CertCo Lawsuit Postpones PayPal IPO

If you’ve been eagerly awaiting PayPal’s IPO to see whether a dot com can
still rocket onto the Nasdaq exchange, you’ll have to wait a while longer –
the launch has been delayed, thanks to a last-minute patent infringement
lawsuit filed against the secure online payments company.

New York online risk-management company CertCo is claiming in a lawsuit filed Monday in federal court in Delaware that PayPal has violated a CertCo 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 action against the Palo Alto, Calif.-based PayPal, whose symbol was to have been PYPL
when it began trading, is a surprise move that
investment bankers deemed serious enough to delay the offering for at least a

PayPal, which enables any business or consumer with an e-mail address to send
and receive secure online payments, had been planning to offer 5.4 million
shares of stock at $12 to $14 each. Trading was to have begun Thursday.

According to the patent information included in the lawsuit, CertCo applied for the patent on October 4, 1996. On February 22, 2000, it was awarded patent No. 6,029,150 entitled Payment and Transactions in Electronic Commerce System.

Referred to ‘150 for shorthand, the patent covers the use of distributed computing systems that process micropayments, or small cash amounts.

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 has profited through infringement of the ‘150 patent,” the complaint says. “As a result of Defendants’ infringement of the ‘150 patent, CertCo’s business and financial expectancies have been harmed. CertCo has suffered and will continue to suffer grievous damages.”

Like a lot of the dot-com companies that went public in the late
1990s, PayPal has yet to turn a profit, however. It lost $107.8 million on
revenue of $104.8 million last year.

In addition to the injunction, the complaint seeks to have monetary damages tripled on the suit’s claim that PayPal “deliberately and willfully” infringed the patent.

PayPal announced its IPO plans in December of 2001, and the market launch was expected
to be a bit of a predictor for what might befall other Internet companies
that have been deferring their plans to go public.

Investment bankers at Salomon Smith Barney and PayPal management decided to
hold the deal, possibly to allow PayPal time to amend its securities
documents to fully disclose the lawsuit to potential investors. The PayPal prospectus also warns investors that it cannot offer assurance that its product features do not infringe on patents held by other companies.

As to when the offering would go forward, that was unclear by Thursday afternoon. Marc Baum of IPO site IPO.com says the offering is expected to get pushed out soon, possibly by Monday, says the Wall Street vet.

PayPal generates most of its revenue from transaction fees paid by its users.

CertCo, which was founded in 1996, is a provider of transactional
security and risk management products and services and also makes money by enabling transactions.

The founders starting forming the company in the mid-1990s as business-to-business exchanges were all the rage with Wall Street and investors.

In 2000, and with a management team including banking, software, legal and
cryptography experts, CertCo began rolling out a suite of
risk management products designed to help Web-based exchanges connect to CertCo’s real-time validation technology.

For example, the CertCo RMX products are authentication services that essentially plug into the servers of online exchanges to make sure real-time checks are included as parties click their way through a deal.

Requests and calls to CertCo for comment were not returned by presstime. A PayPal spokesman said the company could not comment due to quiet period rules before a company offers public shares.

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