Gateway may be held liable in PurchasePro case

Investments in Las Vegas-based PurchasePro.com have reaped nothing but bad memories for about 25,000 former shareholders.

The attorney representing the defunct Internet company, however, now hopes to be able to return some money to the former shareholders.

U.S. District Judge Kent Dawson has ruled that computer company Gateway may be held liable for damages to PurchasePro for failing to carry out a marketing agreement that could be worth up to $40 million.

The amount of the damages will be determined at a later jury trial, said Greg Garman, an attorney with Gordon & Silver.

If PurchasePro wins a large judgment from Gateway, and certainly if a $40 million judgment is entered, Garman said creditors of PurchasePro probably will recover everything the defunct company owes. Even shareholders will get back some cash, he predicted.

Garman said he and his client, PurchasePro trustee Todd Lehtonen, already have recovered about $20 million for creditors of PurchasePro.

It’s unusual for stockholders to get anything back after the liquidation of a public company, Garman said.

A big question mark looms over the matter now, however, because Acer, a computer company based in Taiwan, on Tuesday completed its acquisition of Gateway for $710 million or about $1.90 a share.

Snell & Wilmer attorney Patrick Byrne represented Gateway, but he declined to comment on the effect the merger will have on the pending court case.

The lawsuit stems from training and marketing service agreements in 2000 between Gateway and PurchasePro. The Las Vegas-based dot-com company operated Internet auctions in which businesses could take bids for supplies. The Internet company also sold licenses to companies to use its software to conduct their own Internet auctions.

PurchasePro agreed to establish three electronic marketplaces for Gateway to use for companies around the world but only one of the three marketplaces became functional, according to the judge’s order.

Gateway paid PurchasePro $3.3 million in licensing fees for the software. The Internet company also gave stock warrants, originally worth about $37 million. The warrants allowed Gateway to purchase PurchasePro shares at specified prices. But the shares soon after plunged, wiping out the value of the warrants.

Gateway promised to put the PurchasePro icon on 3 million computers shipped to medium and small businesses so that these businesses could make a link directly to PurchasePro’s “Global Marketplace.” In addition, Gateway agreed provide a PurchasePro link on the Gateway Web site and to send e-mail blasts to business customers. Dawson concluded that Gateway failed to provide the marketing support as promised, attaching PurchasePro icons on about 30,000 computers.

Gateway argued that PurchasePro’s officers committed fraud, but the judge found no proof that the fraud related to the deals with Gateway.

In a motion for reconsideration dated Oct. 15, Gateway attorneys argued that the judge made both factual and legal errors in his ruling. The defense attorneys said the judge was wrong not to consider the marketing agreement in connection with a separate contract for PurchasePro to create the three marketplaces.

Gateway attorneys also contended that PurchasePro broke the contract for marketing services by artificially inflating the value of the stock warrants “and that Gateway was therefore excused from future performance.”

Criminal cases stemming from the collapse of PurchasePro revolve around arguments that the Las Vegas Internet company fraudulently inflated revenue to prevent the price of PurchasePro shares from falling.

Charles “Junior” Johnson, PurchasePro’s former CEO, is being tried in federal court in Alexandria, Va., on charges of fraud, conspiracy and obstruction of justice at PurchasePro and America Online, which had strategic relationships with PurchasePro.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or (702) 383-0420.