electronic commerce sites or their
advertisers’ sites, attempt to restrict our access, or
charge us substantial fees for inclusion.
The market for PayPal’s product is emerging, intensely
competitive, and characterized by rapid technological change.
PayPal competes with existing online and off-line payment
methods, including, among others:
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credit card merchant processors that offer their services to
online merchants, including Cardservice International, Chase
Paymentech, First Data, iPayment and Wells Fargo; and payment
gateways, including CyberSource and Authorize.net;
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Money remitters such as MoneyGram and Western Union, a
subsidiary of First Data;
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Bill payment services, including CheckFree;
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processors that provide online merchants the ability to offer
their customers the option of paying for purchases from their
bank account, including Certegy, PayByTouch and TeleCheck, a
subsidiary of First Data, or to pay on credit, including Bill Me
Later;
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providers of traditional payment methods, particularly credit
cards, checks, money orders, and Automated Clearing House
transactions; and
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issuers of stored value targeted at online payments, including
VisaBuxx, NetSpend and Next Estate.
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In addition, Google has stated it is developing a new payment
service.
Some of these competitors have longer operating histories,
significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition, or a
larger base of customers in affiliated businesses than PayPal.
PayPal’s competitors may respond to new or emerging
technologies and changes in customer requirements faster and
more effectively than PayPal. They may devote greater resources
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to the development, promotion, and sale of products and services
than PayPal, and they may offer lower prices. PayPal may be
forced to lower its prices in response. Competing services tied
to established banks and other financial institutions may offer
greater liquidity and engender greater consumer confidence in
the safety and efficacy of their services than PayPal.
Overseas, PayPal faces competition from similar channels and
payment methods. In each country, numerous banks provide
standard online credit card acquiring and processing services,
and these banks typically have leading market share. In
addition, PayPal faces competition from Visa’s Visa Direct,
MasterCard’s MoneySend, and Royal Bank of Scotland’s
World Pay and Webpay International’s Click & Buy
in the European Community, NOCHEX, Moneybookers, NETeller and
FirePay in the U.K., CertaPay and HyperWallet in Canada, Paymate
in Australia, Alipay and 99Bill in China and Inicis in South
Korea. In addition, in certain countries, such as Germany and
Australia, electronic funds transfer is a leading method of
payment for both online and offline transactions. As in the
U.S., established banks and other financial institutions that do
not currently offer online payments could quickly and easily
develop such a service.
The market for Skype’s products is also emerging, intensely
competitive, and characterized by rapid technological change.
Many traditional telecommunications carriers and cable providers
offer, or have indicated that they plan to offer, VoIP products
or services that compete with the software Skype provides. In
addition, many Internet companies, including AOL, Google,
Microsoft, and Yahoo! offer, or have indicated that they plan to
offer in the near future, VoIP products that are similar to
Skype’s. We expect VoIP competitors to continue to improve
the performance of their current products and introduce new
products, software, services, and technologies. If Skype’s
competitors successfully introduce new products or enhance their
existing products, this could reduce the market for Skype’s
products, increase price competition, or make Skype’s
products obsolete. For example, Skype’s competitors may
integrate more traditional methods of online communication that
do not involve VoIP technology, such as instant messaging, with
content and functionality that Skype does not have, or that is
superior to Skype’s, which could lower Skype’s
adoption rates, decrease its ability to attract new users or
cause its current users to migrate to a competing company. In
addition, some of Skype’s competitors, such as
telecommunications carriers and cable television providers, may
be able to bundle services and products that Skype does not
offer. These could include various forms of wireless
communications, voice and data services, Internet access, and
cable television. This form of bundling would put Skype at a
competitive disadvantage if these providers can combine a
variety of service offerings at a single attractive price.
Furthermore, competitors may choose to make their services
interoperable with one another, rather than proprietary, which
could increase the attractiveness of their services relative to
Skype and decrease the value of Skype’s network of users.
Many of Skype’s current and potential competitors have
longer operating histories, are substantially larger, and have
greater financial, marketing, technical, and other resources.
Some also have greater name recognition and a larger installed
base of customers than Skype has. As a result of their greater
resources, many current and potential competitors may be able to
lower their prices substantially, thereby eroding some or all of
Skype’s cost advantage.
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Our business depends on the development and maintenance of
the Internet infrastructure.
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The success of our services will depend largely on the
development and maintenance of the Internet infrastructure. This
includes maintenance of a reliable network backbone with the
necessary speed, data capacity, and security, as well as timely
development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and
is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. The Internet
infrastructure may be unable to support such demands. In
addition, increasing numbers of users, increasing bandwidth
requirements, or problems caused by “viruses,”
“worms,” and similar programs may harm the performance
of the Internet. The backbone computers of the Internet have
been the targets of such programs. The Internet has experienced
a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face
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outages and delays in the future. These outages and delays could
reduce the level of Internet usage generally as well as the
level of usage of our services.
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We may be unable to protect or enforce our own
intellectual property rights adequately.
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We regard the protection of our trademarks, copyrights, patents,
domain names, trade dress, and trade secrets as critical to our
success. We aggressively protect our intellectual property
rights by relying on a combination of trademark, copyright,
patent, trade dress and trade secret laws, and through the
domain name dispute resolution system. We also rely on
contractual restrictions to protect our proprietary rights in
products and services. We have entered into confidentiality and
invention assignment agreements with our employees and
contractors, and confidentiality agreements with parties with
whom we conduct business in order to limit access to and
disclosure of our proprietary information. These contractual
arrangements and the other steps we have taken to protect our
intellectual property may not prevent misappropriation of our
technology or deter independent development of similar
technologies by others. We pursue the registration of our domain
names, trademarks, and service marks in the U.S. and
internationally. Effective trademark, copyright, patent, domain
name, trade dress, and trade secret protection is very expensive
to maintain and may require litigation. We must protect our
trademarks, patents, and domain names in an increasing number of
jurisdictions, a process that is expensive and may not be
successful in every location. For example, Skype is in the
process of applying to register the Skype name as a trademark
worldwide. In the EU, Skype’s application is being opposed.
If this opposition to Skype’s application were to be
successful, Skype might be forced to apply for trademark
registration in each individual EU country, resulting in
increased expenditures and damage to its business if its
application were rejected in individual countries. We have
licensed in the past, and expect to license in the future,
certain of our proprietary rights, such as trademarks or
copyrighted material, to others. These licensees may take
actions that diminish the value of our proprietary rights or
harm our reputation.
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We are subject to the risks of owning real
property.
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We own real property including land and buildings related to our
operations. We have little experience in managing real property.
Ownership of this property subjects us to risks, including:
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the possibility of environmental contamination and the costs
associated with fixing any environmental problems;
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adverse changes in the value of these properties, due to
interest rate changes, changes in the neighborhoods in which the
properties are located, or other factors;
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the possible need for structural improvements in order to comply
with zoning, seismic, disability act, or other
requirements; and
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possible disputes with tenants, neighboring owners, or others.
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Some anti-takeover provisions may affect the price of our
common stock.
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Our Board of Directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the
preferences, rights and privileges of those shares without any
further vote or action by the stockholders. The rights of the
holders of common stock may be harmed by rights granted to the
holders of any preferred stock that may be issued in the future.
Some provisions of our certificate of incorporation and bylaws
could have the effect of making it more difficult for a
potential acquirer to acquire a majority of our outstanding
voting stock. These include provisions that provide for a
classified board of directors, prohibit stockholders from taking
action by written consent and restrict the ability of
stockholders to call special meetings. We are also subject to
provisions of Delaware law that prohibit us from engaging in any
business combination with any interested stockholder for a
period of three years from the date the person became an
interested stockholder, unless certain conditions are met. This
restriction could have the effect of delaying or preventing a
change of control.
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