Craigslist officials were caught off guard when told in 2007 that their minority shareholder, eBay, was going to compete directly with them in the online classifieds business in the U.S., an attorney for Craigslist said Wednesday.
Ed Wes said he was equally troubled by eBay's defiance in the face of Craigslist's subsequent request that eBay divest or sell its 28 percent minority stake because Craigslist was no longer comfortable having the online auction giant as a shareholder.
Wes said eBay attorney Brian Levey warned him in a telephone call after Craigslist asked for divestiture that eBay CEO Meg Whitman's response might be to tell Craigslist to go "pound sand."
"It was as if he knew what the response would be even before Meg responded, even before she saw the e-mail," Wes said. "It was a stunning moment for me."
Wes was testifying in a lawsuit in which eBay is challenging antitakeover measures adopted by Craigslist founder Craig Newmark and CEO James Buckmaster in response to eBay's launch of its Kijiji classifieds site and refusal to sell or divest its shares.
Craigslist contends that eBay was out to control Craigslist despite assurances that it was satisfied with a minority stake, and that it reneged on promises that Craigslist would be eBay's exclusive vehicle in the online classifieds market in the U.S., and that eBay would help Craigslist expand internationally. Craigslist also claims that eBay misused confidential financial information provided by Craigslist to help develop Kijiji.
Wes testified that Buckmaster began expressing concerns about potential conflicts involving eBay as early as October 2004, two months after eBay bought its minority interest in Craigslist from a disgruntled shareholder. Shortly after closing the deal with Craigslist, eBay began acquiring several online classifieds sites overseas.
"I think Jim was just concerned about eBay having divided interests," Wes said.
Despite eBay's acquisition of the overseas sites and its launch overseas of Kijiji in 2005, Wes said Craigslist officials were nonetheless surprised when given 10 days notice of Kijiji's impending U.S. launch in 2007.
"It was clear to me knowing the way eBay operated that this must have been in the works for some time, and I was surprised that eBay would not have disclosed this earlier," he said.
Wes said eBay's announcement that it would compete head-to-head with a company in which it held both a sizable stake and a board seat, combined with eBay's assertion that its eventual acquisition of Craigslist was "inevitable," caused Craigslist officials to re-evaluate the relationship and take steps to protect itself.
During the five months that it considered those protective measures, Craigslist did not inform eBay what it was doing, Wes said.
"We didn't trust eBay, and we felt it was in the best interest of Craigslist not to provide that notice," he said.
In his cross-examination, eBay attorney William Lafferty asked why Craigslist acted secretly to adopt the protective measures, even though there was no imminent threat of an eBay takeover.
"You never know when the takeover threat may occur," Wes replied.
Asked why Craigslist never complained about competition until 2007, Wes said eBay had assured Craigslist officials that the overseas acquisitions and Kijiji operations would be contributed by eBay to an international partnership with Craigslist.
Efforts to develop that partnership failed however, due partly to antitrust concerns stemming from an investigation of eBay by the New York attorney general.
Lafferty said that when negotiating the deal with eBay, Wes knew eBay already had acquired a classified site in Germany, and that eBay had no contractual obligation not to compete with Craigslist, only what Wes considered a "moral commitment."
"Not enforceable in a court of law, is it Mr. Wes?" Lafferty said.
"I don't know if that's the case," replied Wes.