RealTime IT News

PayPal: CertCo Suit Expensive to Defend

By Ryan Naraine

Online payments firm PayPal is moving to get its $70 million offering back on track after a lawsuit postponed it last week. But legal headaches and a jittery public market could reduce the deal's price, according to Wall Street experts.

Paypal was forced to delay the IPO last week after being hit with a patent infringement lawsuit from New York-based CertCo. Since then, it has filed updated SEC documents denying its technology infringed on CertCo's patent No. 6,029,150, which covers the use of distributed computing systems that process micropayments, or small cash amounts.

Despite the legal headaches, IPO watchers believe the IPO will be completed before the end of this week.

Kyle Huske of IPO.com, a site that tracks the IPO market, believes the underwriters will push through the offering within a few days.

Huske told atNewYork that the CertCo suit would not have a major impact on the IPO aside from leaving a bad taste in the minds of investors. "The demand for the deal is already there but, because PayPal was so far along in the pricing process, this might give investors a chance to push for a cheaper price. It might be an advantage to the early investors," she said.

"The market generally regards any delay in your pricing to be a real problem and this could cause a reduction in the pricing. If we see a severe reduction, we'll see the underwriters decrease the range of the pricing to reduce the shock," Huske said.

PayPal has also warned that, whether or not CertCo proves its case, the litigation could prove costly.

"...Even if we prevail, the litigation could be time-consuming and expensive to defend and could affect our business materially and adversely," according to the company's filing with the Securities and Exchange Commission.

"If any portions of our service were found to be infringing the patent, and if we were unwilling or unable to obtain a license on terms acceptable to CertCo, then we would likely be unable to continue to offer those portions of our service found to be infringing."

CertCo, an online risk-management company, filed the suit just days before PayPal's IPO was scheduled to be priced, claiming PayPal has violated its patent covering electronic payments. The complaint seeks unspecified damages and an injunction against PayPal using the payment system, which is also in use as part of PayPal's payment deal with online auction company eBay.

The technology, as spelled out in over 50 pages in the lawsuit, is at the core of PayPal's business model of sending small amounts of money between parties in digital form and taking a cut of the transaction.

PayPal, the Palo Alto, Calif.-based firm that is looking to become the first dot-com to go public in more than a year, is also in the midst of defending another patent infringement lawsuit filed by Tumbleweed Communications.

The Tumbleweed suit, which was filed separately, is seeking licensing fees for patents related to electronic document delivery. In its latest SEC filing, PayPal also dismissed those claims. "We believe that Tumbleweed's assertions are without merit. We believe that our service does not infringe the patents and that we therefore do not require a license."