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Weekly UpdatesI. INTRODUCTION
In April 1998, the Federal Trade Commission (FTC) released a consumer alert pertaining to the increasing problem of online auction fraud. The consumer alert notified prospective online auction users that fraud was becoming more prevalent as the number of online auction participants burgeoned. The FTC, in the consumer alert, suggested tips that the consumer should consider when bidding in an online auction. Since this consumer alert, the online auction industry's awareness of fraud has grown considerably. While the FTC has had limited success in policing the auctions and bringing prosecutions of fraudulent merchants, little has been done to address whether or not the provider of the online auction site should be held accountable for providing the arena in which the fraudulent practices occur.
Part II of this Note examines the online auction industry and the fraud that is becoming all too commonplace. Statistical evidence clearly indicates that online auction fraud is continuing to grow. Part II then identifies a variety of different fraudulent practices that frequently occur in connection with online auctions. While not an exhaustive list of all the different possibilities of fraud, there is a representative group of practices that will clearly indicate the creativity associated with online auction fraud. Faced with the prospect of online auctions becoming a breeding ground for the unscrupulous and ill willed, Part III of this Note is a detailed analysis of the various efforts to stop online auction fraud. The online auction houses themselves, as well as consumer protection groups, and the FTC have undertaken efforts to curb fraudulent use of the online auction sites. Part IV undertakes a comparative study between online auction fraud and the abuse of the pay-per-call industry in the early 1990s. FTC officials warn that the near demise of the 900-number industry due to fraudulent use could be a foreshadowing of the fate of online auctions if the FTC does not promptly address the fraud occurring online. In Part V, this Note ultimately concludes that the existing efforts of online auction industry self-regulation do not provide adequate recourse against the online auction houses for fraudulent practices occurring on their Web sites. The only effective method to stop the increase of online auction fraud is for the FTC to promulgate guidelines and standards that would put the industry on notice that its members will be held responsible for future acts of online auction fraud committed through the use of their Web site.
II. COMPLAINTS OF ONLINE AUCTION FRAUD INCREASE AS THE PERPETRATORS BECOME MORE CREATIVE
A. Statistical Evidence of the Increase in Online Auction Fraud
Nothing evinces the urgency of curtailing the spread of online auction fraud more than the increase in complaints over the past three years. Both the FTC and the Internet Fraud Watch (IFW), operated by the National Consumers League (NCL), serve as reporting agencies for consumer complaints pertaining to fraud.
According to Lisa Hone, staff attorney for the FTC, using Internet-based auctions to defraud people is "`a new type of crime.'"(1) "Hone said that in the first half of 1998, the FTC's Bureau of Consumer Protection received about [three hundred] complaints involving online auction fraud."(2) In the first half of 1999, the FTC's Bureau recorded about six thousand complaints.(3) This represents a two thousand percent increase in just one year's time.
According to Susan Grant, director of the IFW project, the number of reports alleging auction fraud are increasing at its offices as well.(4) Consumer complaints to the IFW regarding online auctions increased 600% from 1997 to 1998.(5) In 1997, constituting 26% of the total frauds reported, auctions were the number one Internet fraud complaint.(6) While online auctions maintained the number one ranking in 1998, the percentage of reports pertaining to auctions increased to an alarming 68%.(7) This 68% represents nearly 5500 consumer complaints about fraudulent practices occurring on an online auction site.(8) In 1998, approximately two-thirds of all Internet-related complaints to the IFW involved auctions and, as of October 1999, 90% of consumer complaints to the IFW pertain to auctions.(9)
The increase in the number of complaints can be attributed to several factors. As the number of Web sites devoted to online auctions increases, it is predictable that the number of frauds occurring on those Web sites will likewise increase. Currently, well over one hundred online auction sites are dedicated to bringing together consumers with other consumers as well as businesses with consumers.(10)
eBay, one of the most popular sites on the Internet, accommodated more than 6.5 million unique visitors in February 1999.(11) With traffic this heavy, eBay was able to consummate more than one million auctions per day on a consumer-to-consumer basis.(12) eBay officials maintain that problems with fraud are extremely rare.(13) eBay reports that only twenty-seven of the more than one million auctions per day generate a fraud complaint to the company.(14) This equals nearly ten thousand fraudulent transactions per year. More generally, in 1998, online auction sites accounted for auction sales amounting to roughly two billion dollars, and analysts expect that by the end of next year that figure will more than triple.(15)
Another factor that explains the increase in fraud associated with online auctions is the lack of adequate external law enforcement. As the number of sites offering online auction services increases, there is a commensurate rise in the need for better policies. However, one of the difficulties in stopping fraudulent activities and outright theft is that auctions have grown far more quickly than law enforcement budgets.(16)
Regardless of the reason for the increase in the number of consumer complaints pertaining to online auction fraud, it is clear that someone must take the steps necessary to thwart the spread of this new crime. With external resources already stretched thin, a more appropriate and efficient method of enforcement would be to require the Web site operator to police its users. Requiring the online auction houses financially liable for fraudulent actions occurring through the perpetrator's use of their Web site is the only way to impact the online auction houses.
B. Online Auction Fraud: How Does It Happen ?
Fraudulent practices can occur during two distinct phases of the online auction process. First, the fraud can take place during the actual bidding process. Two types of fraud at this stage are bid shielding and bid shilling.(17) Second, the fraud can occur after the auction has ended with a buyer having made a winning bid. Three methods are commonly used to perpetrate this fraud. The buyers may send payment to the seller and receive no merchandise at all. The buyers may send payment to the seller and receive inferior or completely different merchandise. Finally, the buyer may win the auction but never send any payment.
1. Fraud During the Bidding Process
Bid shilling occurs when "an individual schemes with someone else or creates a false identity in order to drive up the bidding prices on behalf of the seller."(18) The effect of this fraudulent practice is to artificially encourage legitimate bidders to continually increase their bid in an effort to win the auction. Many times the individual creating a false identity is the seller who then bids on its own merchandise in an effort to increase the overall price received for the goods.
Bid shielding takes place when a buyer and a partner artificially inflate the bids during an auction.(19) Unlike bid shilling, which hopes to encourage increasingly higher bids, this scheme of bid inflation is intended to discourage other bidders from bidding because the false bid is set at an unusually high level. Then, at the last moment before the auction ends, the shielder, who is the high bidder, cancels its high bid whereby his/her partner wins the auction with the lower bid.(20) For example, Bidder A bids five dollars for merchandise being auctioned, while Bidder A's partner, Bidder B, bids five-hundred dollars for the same merchandise. This high bid discourages any other honest bidders from participating in the auction. Then, just before expiration of the auction, Bidder B withdraws his bid, leaving Bidder A as the high bidder with a bid of only five dollars.
2. Fraud After the Close of the Auction
The winning bidder sending payment to the seller and receiving nothing in return is the most common type of fraud occurring after the close of an auction. Some online sellers have put items up for auction, taken the highest bidder's money, and never delivered the merchandise. In addition, consumers who paid by certified check or money order have little recourse when it comes to getting their money back.(21) With fraudulent online auction users recognizing the difficulty in retrieving a check or money order, it is not surprising that payment by check or money order accounts for ninety-three percent of fraudulent payments.(22) In other words, as Susan Grants proclaims: "`Requesting cash is a clear sign of fraud.'"(23) The FTC alleged that Craig Lee Hare perpetrated this type of fraudulent practice on successful bidders for his advertised computer hardware and software. After the successful bidder mailed his check/money order to Hare, Hare sent nothing in return.(24)
Another form of postauction fraud occurs when the high bidder mails payment to the seller only to have the seller send either different merchandise or merchandise of lower quality to the bidder.(25) While the bidder receives some merchandise, the goods the consumer receives are usually of such poor quality that the purchase is virtually worthless. The FTC also alleged this form of merchandise switching as part of its complaint against Hare.(26)
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