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Stamps.com Sues eBay, PayPal for Breach of Contract

Stamps.com has filed a lawsuit against PayPal and eBay for it says not living up to the legal obligations it has under an existing deal to sell postage stamps online.

Stamps.com says that eBay interfered with a deal it had with PayPal, and it went onto say in court papers that PayPal, failed to assist Stamps.com in launching a new online postage service and is also in violation of an existing contract with the company.

eBay is the parent company of PayPal and the disagreement between it and Stamps.com over the terms of a postage licensing agreement. Stamps.com says in addition to breach of contract, the company alleges eBay is in breach of the implied covenants of good faith and fair dealing.

Back in June 2002, Stamps.com says it inked a license agreement which paved the way for PayPal to use its technology, so that its customers could buy and print postage online.

Under the terms of the deal, Stamps.com says the partners were to make the PayPal online postage service available by the 2002 holiday buying season. However, PayPal customers must sill use a credit card number to pay for postage purchases.

"It became evident that eBAY was dragging its feet in implementing Stamps.com's technology into PayPal's service. In June 2002, STMP and PayPal signed a two-year license to enable PayPal users to buy and print postage online from their PayPal accounts. Subsequently, EBAY acquired PayPal. STMP delivered the requisite software but has been frustrated by what it perceives to be delay tactics from eBAY," says Michael Crawford, analyst at B. Riley & Co., who currently has a strong buy rating on Stamps.com but has no investment banking relationship with the company.

Stamps.com said it believes that PayPal did not live up to its contractual obligations in the agreement. Specifically, Stamps.com believes PayPal did not work to launch the Stamps.com functionality in any reasonable time frame, made misrepresentations to Stamps.com and acted in bad faith. Stamps.com is also alleging that eBay improperly interfered in the Stamps.com and PayPal relationship.

Stamps.com's legal complaint was filed on Tuesday in Superior Court of the State of California in Los Angeles County. The company said it is seeking to recover damages both from the "lost value of the agreement as well as additional damages due to PayPal and eBay bad faith and interference."

"It's interesting to note that Stamp.com's agreement was with PayPal prior to the eBay acquisition, although after the eBay acquisition was announced. Stamps.com is trying to go after the parent company on a 'tortious interference' theory -- that eBay caused PayPal to breach its obligations to Stamps.com," Jeffrey D. Osterman, partner with Weil, Gotshal & Manges LLP, told internetnews.com. Osterman is not representing the company in the case.

"I'm not sure why PayPal didn't integrate the Stamps.com service into the PayPal site, but I suppose the underlying message is that commercial relationships sometimes go sour and depending on the agreement there may be substantial consequences if you announce a product and then don't follow through," added Osterman.

"Additionally, Stamps.com believes that eBAY has been working behind the scenes with the USPS to develop some alternative shipping solution," Crawford said.

While it will be some time before the court reviews the case, Stamps.com appears to be muddling along, posting unimpressive financial results. For the first quarter of 2003, Stamps.com revenues rose 11 percent to a paltry $4.6 million. The company's net loss totaled $2.1 million, up from $707,000 previously. Stamps.com most recent financial results reflect continued sales of its NetStamps labels through the company's online store, but those sales were offset by lower margins and increased promotional expenses.

"We believe Stamps.com has a good case and fairly strong chance of recovering costs. However, we consider this unexpected development as a net negative to the Stamps.com story overall, as a productive partnership with eBAY could accelerate growth of its PC postage business, in our opinion," Crawford added.

The company's United States Postal Service-approved Internet postage service offers customers the ability to print information-based indicia, or electronic stamps, which can be printed directly onto envelopes or labels.