Priceline Stock Suit Settles For $80 Million


In 2000, when the bubble burst, one of the highest-flying Internet companies to crash was Stamford-based, known for bargain airline, hotel and car rental rates, and its zany celebrity pitchman William Shatner.

The resulting stock-drop class action, the company announced in a filing with the U.S. Securities and Exchange Commission two weeks ago, has settled for $80 million after six years of litigation before U.S. District Court Judge Alfred V. Covello.

David R. Scott, of Colchester's Scott + Scott, was co-lead counsel for the plaintiffs. "I believe this is a record for this kind of suit in Connecticut," he said last week.

The 280-page complaint centered on the rise and fall of a privately held Priceline subsidiary, WebHouse Inc., which was designed to show that the Priceline "Name Your Own Price" system of computerized auctions of excess inventory could be applied to commerce beyond plane tickets, hotels and rental cars.

The WebHouse experiment was, the plaintiffs alleged, a reckless gamble that groceries could be sold in the same manner, despite the fact grocery brands focus heavily on building customer brand loyalty. The WebHouse bidding process required customers to accept any of a range of brands.

Between Jan. 27, 2000, and Oct. 4, 2000 — the class action period — investors and analysts were led to believe, the complaint alleges, that WebHouse would show Priceline's business model could be applied broadly to other forms of retailing.

Priceline and WebHouse are inventions of founder and inventor Jay S. Walker, who owned more than a third of both companies. During the class period, he sold 10.9 million shares of Priceline for at least $286 million, the complaint states.

Despite knowledge that WebHouse was "a failure from the start," Walker and other top Priceline officers were able to profit from the artificial inflation of share prices based on investor expectations that Walker's new proprietary form of computerized commerce was becoming the next big thing.

The plaintiff class is also represented by the South Burlington, Vt., firm of Johnson & Perkinson.

"By keeping WebHouse as a private company, nobody could look behind the curtain or kick the tires to make a determination whether the things they were saying was correct," said Scott. "Priceline realized early on that in order to be a long-term sustainable company they needed to be more than just a travel agency."

Priceline's WebHouse was launched in New York, New Jersey and Connecticut, and allowed consumers to bid for groceries, and sometimes gasoline, from their home computers, nail down lower prices on groceries they'd committed to purchase by credit card, and then print out their paid-for grocery list for in-store pickup.

"The interesting and clever thing about it was," said Scott, "because WebHouse was a privately held company, with no duty to publicly disclose financial information, nobody on the outside knew how bad things were until it was too late."

Financial Black Hole

Daniel Slifkin, of New York-based Cravath, Swaine & Moore, represented Priceline, along with his partner Evan Chesler. Slifkin, reached for comment last week, said stiffly, "I'm not going to speak with you." He cited firm policy, and referred The Law Tribune to Priceline General Counsel Peter J. Millones, who did not return a call at press time.

Priceline's March 30, 1999 initial public offering at $16 a share shot up to a dizzying $144 a share within the first few months, but retreated to the $60 to $70 range by the summer of 1999.

The WebHouse grocery model, far from being a shot in the arm, became a financial black hole, according to former employees. In late November 1999, the grocery experiment required subsidies of $1 million per week, which grew to $5 million per week later in 2000, amounting to $4 of the average $13 grocery trip. "As one former Webhouse employee acknowledged, WebHouse essentially was giving the groceries away by incurring a loss on virtually every sale," the plaintiffs' complaint stated.

The complaint alleged that computer problems forced Priceline to invest over $100 million in new hardware in an attempt to keep its ordering system from crashing, and employ software programmers 24 hours a day in an effort to stay up and running.

Even so, in the WebHouse model, the savings that consumers experienced was not due to lower prices from grocers or wholesalers, but from millions in subsidies Priceline pumped into the system hoping to achieve a "critical mass" and become viable, the complaint alleged.

Scott said a fairness hearing is scheduled for July 2 before Covello. At that time, the court will determine the fair compensation for the plaintiffs' lawyers, based on the success they achieved, legal effort and other resources expended, and difficulty of the case. Scott said legal fee awards are typically from 20 percent to 33 percent of the overall award. •


Copyright 2007, ALM Properties, Inc.