a.An internet auction shares with traditional auctions the characteristic that the organiser provides a platform for buyers and suppliers to meet, sets the rules under which the ‘auction’ is conducted and that buyers bid in succession, with the highest bidder winning the contract1. It seems that the seller’s presentation on an online auction website is not a mere invitation to treat, so that the buyer’s acceptance of the contract would conclude the contract.2
b.However there are also significant differences. In a traditional auction, the auctioneer accepts the buyer’s offer as agent for the supplier behalf by the fall of the hammer3, whereas in an internet auction the highest bid is determined by the expiry of time. In a traditional auction, the auctioneer usually is in possession of the goods to be sold and sometimes has a chance to inspect them, whereas in an internet auction the goods remain in the possession of the supplier and the organiser of the auction will not have seen the goods at all. In a traditional auction the auctioneer describes the goods, whereas in an internet auction, the goods (or services) are described by the supplier, with the organiser having little or no influence over the content of the presentation. Furthermore, it is hard to construct a relationship of agency between the auction seller and the provider of the auction platform, as the provider of the auction platform does not act on behalf of the seller to form contracts with buyers.4 Ultimately the differences between a traditional auction and an internet auction can be summarised as a difference in the control the organiser of the auction has over the sales process.5 Under English law there is no overarching definition of what amounts to an auction at law. This means that for each legal provision the question of whether that provision applies to auctions may have to be answered differently. A satisfactory answer can only be found by applying a functional equivalence test, i.e. looking at the purpose of the legal provision and to what extent an online auction is functionally equivalent to a traditional auction in that respect.
Liability of the seller in B2C transactions
c.The Distance Selling Directive 1997/7/EC Article 3 (1), 5th indent excludes contracts concluded at auctions completely from the scope of the Directive. This exclusion has been implemented by Regulation 5 (1) (f). Ultimately it is unclear whether internet auctions are auctions as the term is used in the Distance Selling Directive. However, it seems that there is a majority opinion that internet auctions (in the format described above) are not auctions, and hence within the scope of the Distance Selling Directive.6 If this interpretation of the term auction is correct, it follows that the information requirements (Articles 4 and 5 of the Directive), the cancellation right (Article 6) and the provisions on performance (Article 7) and card protection (Article 8) apply to suppliers, as long as the supplier is a business, i.e. acting in a commercial or professional capacity and as long as the supplier is acting under an ‘organised distance sale scheme’7. Therefore a ‘one-off’ auction sale by a business may not be subject to the provisions of the Distance Selling Directive. One obvious violation of the Distance Selling Directive encountered on online auction platforms is that sellers do not always disclose their identity and address.8
d.By contrast, auctions are not excluded from the scope of the E-commerce Directive 2000/31/EC. Therefore the information requirements contained in Article 5 and the other consumer protection provisions in that Directive (such as the requirement to provide the consumer with means to correct input errors, or the requirement that the steps to conclude the contract must be clearly explained) do without question apply to internet auctions.
e.The Control of Misleading Advertisement Regulations 1988, the Trade Descriptions Act 1968, the Consumer Protection Act 1987 and the Unfair Commercial Practices Directive 2005/29/EC do not contain any exceptions or exclusions in respect of auctions.
f.Section 57 (2) of the Sale of Goods Act states that
‘a sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner’
g.It seems therefore, that for purposes of the Sale of Goods Act 1979, an internet auction may be regarded as an ‘auction’, so that the consumer protection provisions apply to business sellers in internet auctions. Section 57 of the Sale of Goods Act contains provisions for auctions and in particular provides that if the seller (or someone else on his behalf) wishes to bid at an auction, the seller must expressly notify this reservation of the right to bid. If the seller does not comply with this notification, the buyer may treat this as a fraudulent action9 and rescind the contract and claim damages. Thus the Sale of Goods Act makes clear that ‘shill bidding’, i.e. when a seller (or someone in cahoots with the seller) makes bids on his own item in order to drive up its price without disclosing this practice to the seller, is fraudulent.10 In addition, this would probably amount to an unfair commercial practice under the Directive.
h.The definition of ‘dealing as a consumer’ has been amended for the purposes of the Unfair Contract Terms Act 1977, the Sale of Goods Act 1979 and the Supply of Goods and Services Act 1982 by section 14 (3) of the Sale and Supply of Goods to Consumers Regulations 200211. This makes clear that where:
the buyer is an individual (not a body corporate) and
he or she is not buying second-hand goods at a public auction at which individuals have the opportunity of attending the sale in person,
he or she will still be regarded as a consumer.12
i.Therefore these Acts apply where a consumer buys from a seller acting in the course of business at an online auction. Where the auction is partly online (i.e. bids may be made online or on the telephone, but it is also possible to attend the auction face-to-face in person), these Acts only apply to the sale of new goods (as opposed to second-hand goods, such as antiques).
j.The effect of this definition is that sellers of goods have to comply with the implied terms in sections 12 (title), 13 (sale by description), 14 (implied terms about quality and fitness) and 15 (sale by sample). In an online auction of services13, suppliers also have to comply with the implied terms in sections 13 (implied term about care and skill), 14 (time for performance) and 15 (consideration). Suppliers are not able to exclude the implied terms in a consumer contract and any other exclusion clauses have to satisfy the requirement of reasonableness.
k.Moreover, section 20 (4) of the Sale of Goods Act 1979 now14 provides that the risk in the goods passes to the consumer only at the point when they are in fact delivered to the consumer. In practice this would mean that the business seller of goods at an online auction has to insure the goods, when dealing with a consumer buyer. In the author’s personal experience this seems to be contrary to actual practice observed by sellers on eBay.
l.Finally the Unfair Terms in Consumer Contracts Regulations 1999 have no exclusions or special provisions concerning auctions. Hence if a seller uses standard terms in an online auction sale these would be subject to the fairness test established by the Regulations.
m.In conclusion it can be said that since the change of law in 2003, the majority of consumer protection provisions apply to business sellers in online auctions. The only notable exception, where the law is unclear, are the provisions in the Distance Selling Directive (and the Regulations). Some clarification is urgently required here.
n.Therefore the main problem for consumer protection in online auctions does not arise from consumer laws not applying, but rather from the difficulty of enforcing such provisions, considering the enormous amount of small scale transactions occurring on platforms like eBay and the inability of consumers to enforce their rights.15 Consumers would benefit from a greater awareness of the risk that their rights may be unenforceable in practice when buying via online auctions.
Position of the auction provider
o.This section briefly discusses the issue of whether the provider of an auction platform is liable for the activities on the platform. For example, if a seller on eBay falsely describes goods sold via online auction, could eBay be made liable for such misdescription? It seems clear that Regulation 19 of the Electronic Commerce (EC Directive) Regulations 2002 applies, where the auction platform provider merely provides hosting (i.e. storage) services. This provides for immunity against criminal liability where the provider has no actual knowledge of the unlawful activities or information.16 This should be a defence to the criminal offences created, e.g. by the Trade Descriptions Act 1968.17
p.It provides immunity against civil liability where the auction provider does not have actual knowledge of the unlawful activities or information and is also not aware of any circumstances, from which it would have been apparent that the activity or information was unlawful.18 This constructive knowledge test does not impose any active filtering or monitoring obligations on the auction service provider.19 So for example an auction provider would not be liable in damages for a misrepresentation unless it had actual or constructive knowledge.
q.However once an auction service provider has received sufficiently precise notice about unlawful activity or information, it has to act immediately to remove or block any offers on the website, in order to avoid liability.20 This requires active management of the platform. This raises the question of what amounts to sufficiently precise notice. Regulation 22 states that this depends on all the relevant circumstances but the courts must take into account whether the notice was sent to email or other contact details given for that purpose and whether the person giving notice included his or her name and address, where the location is stored and why the information is unlawful. In the context of an online auction this should include the category of sale, the identifier of the seller and why the information is unlawful.
r.The uncertainty as to what amounts to constructive knowledge is in fact a big open issue for providers of third party marketplaces, including auctions. They are concerned that they lose their immunity if they implement monitoring activities to prevent fraud or other illegal activity.21
s.It is also important to note that the immunity for hosting given under Regulation 19 does not prevent an enforcer such as the OFT to take enforcement action, including by asking the auction provider to block the relevant offers or applying for an enforcement order (injunction) to the court.22 Hence where a business seller engages in unfair commercial practices on an auction platform towards consumer sellers, Regulation 19 would not stop the OFT from taking enforcement action against the provider of the auction platform.
t.By way of example, in a recent French case, concerning an imitation of a piece of jewellery sold on a French auction site, the Tribunal de Grande Instance de Paris also found that the auction provider acts in a hosting capacity and is immune from liability for damages for IP infringement or misdescription of goods towards consumers, as it had no actual or constructive knowledge and no control over such description.23
u.Also, in a recent German case24 the highest German civil Court has held that the provider hosting the auction is not liable in damages, but can be made subject to an injunction to take measures to prevent future trademark infringements25. However, the Court also made clear that the auction provider not only had a duty to remove or block specific offers which it had been made aware of, but that, knowing of specific past infringements, it had a duty to take reasonable measures to prevent future, similar infringements. This could be achieved by employing filtering mechanisms, searching for suspiciously low prices or keywords, which then would alert the auction provider to remove postings. However the auction provider would not be liable in respect of any unlawful activities, which are not recognisable such. In order to understand the Court’s ruling it is important to keep in mind that it mainly looked at the issue of granting an injunction. The Supreme Court agreed with the appeal court’s finding that there was no liability in damages (for the past infringements), as Ricardo had no actual or constructive knowledge.
v.It is likely that the English courts would take a similar approach. Therefore, this case is a powerful illustration that the exemption from liability for hosting does not give absolute protection to auction service providers. Courts may still issue injunctions against auction providers which require them to seek out specific infringements, based on past infringements. This seems to strike a fair balance between consumer protection and the interests of platform providers.
w.Finally, the auction provider will be liable for its own activities concerning the internet platform. For example, the terms and conditions incorporated in its contract with the seller on the one hand and with the buyer on the other hand must comply with the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.
x.Also, liability might arise from the auction provider’s control and design of the process. While it seems fairly clear that an online auction provider (following the model where sellers directly upload the presentation of the goods for sale) has no control over each individual article and its description, it has some control over the technical design of the process, which goes beyond the mere storage (hosting) of information. For example, where the online auction provider classifies the contents of the auction website according to certain categories or where it actively encourages the sale of certain types of goods, it may well know what types of goods are sold at its auctions.26 Another example would be that it should be easy for an online auction service provider to prevent shill bidding, by technically blocking the seller from bidding (at least where the seller only uses one identifier; clearly where a seller fraudulently registers many identifiers this may be impossible to control). Ultimately it is a technical question of fact to what extent (and at what cost) an online auction service provider has control to prevent fraudulent activities. The compromise struck in the E-commerce Directive (actual or constructive knowledge) seems to be a fine balance in this respect, which has to be assessed according to the circumstances in each case.
Consumers as sellers
y.The consumer protection provisions discussed only apply where the supplier is acting in the course of business, with the consequence that they do not apply to C2C transactions.27 The obvious explanation for this is that the purpose of these provisions is to protect the consumer as the weaker party to the transaction. However, the rise of internet auction sites has enabled many C2C transactions. This raises the question whether certain consumer protection provisions (such as the Unfair Commercial Practices Directive) should apply to consumers as sellers. This would only seem appropriate where there are widespread and harmful unfair commercial practices developing in this market segment. More importantly, the easy access to selling via eBay has also blurred the distinction between selling as a consumer and selling as a business. The test of whether a person is acting in the course of business is clearly a question of degree and depends on the regularity and whether the transaction is carried out with a view of profit.
z.There has been much recent publicity both about eBay’s astonishing expansion and success and large scale fraud committed by criminals registering with eBay and enticing consumers to part with their money.28 Clearly the criminal law (fraud) applies to such activities. We are not aware of any particular need for further regulation of transactions, but possibly this area would need further examination. The main issue here seems effective prosecution and enforcement, as well as consumer education.
aa.Another question is to what extent online auction providers should take active steps to prevent fraudulent activities. Ebay has been pro-active in this area to some extent. It has a feedback system, which allows buyers to check the feedback of previous buyers. However feedback can of course be fabricated by sellers. Furthermore, eBay provides dispute resolution services.29 Ebay also provides some limited insurance, up to a maximum of £500 for users paying with PayPal. Ebay also lists the items which are prohibited.30 However some argue that this is not sufficient and that auction providers like eBay should do more to prevent fraud and mis-selling.
1 The ‘Buy-It Now’ facility on Ebay clearly does not amount to an auction, as here there are no successive bids with the highest bidder winning the contract. This business model is more like an unconditional offer, which is accepted by the consumer choosing the ‘Buy-It Now’ facility.
2 This has been held by the highest German civil court, the BGH in a case where the seller forgot to state a reserve price and as a consequence sold a new car at a low price: see BGH VIII ZR 13/01 of 7. November 2001, it is likely that the courts would have come to the same conclusion here in England.
3 Section 57 (2) of the Sale of Goods Act 1979 provides that ‘a sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner’. Therefore under English law auctions are not limited to a modus operandi, whereby the contract is completed by the fall of the hammer, or in other words, auctions may take another form. Hence the mere fact that an internet auction is not concluded by the fall of the hammer does not disqualify it to be an auction.
4 C Riefa ‘Consumer Protection on Online Auction Sites: Just an Illusion?’ (August/September 2005) 16(3) Computers & Law 34-36, 35
5 The law in France, for example distinguishes between traditional auctions and those conducted online, Loi no 2000-642 of 10. July 2000
6 A Nordhausen, ‘Distance Marketing in the European Union’, Chapter 8 in L Edwards (ed) The New Legal Framework for E-commerce in Europe (Hart Oxford 2005) 239-276, 247;C Riefa ‘Consumer Protection on Online Auction Sites: Just an Illusion?’ (August/September 2005) 16(3) Computers & Law 34-36, 34; Judgment of the Highest German Court, German Federal Supreme Court, BGH VIII ZR 375/03 of 3. November 2004, where the BGH held that the cancellation right provided for under the distance selling legislation does apply to internet auctions, such as the one run by eBay. The Court placed great emphasis on the fact that consumers in internet auctions need the same protection as in other sales modes, as they have no opportunity to view the goods before sale (see also Recital 14 of the Directive) and there is no third person (such as the auctioneer) who acts as an intermediary. See also Atiyah, Adams and MacQueen The Sale of Goods (11th edition Longman 2005) 58. The OFT Guidance ‘Home shopping: Distance Selling Regulations’ also (in our opinion wrongly) states categorically that the Distance Selling Regulations do not apply to online auctions, p.3.
7 Article 2 (1) definition of distance contract
8 Regulation 7 of the Distance Selling Regulations, discussed in C Riefa ‘Consumer Protection on Online Auction Sites: Just an Illusion?’ (August/September 2005) 16(3) Computers & Law 34-36, 35
9 Section 57 (5)
10 See Ebay policy at http://pages.ebay.co.uk/help/basics/f-shilling.html ; for an example of a criminal prosecution for fraud in the US see http://www.cybercrime.gov/Fetterman_indict.htm [last visited on 11. February 2006]
11 SI 2002/3045
12 Sections 12 (2) and 25 (1B) of the Unfair Contract Terms Act 1977 and s.61 (1) and (5A) of the Sale of Goods Act 1979 (referring to UCTA 1977) and 18 (4) of the Supply of Goods and Services Act 1982; prior to 2003 there was a blanket exclusion on sale by auction or competitive tender.
13 Arguably an online ‘auction’ of services is not an auction in the proper meaning of the word. According to the Oxford English Dictionary an auction is described as ‘a public sale in which goods or property are sold to the highest bidder’. So, in the case of services, the question of whether auctions are excluded from the scope of the legislation may not arise on the first place.
14 Changes introduced by the Sale and Supply of Goods to Consumers Regulations 2002 in 2003
15 C Riefa ‘Consumer Protection on Online Auction Sites: Just an Illusion?’ (August/September 2005) 16(3) Computers & Law 34-36, 35
16 Regulation 19 (a) (i)
17 The Trade Descriptions Act 1968 itself provides a defence for third party information where the maker of the description has no knowledge in s.24 and an innocent dissemination defence in s. 25. Likewise there is a defence concerning misleading price indications where the publisher did not know and had no grounds of suspecting that the publication would contain a misleading price indication, s.24 Consumer Protection Act 1987.
18 Regulation 19 (a) (i)
19 Article 15 (1) of the E-commerce Directive 2000/31/EC, which provides that Member States shall not impose a general obligation on providers to monitor the information they store, not a general obligation to actively seek facts or circumstances indicating illegal activity.
20 Regulation 19 (a) (ii)
21 Results of the Empirical Research, Summary of Responses, Appendix One, Error: Reference source not found
24 BGH I ZR 304/01 of 11. March 2004 concerning false Rolex watches on the Ricardo auction website
25 This is not a consumer protection case, as the sellers did not misdescribe the Rolex watches, they were in fact described as fakes and imitations. However, similar considerations apply to the liability of auction providers in respect of consumer protection law.
26 For example in the Yahoo case mentioned in section 7 above Yahoo was aware that Nazi objects were sold and subsequently blocked these.
27 The exception is of course the implied term as to the ownership of goods under s.12 of the Sale of Goods Act 1979
28http://www.bbc.co.uk/watchdog/reports/consumer/consumer_20051206_2.shtml, http://business.guardian.co.uk/story/0,,1705167,00.html, http://money.guardian.co.uk/businessnews/article/0,,1702462,00.html[last visited on 11. February 2006]
29 www.squaretrade.com [last visited 11. February 2006]
30 http://pages.ebay.co.uk/help/sell/item_allowed.html [last visited 11. February 2006]