‘Fair warning’ – 7 Risks in holding an E Auction

Online auctions (or e-auctions) are big business and can catapult the regional auction house onto an international stage with access to new and dynamic global markets.

Companies such as eBay have added all kinds of auction capabilities to their websites in order to attract users and add excitement. But running an online auction – an auction which is held over the Internet – raises many legal issues both for the seller and the buyer.

This article looks at ways to mitigate the organisation’s risks which come from adding an auction to a company’s website. The information does not constitute legal advice and organisations considering an online auction should always seek expert opinion.


1. What kind of auction?


Auction Gavel, e-auctionYou might think that an auction is a sale where buyers bid the highest price for an item and the fall of the auctioneer’s hammer confirms the deal. This English auction is the most common type, but there are others and each carries its own legal risks and responsibilities, including:

  • Vickrey auctions – the highest bidder obtains the item at the price offered by the second highest bidder;
  • Dutch and Yankee auctions  - auctions formatted to handle a situation in which a seller wishes to sell multiple, identical items;
  • First-price sealed-bid auction – a single bid is made by all bidding parties and the single highest bidder wins, and pays what they bid. The main difference between this and English auctions is that bids are not openly viewable or announced as apposed to the competitive nature which is generated by public bids;
  • Reverse auction - where the roles of buyer and seller are reversed. Multiple sellers compete to obtain the buyer’s business and prices typically decrease over time as new offers are made. They do not follow the typical auction format in that the buyer can see all the offers and may choose which they would prefer. Reverse auctions are used predominantly in a business context for Procurement.
  • Bidding fee auction, or penny auction requires customers to pay for bids, which they can increment an auction price one unit of currency at a time

2. Bidder terms and conditions


Sophisticated auction websites such as eBay publish several policies that cover the variety of goods intended for auction. Less sophisticated sites will still need to carry bidder terms and conditions which include:

  • the method by which bids will be processed;
  • how winning bids will be handled;
  • how winning bidders will be notified;
  • the use of “reserve” prices (a secret price below which no bid is accepted); how disputes between bidders will be addressed;
  • how merchandise and payments will be shipped;
  • refund and return policies;
  • information on fees, membership eligibility requirements, and feedback mechanisms;
  • which country’s jurisdiction and laws will apply.

The rules may also include a list of prohibited items due to their potentially hazardous or unlawful nature (e.g., firearms, chemicals, or fireworks). Some countries may also prohibit certain products, such as France’s ban on the sale of Nazi memorabilia.

The European Distance Selling Directive does not apply to online auctions so bidders acting in a private (rather than a business) capacity do not have the right to a cooling of period, as consumers generally do when purchasing products ‘at a distance’.


3. Sale of goods ‘as seen’


Offline, items are sold in auction ‘as seen’. Companies that are auctioning off their own goods (as opposed to merely creating a forum for third party transactions) should be particularly aware of the legal issues that auctioning specific items may pose, such as rare wine which may be subject to pricing or shipping regulations. Similarly, although companies may be tempted to describe their goods for auction with glowing words to encourage bidding, they should bear in mind that all the rules, regulations, and laws which govern the conventional sale of goods still apply.


4. Privacy


Most auction sites require that users, both bidders and sellers, register before participating. The registration process usually involves collecting some user information, including name, address, phone number, etc. The auction site owner should publish and adhere to a “privacy policy” regarding how it collects and utilizes user information online. This includes compliance with the EU cookies rules in EU member states as well as Data Protection.

Auction rules do vary significantly in other countries, so companies may wish to limit participation to their own country. However, if you do allow those in other countries to participate in online auctions, you must be aware of international privacy laws and regulations.


5. User feedback


Following the lead from eBay, many auction sites now provide a feedback mechanism through which registrants can provide post-transaction commentary about other users. This user “feedback” is meant to keep the bidding process open and honest, and to allow customers to communicate their satisfaction or dissatisfaction with the seller and its goods. However, user feedback has already become the basis of at least one libel lawsuit, in which one car retailer sued another, alleging that the defendant had posted false and defamatory feedback.

Companies should incorporate rules concerning the content of user communications in their web site terms and conditions (not the same as bidder terms and conditions) as well as expressly disclaim all responsibility and liability for user-provided content.


6. Website terms and conditions


Website terms and conditions govern visitors’ use of your website. It covers issues such as legal notices, ownership of intellectual property, use of hyperlinks and disclaimers.

A “clickwrap” agreement requires the users to view the agreement and click “I Agree” or some similar wording before gaining access to the site or a feature. Terms and conditions are usually accessible through a link at the bottom of the home page of the site and do not require viewing or consent. Although many companies opt to have terms and conditions rather than clickwraps because of their more user-friendly nature, as between the two, clickwraps are more likely to be found to be enforceable in court.


7. Money laundering


In a cash high business, you have to take a zero tolerance attitude towards money laundering. Not only will the regulators come down heavy on an organisation that doesn’t have sufficient controls in place to prevent money laundering, but it also doesn’t look good from a commercial and professional standing. Knowing who’s who is an essential part of the registration process if users are not already known to the auctioneers.


And finally…


Auction companies tend to outsource the online part of their operations to hosting companies such as i-bidder. Not only does this ensure that expertise and service is consistent, but the auction company will also get access to a wider market as well as Internet savvy customers. All in all, professional auction houses will always ensure that customers have a safe and enjoyable browsing experience when bidding online.

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