Craigslist executives were well aware that eBay Inc could compete in online classifieds when they negotiated a deal to sell it a minority stake, a former eBay executive testified in court on Wednesday.

Garrett Price, who was eBay's principal deal maker in its $32 million agreement to acquire a 28.4 percent stake in Craigslist in 2004, also said half of that amount -- which went to Craigslist founder Craig Newmark and CEO Jim Buckmaster -- amounted to extortion.

EBay, which sued Craigslist in Delaware in 2008, is fighting over its stake in the popular online classifieds site. It claims that privately held Craigslist unfairly diluted the stake to 24.85 percent, thereby denying eBay a seat on its board.

Defendant Craigslist has sued eBay, meanwhile, in San Francisco over the same issues, saying that eBay used confidential information from Craigslist in order to launch its own competing online classifieds site, Kijiji.

Price testified that the two parties had discussions about the possibility of competition before the deal was signed.

It was very clearly understood ... they were not seeking from us a bar on our ability to compete but simply trying to delineate what would be the consequences if we did compete, said Price, testifying on the third day of the trial.

Price, now a vice president of business development at eBay's PayPal unit, said the categories of jobs and apartments were the most concerning to Newmark and Buckmaster because those were the two categories on which they had paid listings, so they accounted for 100 percent of their revenue.

Price, who said eBay had no restrictions on competing abroad under the agreement, said it would lose certain rights were it to delve into the jobs category in the United States.

But the company sought to keep a non-compete agreement narrowly tailored so as not to restrict eBay's business, Price said, adding that Craigslist was aware that eBay already operated online classifieds businesses in Europe.

Did you ever tell Mr. Newmark or Buckmaster ... that a non-compete was ... a Defcon 5 deal breaker? asked eBay's attorney, using a term Price wrote in an email. The term, which stands for Defense Readiness Condition, refers to a level of military readiness for an attack.

Yes, I did. It was made clear to me (by senior eBay management) that this was extremely sensitive, said Price.

When Buckmaster brought up the idea of a non-compete agreement, Price discouraged it, he said. I went pretty ballistic about it. I was very clear to them this would be a big problem, Price said. I would never get approval for it.

SULLY REPUTATION

The $16 million payment to Newmark and Buckmaster as part of the deal amounted to extortion, Price said. EBay paid another $16 million to shareholder Phillip Knowlton for his stake.

The motivation, from my perspective, was an emotional one. They did not feel it fair, rightly or wrongly, that Mr. Knowlton receive compensation that they did not receive, Price said.

They took great pains to avoid it being disclosed, he said, adding Newmark and Buckmaster believed knowledge of the payment would sully the reputation of Craigslist, known for its disinterest in making money and anti-corporate values.

Earlier in the day, a Craigslist attorney cross-examined eBay counsel Brian Levey and disclosed emails showing that non-public financial data from Craigslist, such as balance sheets and income statements, were passed among eBay executives.

Levey acknowledged under cross examination that executives charged with starting the U.S. classified business also had access to the information.

The trial, being broadcast over Courtroom View Network, is expected to continue through the week.

The case is eBay Domestic Holdings Inc v Newmark, et al, Delaware Chancery Court, No. 3705-CC.

(Additional reporting by Thomas Hals; Editing by Richard Chang)

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