Learning from the Craigslist-eBay Mess

Lawsuits pitting the online classified and e-commerce giants should make prospective partners think hard before seating a rival on the board

by Catherine Holahan

Frenemies be afraid. Alliances with would-be competitors can be perilous. Nowhere in techdom is that clearer than in the battle now brewing between e-commerce giant eBay (EBAY) and classified site Craigslist. Fallout from the companies' legal dispute could serve as an object lesson for other tech companies considering teaming up with a rival.

Lawsuits between the two companies relate to eBay's half-decade-old investment in Craigslist and the ill will that ensued as eBay's changing business focus brought it into closer competition with the smaller ally. A host of tech companies—including Microsoft (MSFT), Yahoo! (YHOO), Google (GOOG), and News Corp.'s (NWS) MySpace—are engaged in or considering their own partnerships with potential competitors. No two pairings are the same, but legal experts close to all the players will no doubt be on the lookout for any parallels in the eBay-Craigslist contretemps.

The suits raise legal questions that all competitive partners may someday face: Can a company executive hold a seat on a rival's board? And what recourse does a company have when it believes an investor is using information gleaned from a board position to bolster a competing business? "You would certainly want to be very careful when you are on the board of a company you could compete with," says Kathryn Deimer, a partner at San Jose-based law firm Deimer, Whitman & Cardosi, which specializes in business litigation and business breakups.

Too Close for Comfort

By way of background, eBay invested about $30 million in Craigslist in December, 2004, picking up a board seat, in hopes of gaining a toehold in the $4 billion U.S. classified advertising business. At the outset, theirs seemed an ideal match. EBay wasn't a direct competitor; its members bought and sold items using an online payment service, typically over distances, often incurring shipping charges. Craigslist users also engaged in e-commerce, though they typically did so locally, using cash.

Yet eBay had an eye on expanding its classified business. In November, 2004, it had purchased Netherlands-based Marktplaats, a leading foreign classifieds site, for $290 million. According to Craigslist's suit, eBay had begun making overtures to Craigslist earlier that summer. Craigslist says eBay wanted to buy a large stake with the possibility of buying it outright. Garrett Price, then eBay's senior director of corporate development, told executives: "We just purchased the largest classifieds site in the Netherlands for $290 million, what do you think we would pay for the largest classifieds site in the United States?" according to Craigslist's lawsuit. Craigslist and eBay representatives declined to discuss the matter, citing the pending litigation.

Craigslist soon found it didn't like having such a close competitor on its board. In less than three years, the eBay-Craigslist dream tieup became a competitive nightmare. In court papers, eBay says Craigslist illegally constrained its influence by diluting eBay's 28% stake, eliminating its board seat, and inhibiting eBay's ability to get the highest price for its share of the company (BusinessWeek.com, 5/2/08). Craigslist is countersuing eBay (BusinessWeek.com, 5/13/08) for allegedly using its board position to launch a direct U.S. competitor. Both companies seek rulings that would prevent the other from interfering in its business.

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