LOS ANGELES, Dec. 27 -- Wearing peel-off paper tags with their names crossed out, a small group of protesters supporting etoy, a seven-member Swiss performance art cooperative, against a giant toy retailer went to the Los Angeles County Court House Monday morning to see a trial.

Meanwhile, eToys, one of the most celebrated Internet startups and the plaintiff in the case, saw its shares [ETYS] plummet 5 points (on an up day for the Nasdaq) to a little over 25, the lowest level in a year -- and under the terms of a proposed settlement based partly on share price, that drop cost the protestors some $35,000.

Rita Margolis, a representative for RTMark.com, the most prominent protester against online toy retailer eToys' attempt to erase the etoy domain name, explained the protest message. "We're crossing out our names," she said, "because even a name is not guaranteed unless you have money for lawyers these days."

But the case was continued to Jan. 10 so lawyers can argue over terms of a possible settlement that is outlined in two letters from lawyers for both sides obtained by The American Reporter. The sides appear to be as much as $775,000 apart, and the gap is ioncreasing as the stock price falls.

Margolis and the handful of other artists who gathered for Monday's hearing say they have just one concern: preserving their artistic freedom and identity in the new technology of the Internet. Their nemesis, Internet giant eToys.com, the third largest retailer on the Net, says the issue is the protection of their commercial reputation and identity. But does it all boil down to Art versus money?

EToys.com is suing etoy, which uses the Internet as its art medium, for trademark infringement. One look at the two domain names will tell why.

But early on Monday morning, eToys requested a postponement of the hearing until Jan. 10. No reason was given for the postponement, and lawyers for both parties failed to return messages Monday. The reason could be as simple as the holiday crush, but more likely, eToys is working hard to shore up either its case or its stock.

One undisputed fact is that eToys received its domain name in 1996, two years after etoy registered theirs in 1994. And while courts and now Congress seem to approve of retailer efforts to oust "cybersquatters" who register domain names similar to theirs in order to be bought out by the retailers at a profit, that motive is not alleged here. But confidential documents in the case show that 7,000 shares of eToys stock are part of a settlement offer made by the toy retailer to the collective.

Etoy has no physical presence in the U.S. and can't reasonably be considered a competitor for eToys' core business of selling toys via the Internet. EToys has to show that it will suffer measurable harm that cannot be otherwise avoided if etoy continues to exist as a separate domain.

Despite those hurdles, eToys has fared well so far. On Nov. 29 in Superior Court here, the company won an injunction that has kept etoy off the Net and unable to use its domain for email or a Web presence.

When etoy moved to try the case in federal court, eToys prevailed and got it sent back to the state level. Still, eToys may eventually find itself on difficult ground.

From the lawsuit's beginning in November, eToys' lawyers cited the defendants for a lot more than trademark infringement.

EToys says etoy has disseminated pornography, traded illegal stocks, misled consumers, competed unfairly, and even supported terrorism, specifically the Oklahoma City bombing -- among other activities not normally associated with artists.

What's more, in a press release obtained Sunday by The American Reporter from a Los Angeles artist supporting the etoy effort, the artisists' collective takes credit for helping drive down the company's stock by more than 50 percent since the injunction was obtained on Nov. 29, and cost it billions of dollars in market capitalization -- and allegedly has spurred an FBI investigation of the protestor's Websites.

"Protests so far have contributed to eToys' four week stock fall of over 50%," the press release says, "... and have prompted FBI action against protest websites."

In the press release, the collective admits to bombarding eToys with false toy orders and skewing eToys' claim that "it has added 90,000 new customers this season." Actually, eToys has claimed about 900,000 customers since Sept. 30.

"Any such figures are questionable because of false information entered by activists," the RTMark/etoy press release says.

The etoy group also took some steps against eToys that may be against the law in the United States. "On December 15 ... the Electronic Disturbance Theatre and RTMark came together to expand the anti-eToys protests into a full-fledged 'information war' against eToys, with the aim of establishing a precedent in e-commerce... .

"The organizations' WWW 'sit-in' had little effect on the first day, but massively overloaded eToys' server on Thursday, December 16 by filling its customer database with false information. Observers ... were unable to reach eToys.com at times, and online ordering was paralyzed," the release said.

"Although eToys had pooh-poohed the attack the day before, they now panicked. eToys filed a restraining order against the Electronic Disturbance Theatre, cutting it off the Web and, meanwhile, changed their site to resist attack." One eToy employee sent one etoy activist a "threatening letter" telling the activist to 'get the hell out of dodge."

Etoy claims the various actions forced eToys to extend its deadline for Christmas delivery. "The 'sit-in' is one of about 15 campaigns coordinated by RTMark, aimed at disrupting the internal and external communications of eTioys.com, and targeting telephone and fax lines as well as behavior and morale of employees, management, and major investors," all aimed at "making eToys.com an example the online world will never forget," the press release said.

On Monday, etoy activists announced two new campaigns: to bring the retailer's stock down to "zero," and to force its CEO, Toby Lenk, to resign.

On Dec. 17, 1999, the giant toy retailer issued a press release that didn't mention any information warfare with etoy, but did note an (much more) increased customer base and said it would extend its deadline for orders needing delivery by Christmas.

EToys.com "has surpassed 1.5 million cumulative customers with two weeks still remaining in the holiday quarter ending Dec. 31. This latest customer count is more than double the 611,000 cumulative customers that had made a purchase from eToys before Sept. 30, 1999.

"Our ability to attract new customers at such an accelerated pace underscores the rapid growth of online shopping and the success of eToys' holiday marketing effort," said Toby Lenk, eToys' president and chief executive officer. After noting a new ntional advertising campaign and "promotional alliances" with The Gap, McDonald's and Rosie O'Donnell, the press release continued:

"Separately, the company announced it has extended by 24 hours the last day it will accept customer orders for delivery by Christmas. eToys said it moved its ordering deadline from midnight tonight to midnight tomorrow (Dec. 18), allowing its customers an additional Saturday of holiday shopping."

CNN Financial Network anchor Terry Keenan noted the company's declines in several updates Monday. "EToys [is] taking a hit," Keenan said. "Robertson Stephens [is] downgrading the stock to a long-term attractive from buy. Analysts there [are] noting the company is struggling to keep up with holiday demands."

But Keenan also mentioned problems that have driven down other toy retailer stocks including Hasbro, which markets the popular Pokemon toys, and Toys'R'Us. Since late December, 1998, eToys' share price has fallen from a high of $86 to yesterday's close at $25.62, the lowest of the year.

Ironically, the seven men and women who make up the etoy collective also saw the value of eToys' confidential offer fall from more than $400,000 to $175,000 yesterday, making them, perhaps, the victims of their own success.

EToys also claims etoy has diminished the commercial value of eToys' trademark and confused consumers who were looking not for a performance art experience, but for toys. One eToys brief offered pages downloaded from the etoy site and letters from confused eToys customers who apparently believed that eToys was responsible for some controversial art, including a photograph of a woman's breasts and a man's penis pierced with needles.

One customer complained that eToys had "exposed" his "grandchildren" to pornography and violence, while another warned that he would never shop at eToys again. The Swiss art collective has called itself "the first streetgang of the Internet," eToys claims.

Etoy has also sold ersatz "shares" of its "corporation" -- pieces of paper that look like stock certificates, but says they are really intended as works of art.

Granted, etoy plots the daily price of its certificate as if it were actual stock. But then, as Yale law student Ernest Miller, an observer at the protest, pointed out, art buyers do the same thing with what they purchase. "I've seen one of those certificates," said Miller. "They're suitable for framing."

"If this were a violation of federal trading laws," he added, "The SEC (Securities and Trade Commission) would have sued them by now." The weakest piece of evidence may be eToys' claim that etoy supports terrorism. The plaintiffs base this on a photograph of the bombed-out Murrah Federal Building in Oklahoma City with a caption that reads "Such work needs a lot of training."

There are two mysteries that cloud the court records for this case. One is that presiding Judge John P. Shook granted eToys' request for an injunction on Nov. 29 without comment. He merely kept eToys' original order virtually unaltered, only drawing a line through the plaintiff's word "Proposed," to make the order legally binding.

The second was similarly curt. When eToys challenged the defendant's motion to take the case to federal court, Senior U.S. District Judge Edward Rafeedie granted the remand, again without supporting his decision.

Instead, Rafeedie's was a standard juridical reply: "Defendants have not" established "that the case falls within the original jurisdiction of the federal courts." Nor did Rafeedie explain why he believed the case had been "improvidently removed" from the state court.

In their original request, etoy's lawyers gave two reasons the courts should not grant the injunction. First, according to the Lanham Trademark Act of 1946, any case involving registered trademarks is a federal matter. The lawyers decided that the Lanham Act applied since eToys had registered its trademark, though etoy had not.

Second, etoy lawyers say, the case appears to be one of international significance that deserves federal notice. Etoy points out that none of the defendants named in the suit resides in the United States. (The primary spokesperson for the group is Martin Kubli, based in Zurich, Switzerland.) Thus, reasoned the lawyers, the case could not be tried as if California trademark laws applied. Indeed, the lawyers may even argue that the case rightly belongs in international court.

The eventual decision, if any comes, could have long-term consequences for the Internet, which the U.S. Supreme Court has recently acknowledged is a vital communications medium.

Ernest Miller, that Yale law student, has been watching these developments with much concern, and he believes that such a precedent could take decades to reverse.

Miller compares the struggle on the Internet to the development of the telephone. At one time, he said, the U.S. Supreme Court held that telephone wiretapping did not constitute illegal search and seizure. They reversed that decision some thirty years later when they decided that wiretapping in fact was an invasion of privacy.

Until the Internet came along, trademark laws and guarantees of free expression did not clash, he says. Miller points out that there have been no court rulings to help separate the two on the Internet. Moreover, says Miller, "It would be extremely difficult for a lawyer to win such a case using the First Amendment.

"To be able to win a First Amendment case" he continued, "you have to show" how a party's actions harm the First Amendment. "And although we intuitively feel that there are harms, to explain them in a legal manner that would be convincing to a judge is a lot harder.

"Plus, you know, when you make arguments you refer to other cases. But there [are] no precedents.

"It makes life more difficult on the judges," he added. "They have to think in new ways. A judge is rightly going to want to be conservative, not shake things up too much."

The idea that First Amendment rights should be considered in trademark cases may not sit well with judges, he continued. Miller also agreed that future court rulings regarding the Internet might continue to clash with the First Amendment.

"People are going to see [the clash], and they're going to talk about it, but I don't think we're going to see any legal precedents on it anytime soon," he said. Pausing, he added, "I hope I'm wrong."

Before the case actually went to court, the American Reporter has learned, eToys attempted to negotiate a settlement, but etoy stubbornly held out for a substantial sum of money and stock. Given its hard-nosed approach to the issue and its stated intention to bring the stock to "zero," according to RTMark's Rita Margolis, it is uncertain how serious those financial claims are.

The issue of eToys' losses are clearly serious, though. The company, which has about 120 million shares outstanding, is 39 percent owned by company executives, and has substantial stakes from idealab! (18 percent) and Intel Corp. (8 percent). It offered 8.3 million shares at $20 in a May 20, 1999, IPO underwritten by Goldman, Sachs & Co. and hit a peak at $86 on Oct. 8. From there it has fallen 63 points -- and most of that drop began on the day it got an injunction against etoy, Nov. 29.

From the case file in Los Angeles, the American Reporter has obtained two "confidential" pre-trial letters that shed light on the efforts to settle the case outside of the courtroom. Both were filed on November 23, 1999.

The first was written by eToys' lawyer Bruce A. Wessel of Irell & Manella to Judge Shook on Nov. 23, and in it eToys recounts how it had approached etoy with two offers to buy the etoy domain name.

Originally, the Wessel letter shows, eToys offered $20-30,000. Etoy refused and asked for $750,000, according to the letter. EToys then offered $50,000 plus 7,000 shares with an estimated value at the time of $400,000. Etoy refused again and demanded $1,000,000.

In a second document obtained by AR, etoy's lawyer, Robert S. Freiworth of Isaacman, Kaufman, and Painter, also writing to Judge Shook, repeats the $1,000,000 request, but adds that it includes shares of eToys' stock.

On Monday, as the demonstrators waited outside the courtroom, eToys' stock fell 5 points to its lowest level in the past 52 weeks, and the value of the offer may have fallen $35,000 with it.

A million dollars is a lot of money, but a company trademark and billions of dollars of market capitalization are also at stake. Yet if eToys makes such an offer and etoy accepts, fellow artists may wonder if the collective gave away its name for money when it should have defended itself and the cause of free expression on the Internet.

As it stands, the protesters will have to go without their Website a while longer. And unless a judge is willing to offer a substantial decision in a trademark case that may impact the Internet for much of the 21st Century, some retailers can't feel very secure as they choose a name for themselves on the World Wide Web.

Information on eToys press releases and financial data was obtained from money.net, an American Reporter content partner.