E-Business Comes of Age in Court

The Internet economy is entering maturity, but not in the stock market or even in research and development labs. The dot-com sector is coming of age in a courtroom.

And while analysts say many of the patent lawsuits, class-actions, merger-related filings and antitrust actions will result in little tangible damage, e-business finds itself scrambling to stamp out legal brush fires.

"You can't underestimate the distraction factor," Giga Information Group analyst Laura DiDio told the E-Commerce Times. "When executives are traveling to depositions and making court appearances, they're not focusing on new products and taking care of customers."

The highest-profile cases underscore that theory. DiDio noted that in addition to its epic battle with U.S. antitrust regulators, Microsoft (Nasdaq: MSFT) is embroiled in more than 100 civil suits, all of which are draining the company's brain power and disrupting innovation and business planning.

Big Suit, Little Suit

Even smaller companies have recognized that lawsuits can throw a business off course if they are allowed to grind on for months or years.

In fact, firms often cite distraction as a top reason for settling lawsuits even when they believe they have a strong case.

For example, distraction was a major factor in the settlement reached earlier this year between Nielsen//NetRatings and longtime but fading rival Jupiter Media Metrix. Rather than fight the lawsuit in court, NetRatings chose to pay to gain the right to a disputed audience-measurement methodology patent.

"We decided that it was not in our best interest to spend our summers getting people ready for depositions, preparing arguments and gathering documents," NetRatings vice president Sean Kaldor told the E-Commerce Times. "The settlement enabled us to put the focus back on our business where it belongs. For us, that's a win-win situation."

Join the Club

While the stock market boom and bust has triggered a rise in lawsuits through the business world, the high-tech sector seems to have been hardest hit. The list of dot-com companies that have been sued for misleading investors is still growing.

Companies ranging from Homestore.com (Nasdaq: HOMS) to Amazon (Nasdaq: AMZN) have been slapped with actions. And the remaining executives of defunct eToys broke new ground recently by suing their own underwriter, Goldman Sachs, for allegedly undervaluing the company's stock at the time of its initial public offering.

Not every legal action is a disaster. Many observers believe HP (NYSE: HPQ) CEO Carly Fiorina made a strong statement about her future -- and the future of HP -- when she successfully fought a challenge to HP's merger with Compaq during her time in court recently.

Rooting It Out

According to analysts, several factors are to blame for the dot-com lawsuit craze, from the incredible rise and fall of dot-com stocks to the proprietary nature of many business models that have given rise to intellectual property cases.

The nature of e-commerce is also a factor. For instance, a judge recently cleared the way for a class-action suit against E*Trade (NYSE: ET). That suit seeks damages to compensate for losses that occurred when the E*Trade site crashed in 2000, leaving some customers unable to buy or sell stocks.

Bad Behavior

But the can't-miss attitude of the dot-com boom might be most to blame for the current rash of lawsuits.

"A lot of companies got caught up in the frenzy without really having a plan for making money," GartnerG2 analyst David Schehr told the E-Commerce Times. "They targeted a niche that wasn't there, or they thought they could invent a niche that didn't exist. That's a recipe for failure and not one for making customers and investors happy."