In what is one of the more amusing lawsuit filings I’ve read in recent memory, Craigslist has fired back in its legal battle with eBay.

Craigslist’s lawsuit against eBay, filed in San Francisco County Superior Court, accuses eBay of unfair competition, fraudulent business claims, copyright infringement, false advertising and lays out a story of  “corporate spying“  Craigslist believes eBay was using its stake in Craigslist to engage in.

It states:

“craigslist was first advised of eBay’s interest through the Former Shareholder’s counsel on May 4, 2004, and at that time was told that eBay agreed with craigslist’s vision and was willing to accept a minority stake in craigslist.”

“On Wednesday, July 21, 2004, eBay invited craigslist to a meeting which was to take place the next day, at which Ms. Whitman, eBay’s then President and Chief Executive Officer, would personally present her case for why craigslist should welcome eBay as a shareholder. That evening, eBay’s counsel circulated a revised term sheet, which was described as a term sheet for a ‘basic investment, without any extraordinary rights or obligations’.”

“The parties met on July 22, 2004, as eBay requested. In attendance (among others) were Ms. Whitman and Michael Jacobsen (eBay’s Senior Vice President and Corporate Counsel) from eBay, and Mr. Newmark and Mr. Buckmaster (craigslist’s Chief Executive Officer) from craigslist. Ms. Whitman mentioned how much she loved craigslist, and even noted that one of her sons had successfully used the site when locating an apartment. She said that eBay and craigslist were similar companies, in that the strength of each was in their very loyal user communities, and that the success of both companies had resulted from listening to what their communities wanted. She emphasized that eBay espoused very high values and pointed to the ‘Code of Conduct’ created by eBay’s founder, Pierre Omidyar, which at the time was prominently featured on the eBay website.”

“Ms. Whitman stated how much eBay could help craigslist on issues such as ‘trust and safety,’ where eBay had many years of experience, as well as in operating in international environments, where eBay also had substantial expertise and “on the ground” resources. She said that she viewed eBay’s purchase of a minority interest as a courtship, and that craigslist should be happy that eBay was interested in helping craigslist and was willing to acquire the minority stake. Ms. Whitman further committed to craigslist that eBay would drop demands previously made for a bigger interest in craigslist than was presently being offered for sale by the Former Shareholder.”

“Mr. Newmark and Mr. Buckmaster were impressed by Ms. Whitman’s presentation; most notably the importance to eBay of its community and eBay’s dedication to Pierre Omidyar’s Community Values – particularly the values that ‘We believe that people are basically good;’ ‘We believe that an honest, open environment can bring out the best in people;’ and ‘We encourage you to treat others the way you want to be treated.’ These were very similar to craigslist’s own principles and, in reliance on eBay’s expressed commitment to these principles, along with Ms. Whitman’s representations, craigslist agreed to resume discussions.”

“As indicated above, Mr. Newmark and Mr. Buckmaster placed critical importance on what eBay asserted to be shared community values. They also gave particular weight to Mr. Omidyar’s laudable philanthropic activities.”

“However, eBay did not post a link to Craig’s blog entry on its own website once the transaction had closed, as eBay had promised it would.”

“They believed that Omidyar had a moral compass very similar to their own.”

“Mr. Newmark and Mr. Buckmaster were taken aback by eBay’s behavior, and feared that they had a wolf in sheep’s clothing in their midst. However, they still had tremendous respect for Mr. Omidyar, and craigslist tried to review in good faith even extreme proposals made by eBay, particularly since many of the proposals were couched in terms of community service.”

Cry me a river.

Even though Craigslist’s lawsuit acknowledges that both companies had agreed that they would be able to compete against each other (with eBay forfeiting certain rights in that case), Craigslist is clearly not happy that eBay really became a competitor with the launch of Kijiji in the United States.

It is asking the court to…

…”order eBay to (1) make full restitution to craigslist, (2) disgorge their related profits (3) restore to craigslist all shares of the company acquired by means of, or for the purpose of unfair competition, and (4) pay punitive damages for their malicious behavior.

After discussing the case at some length with a friend who is a legal expert, I draw two conclusions:

  • It’s obvious that Craigslist is stretching to respond to the serious allegations of skulldrudgery leveled at it by eBay, which are potentially far more damaging to Craigslist if found to be true. If Craigslist felt that eBay had been engaging in malicious and damaging behavior for some time, it’s somewhat unusual that it didn’t decide to file a lawsuit earlier.
  • It’s highly unlikely that Craigslist is going to achieve what it wants – a quick, easy and painless removal of eBay as a Craigslist shareholder.

In my opinion, the most interesting thing about Craigslist’s lawsuit is the effort its attorneys have taken to focus on the difference between the “values” the two companies hold. It shows just how naive the company’s management is.

While this focus on “values” will win Craigslist brownie points with Web 2.0 idealists and corporate hippies, the fact that it believes eBay’s “values” are not in line with its own realistically has no relevance to the lawsuit.

In discussing with my friend concepts that might give Craigslist room to include a discussion of “values” in court, such as promissory estoppel, it became clear that their potential applications to Craigslist’s arguments are extremely weak, especially given how subjective judgments related to the “shared community values” it claims it relied upon would be.

After all, how would Craigslist argue convincingly, for instance, that eBay lied about believing “people are basically good“?

Unless eBay made specific representations about such matters in its written agreement with Craigslist, which is quite unlikely, I think trying to claim that Craig Newmark and Jim Buckmaster were essentially sweet-talked by Meg Whitman is a waste of paper (and billable hours).

Beyond all of this, what eBay versus Craigslist highlights for entrepreneurs is the importance of having strong shareholder agreements and choosing your shareholders wisely.

Had Craigslist been more prudent in the handling of its affairs, it would not be in this situation, either because eBay wouldn’t have been a shareholder or because it would have been able to negotiate more favorable terms with eBay from the outset.

As noted by Mathew Ingram, Canadian tech attorney Rob Hyndman observes this too:

“I can’t help but think that Craigslist’s salvo against eBay is an attempt to accomplish by litigation what it failed to accomplish by business planning and sensible precautions among co-founders when it first issued shares, and by negotiation with eBay when it acquired its interest. And while it may be a small point (or perhaps ultimately not so small), I also can’t help but think about this in the context of Craigslist’s well-known disdain for ‘professional’ management…”

Unfortunately for Craigslist, its popularity and appealing, quixotic management style do not exclude it from the harsh reality of the business world: companies are more liable to be exposed to costly legal disputes when they fail to plan ahead.

Interestingly, in its boilerplate repsonse to eBay’s lawsuit, Newmark and Buckmaster admit that they did some of the things eBay has alleged, such as adopting a new shareholder rights agreement, but claim that they are “protected by laws that give directors discretion to act in their company’s best interest.

This, despite the fact, my friend (and others) have observed that the actions taken by Newmark and Buckmaster didn’t seem necessary to protect the company because there was no obvious threat requiring such actions. They also seem to solely benefit Newmark and Buckmaster – the majority shareholders – at the expense of eBay, the only minority shareholder.

From my perspective, it’s clear that regardless of how this legal drama plays out and who eventually prevails (besides the lawyers), Craigslist and entrepreneurs in general should consider that handling some of the more important aspects of their business dealings in a more traditional “

by the books

” fashion has its advantages and doesn’t require the sacrifice of core values.

To the contrary – it may provide companies with the means to ensure that they never risk violating their values and even more importantly, the law.