Learning from the Craigslist-eBay Mess

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Anticompetitive Rivalry

A key sticking point is the presence of an eBay representative on Craigslist's board. Legal experts say having a rival appoint a director should be avoided—especially in California, which has stringent anticompetitive rules preventing board members from taking advantage of their positions. Typically, such rules would forbid a rival from holding a seat on another's board altogether. After all, a board member from the competing company is still an agent of that company, even if the person is not directly responsible for the business unit that competes with it.

Craigslist and eBay appear to have entered their tieup with eyes open about the prospect of future competition. Craigslist had designs on expanding more aggressively into Europe and eBay knew it may someday want to compete on Craigslist's turf, according to court papers. According to eBay's suit, the partners were so aware of the chance of rivalry they wrote a provision into their agreement to change the terms of their deal so that, should they become direct competitors, Craigslist could limit the amount of information to which eBay's investment entitled it.

Deimer says that agreement may not hold up in court, given eBay stepped up its emphasis on the classified business after investing in Craigslist. "It certainly is suspicious looking that somebody walks in a door, gets involved in a deal, and then is suddenly competing in the same business," Deimer says. "It would be virtually impossible to convince anyone that it would be acceptable to enter into a contract to steal someone's trade secrets." In July, 2007, eBay launched a U.S. version of its global classifieds site, Kijiji (BusinessWeek.com, 7/6/07).

Well-Meaning Boards Behaving Badly

Why did Craigslist agree to a board seat in the first place? In its lawsuit, Craigslist indicates it was looking to eBay to help improve trust and safety on the site. In public statements, former eBay Chief Executive Meg Whitman often spoke enthusiastically about the partnership. In its lawsuit, eBay contends the launch of a U.S. competitor to the site gave Craigslist no right to take away its board seat. Per their agreement, Craigslist could limit eBay's access to valuable competitive information, but not ban the company from board meetings, dilute its investment, or limit eBay's ability to its stake. Craigslist contends eBay was using its board seat to help bolster Kijiji's competitive stance, and therefore no longer deserved to be on the board.

To successfully counter that argument, eBay may need to prove it didn't steal anything from Craigslist. That means showing its Kijiji site did not rely on proprietary Craigslist information and that its board appointees were sufficiently firewalled off from eBay's classifieds business. In its suit against Craigslist, eBay argues it changed board appointees precisely so that it could keep the two businesses separate. Craigslist alleges appointees were always tied to Kijiji.

Even if eBay was behaving in an anticompetitive manner, Craigslist still doesn't have a right to harm the company as an investor, Deimer and other lawyers say. When a board member and investor is behaving badly, the company can't simply strip them of their contract-given board seat and shareholder rights. In other words, Deimer says, two wrongs don't make a right. Under the law, eBay is entitled to the same rights as any other investor, despite Craigslist's suspicions, legal experts say.

In the end, both companies could prevail. That would mean only more legal battling as they try to figure out which verdict is applicable. And when the wrangling is over, both companies may wish they had been more choosy about which rival to turn into a frenemy.

Holahan is a writer for BusinessWeek.com in New York.