Someone's clicking the "Sue us now!" button on eBay (Nasdaq: EBAY).
A Connecticut-based company is suing eBay for at least $3.8 billion, alleging that the auction site's PayPal platform infringes on six of its patents.
I'm no legal eagle, but as an investor, I can tell you that the market doesn't like uncertainty. Until the claim is settled or legally cleared, lingering doubt even in the most frivolous of cases can weigh on a company, especially when there's a gargantuan judgment at stake.
PayPal has been the workhorse in eBay's arsenal, overcoming its meandering marketplace business. It also has greater pressure to perform for eBay's portfolio, now that the dot-com giant has unloaded a majority stake in Skype.
PayPal has stared down financial giants in the past. It was able to outlive Citigroup's (NYSE: C) C2it and Wells Fargo's (NYSE: WFC) Billpoint during its early years, long before the patents disputed in the lawsuit were originally filed. PayPal should also have no problem against the titans it could bump heads with in the future, following American Express' (NYSE: AXP) purchase of Revolution Money last year, and Visa's (NYSE: V) recent move to acquire CyberSource (Nasdaq: CYBS) in a $2 billion deal.
Shareholders will be calmed to see $4.5 billion in cash and short-term securities sitting on the company's balance sheet. The patent lawsuit won't take eBay down, even under the grimmest of scenarios. A courtroom defeat would also likely result in an appeal, buying eBay even more time to pad its coffers.
However, unless this case is entirely without merit, it may keep eBay's expansion in check. The auction site doesn't need this distraction; with organic weakness at home, it ought to be marshalling resources to buy fast-growing foreign competitor MercadoLibre (Nasdaq: MELI) in Latin America, or finding another powerful purchase that could perk up its companywide performance.
There's never a right time to be sued, but the current case against PayPal star seems especially unfortunate now.
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