eBay 2004 Annual Report Download - page 56

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 the listing of a pornographic video clip on that site. Similarly, our Korean subsidiary and one
of its employees was found criminally liable for a listing 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 oÅerings. 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 signiÑcant 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 traÇcking, prohibited sales of alcoholic beverages or tobacco products, and online securities
fraud. PayPal recently announced a change in its acceptable use policy that would enable PayPal to Ñne 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 may be funded using PayPal.
PayPal is subject to 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 Ñrm.
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 more closely international transactions. These regulations
could impose signiÑcant costs on PayPal and make it more diÇcult for new customers to join its network.
PayPal could be required to learn more about its customers before opening an account, to obtain additional
veriÑcation of international customers and to monitor its customers' activities more closely. These require-
ments, as well as any additional restrictions imposed by Visa, MasterCard, American Express, and Discover,
could raise PayPal's costs signiÑcantly and reduce the attractiveness of its product. Failure to comply with
federal and state money laundering laws could result in signiÑcant criminal and civil lawsuits, penalties, and
forfeiture of signiÑcant assets.
We are subject to intellectual property and other litigation.
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 aÇliates in the regional court of Cologne, Germany. The suit
subsequently was transferred to the regional court in Dusseldorf, 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
Dusseldorf, 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. In March 2004,
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