On Wednesday, eBay released its Q4 and full-year 2022 financial reports. On Thursday, the company released its required SEC annual report (10-K) form, which offers more details on eBay’s operations.
One item that stood out in the 10-K form is that eBay reserved $64 million to cover potential losses from legal matters, involving government investigations and a related civil lawsuit.
The U.S. Department of Justice (DOJ) is investigating eBay for products sold on its platform that may have violated laws and regulations of the U.S. Environmental Protection Agency (EPA) and, separately, the U.S. Drug Enforcement Agency (DEA).
eBay said: “The inquiries relate to whether and to what extent the Company should be liable for the sale of regulated or illicit products manufactured and sold by others who listed such products on Marketplace platforms in a manner that evaded and/or was designed to evade detection by the Company.”
While it didn’t provide many details on these two investigations, the one involving EPA regulations is probably regarding the sale of devices that defeat vehicle emissions systems (“defeat devices”) on its marketplace platform.
Defeat devices disable filters and catalysts in the exhaust system that reduce harmful emissions and thereby pollute the air with harmful pollutants. Typically, the reason defeat devices are popular in the enthusiast community is that they make more engine power.
In 2020, the EPA ramped up a crackdown on these devices, reaching settlements with companies ranging from the tens of thousands to multi-million dollars.
This updated policy expanded the list of prohibited car and truck parts that cannot be sold on the platform, most of which include specific engine tuning or exhaust parts that are outlawed by EPA regulations.
In the 10-K, eBay revealed it was in discussion with the DOJ and EPA about a potential settlement regarding alleged violations of the Clean Air Act, which is the regulation that prohibits the sale of defeat devices.
Last year, the EPA reached a settlement with Keystone Automotive to pay a $2.5 million penalty for its involvement in selling aftermarket defeat devices. This particular settlement is interesting as only two other settlements were larger and both involved manufacturers with direct consumer sales of such devices.
Keystone Automotive is one of the largest wholesale distributors of performance aftermarket vehicle parts in the country, selling branded merchandise to parts dealers and repair shops. They were not a manufacturer of the parts, only a distributor with a primary focus on wholesale sales.
If the EPA case mentioned in the 10-K is about the sale of defeat devices, eBay’s exposure could be more significant than Keystone Automotive’s due to its direct-to-consumer reach and scale of business.
Should the EPA believe eBay was negligent in enforcing its original ‘Vehicles, parts and accessories policy,’ which prohibited the sale of such devices in more general terms, the company could face a stiff penalty, potentially larger than Keystone.
In addition, the EPA may look at eBay as a public relations prize (the public knows eBay, but doesn’t know Keystone) to demonstrate it is taking significant action to stop the sale of these parts.
eBay did not elaborate on the DEA investigation. The DEA’s primary mission is the enforcement of federal controlled substances laws. It would appear any investigation by the DEA would likely involve potential interstate transactions of controlled substances that originated on the marketplace.
At face value, this doesn’t sound good either. But without having details, it’s a bit difficult to assess the potential liability of this investigation.
eBay Cyberstalking Case
The third item mentioned in the 10-K involves a cyberstalking case involving former eBay employees, including mid-level executives, and potentially inappropriate or in-direct actions by two top executives, former eBay CEO Devin Wenig and CCO Steve Wymer.
In a nutshell, the case involves the criminal stalking of the husband and wife owners of a blog that often published critical stories about eBay.
In total, seven employees (technically, one was a contractor) were charged criminally. The DOJ did not pursue criminal charges against Wenig and Wymer, with both denying wrongdoing.
All seven employees and Wymer were terminated by eBay as a direct result of the cyberstalking situation coming to light. Wenig was allowed to resign with an exit package worth $57 million.
At one time, it looked as though Wenig and Wymer could potentially face criminal charges by the DOJ, possibly arising out of plea deals with other defendants. But that never materialized, and the seven former eBay employees have pled guilty since then, with no apparent criminal repercussions for Wenig or Wymer.
James Baugh, the former Senior Director of Safety and Security at eBay, received the largest sentence in this case, a 57-month prison term, plus two years of supervised release and a $40,000 fine.
eBay acknowledged in its 10-K filing that it has begun discussions with the U.S. Attorney’s Office for the District of Massachusetts regarding the company’s potential criminal liability in this case.
eBay expects such a criminal settlement “may include fines, other payments, and non-monetary remedies, such as additional remediation, compliance and reporting requirements.”
Furthermore, eBay faces a civil lawsuit from the victims of the cyberstalking case that was filed in July 2021 and is still ongoing. Additionally, the plaintiffs have been granted a request to amend their original complaint by March 1 to include new details learned from the criminal cases.
While the civil suit also named all seven former employees involved along with Wenig and Wymer as defendants, the big entity with cash is eBay. The request to amend the original complaint suggests the additional information may be very damaging, potentially increasing the possible liability by eBay and/or all defendants.
But that is not all. eBay’s “Umbrella” insurance company has filed a lawsuit against the company due to a disagreement with eBay about provisions in its policy. The insurer claims they are not required to cover financial liabilities from the civil and criminal judgments or settlements in the cyberstalking case.
Unless eBay can prevail in this matter, any payout in the cyberstalking case would come out of their pocket. It may also explain why eBay reserved funds to cover these legal matters, and it may believe the cyberstalking situation could be the most costly.
The $64 Million Dollar Question
All of these legal matters appear to have the potential for losses in the tens of millions in the aggregate.
“Given the uncertainties involved, the ultimate resolution of these matters could result in additional
losses that may be material to our financial results for a particular period, depending on, among other factors, the size of the loss or liability imposed and the level of our net income or loss for that period,” the company said in its 10-K.
Of course, as a public company, they have to disclose to investors potential significant liabilities that could negatively impact their business and finances. The language in 10-K forms very much covers any possible problem, some of which may seem improbable.
However, the fact they reserved $64 million already and disclosed these three cases means they must reasonably believe they will have to settle or lose some or all of these cases.
Still, $64 million is a relatively meaningless figure in the company’s overall financial picture. Absent surprising negative turns in these matters, it should not materially impact eBay’s financial results moving forward.
Read the full 10-K here (includes highlighted sections relevant to this article)
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