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A closer look at the law that allows shill bidding - UCC 2-328

By Michael Bugeja

Let me begin by stating that I’m going to focus here on Proxibid, probably the best online venue for estate auctions because of its Unified User Agreement that holds both buyer and auctioneer accountable. You don’t get this type of protection from many other popular portals, including emerging competitor HiBid.com.

 Throughout the piece I will be referring to Proxibid because it remains my main personal bidding platform. But keep in mind that what I am stating here pertains to the Uniform Commercial Code. I can write cogently about that code because Proxibid adheres to it. When bidding on other platforms, typically I have to telephone the auctioneer and ask questions such as, “Do you see maximum bids? Are you, your employees, or the seller allowed to place bids? Is that included in your terms of service?”

 In the title of this post I have used the word “shill.” What does that really mean?

 For a useful article about that you might want to visit Mike Brandley’s blog post titled, “What is Shill Bidding?” He defines shill bidding, an illegal but widely extant practice in online venues, including eBay, as “bidding without the genuine intent to purchase, and rather with the intent to ensure price protection for the seller by one of two methods.” Method One: to ensure a minimum price for the lot. Method Two: to encourage good faith bidders to continue to raise their bids.

 How can this be legal?

Now focus on UCC-3-228, from the Uniform Commercial Code, which deals solely with auctions and auctioneering. The above screenshot is from the Cornell University law site. Look closely at (4) and the phrase “notice has not been given that liberty for such bidding is reserved.” In other words, if notice is given, the seller or his or her employees, relatives and agents may engage in increasing bids on lots.

Proxibid handles this issue with a disclaimer found at the top of the seller’s terms of service:

PLEASE READ: At the request of the auction company, this auction permits bids to be placed by the auctioneer, an employee of the auctioneer, or the seller or an agent on the seller’s behalf. While Proxibid’s Unified User Agreement prohibits this behavior, in accordance with UCC 2-328, this auction is permitted to engage in this activity by providing this clear disclosure to you, the bidder.

The portal didn’t always have this notice. In fact, when I blogged independently on a now defunct site, Proxiblog.org, I encouraged Proxibid to post such notices for more than a year before the company finally did so. Check out this Jan. 28, 2012 post praising Proxibid for requiring auction companies to disclose shill bidding via the above disclosure notice.

In the past year, however, I have been rankled by a practice concerning wasted time spent on auctions with that disclaimer. Specifically, it appeared to me, an employee or agent of a company—registering with Proxibid as a “buyer”—was slowly, incrementally, raising bids on specific lots over a span of days before the auction was scheduled.

Typically, when an auctioneer is going to bid on items—because he or she either wants the item or desires a minimum price (or reserve) for the lot—that sum is bid as soon as a good-faith buyer makes the first bid. The seller goes to the maximum, and that’s the end of it. But slow, incremental bids (seller waits for you to bid, then raises the bid, and waits again, and then raises the bid again, and so on) placed over a specific time span clearly is done with the intent to trigger ever-higher bids from a buyer desiring a lot. That’s the spirit of Method Two of shill bidding, as described earlier.

And it’s being done on several platforms. I just happened to experience it on Proxibid.

According to 10 j. of Proxibid’s Unified User Agreement, sellers and their employees, agents, etc., are not allowed to bid unless notice is given (that aforementioned disclaimer). If Proxibid discovers the practice is occurring without such notice, it will add the notice within three business days. (I can attest that Proxibid has done exactly that when I complained about a seller engaging in shill bidding.) Further, this clause states that any seller who posts the notices and wins the lot (because no higher bid was received) “is liable for the for the purchase price and all associated expenses of the auctioned item.” (Essentially, this is a “buy-back” fee.)

For the record, Proxibid does not have a buy-back fee. But this is how my auctioneer associates selling on Proxibid describe this clause when explaining fee structures to me. That’s why I used the term.

How do you deal with this as a good-faith buyer?

On Proxibid, and again not on several other portals, you’ll see the redacted name of the buyer on every bid lot (first and last letters of his Proxibid ID with asterisks in between, such as c****r). If you bid on a coin and the same redacted name continues to bid every time you do on your and other good-faith buyers’ lots, chances are that Method Two is in play.

Yes, this is legal. Yes, this is going on.

There is an ethical method that “good-faith auctioneers” can employ to secure minimum acceptable bids (Method One above):

  • Post the UCC 2-328 disclaimer, as required by Proxibid (again distinguishing it from many other portals), that an employee or the company may bid on the lots.
  • Open with a high starting bid acceptable to the seller. (Option #1)

  • List a reserve for the lot. (Option #2)

Here’s the problem in a nutshell. When an auctioneer doesn’t open with a starting bid or list a reserve, the seller not only may be wasting a bidder’s time but is giving the impression that another good-faith bidder wants a desired lot (receiving “outbid” notices, wasting more time) in the hope of ever-rising bids.

The issue is even more legal and potentially troubling. The late J. Stephen Proffitt III, Esq., published an insightful article about this titled, “A Closing Look at UCC Section 2-238.” He covers how the code relates to auctions with reserves, auctions without reserves, and “forced” auctions (such as a bank foreclosure auction)

A copy of this post was sent to Proxibid, which was invited to respond:

Proxibid strongly discourages auction companies, their sellers and their employees from bidding in their own auctions and only a very small percentage of our clients even engage in this practice. Rather, we educate auction companies about the benefits of using starting bids and reserves to provide the best and most trustworthy buyer experience while at the same time driving prices for their consignors. However, auction companies are permitted by UCC 2-328 to bid in their own auctions. Proxibid takes it seriously when an auctioneer is engaging in this practice and requires a disclaimer to be posted on their auction to make buyers aware, unlike other platforms. Proxibid does not have a buy-back policy or a buy-back fee of any kind. Any other fee arrangements that sellers arrange with their buyers is their prerogative and their policy as we do not intermediate the billing relationship between buyers and sellers. Remember, Proxibid is a conduit between buyers and sellers, but we are not the actual seller—we are not restocking our own shelves with goods unsold.

Once again, this post is not meant to criticize Proxibid or its sellers. It is, however, meant to call attention to the law that allows shill bidding, and to be of service to the bidder rather than the seller because, in the end, the bidder is more important to the business.

If you comment below, please keep in mind that this article is meant to be educational. Do not identify any auctioneer, any seller, or yourself. But do tell us how you feel about UCC 2-328, which allows sellers or his or her agents to bid on their own lots. How can online coin auctions become more transparent about what may be happening behind the digital screens?