Private Redress and Public Enforcement on Online Auction Platforms

Chapter 6
Private Redress and Public Enforcement on Online Auction Platforms

When sales go wrong, consumers ought to be able to tap into effective redress mechanisms, including in-house complaints procedures, mediation, conciliation, arbitration, adjudication, ombudsman schemes or legal mechanisms¹ such as going to court. Unfortunately, on online auction platforms, rights granted to consumers are not always matched by easy access to private redress mechanisms. Relying on consumers themselves to seek redress is insufficient. Lax practices in the online auction sector are causing consumer detriment that is best addressed via public or self-regulatory intervention. This chapter reviews the main elements in the arsenal for private redress available to consumers and assesses their viability. It also explores trends in online auction complaints and the intervention of self-regulatory bodies and public enforcers, calling for better enforcement mechanisms all round.

1 Private Redress on Online Auction Platforms

Courts are one avenue available to consumers. However, despite the fact that ‘consumer protection legislation at EU and Member State’s level has been significantly strengthened in the past decades’ the European Commission found that ‘when their rights are violated European consumers do not always obtain effective redress’.² The reasons for such lack of effective redress are explained by some of the deficiencies of the court system. It is indeed the public perception that court proceedings are expensive, time-consuming and burdensome. They also result in an uncertain outcome, due to their adversarial nature. For some consumers, those elements prove too great an obstacle. Many do not try to seek redress. For others, it is the absence of knowledge of their rights that is responsible for ‘redress apathy’.

According to Hörnle, ‘for most e-commerce disputes the cost of legal redress by litigation is not proportionate to the value of the claim’.³ On online auction sites most claims are likely to be for a small amount. Take for example a dispute over a bid package on a penny auction site or the purchase of a toaster on eBid. This hardly seems worth the court fee and time necessary to engage with a small claims procedure. A 2004 Eurobarometer survey showed that consumers were unlikely to go to court for amounts below 500 euros.⁴ Only 11% of the people polled were prepared to go to court for amounts below 100 euros. The survey further analysed the reasons for avoiding court. Out of the respondents who declared being willing to go to court for amounts above 100 euros (a total of 54%), the cost of the procedure in relation to the cost of the product or service was the chief reason for not doing so. It was cited by 73% of respondents.⁵

The same Eurobarometer survey also highlighted that amongst the respondents who were willing to go to court for amounts above 100 euros, the length of the procedure (33%) and its complexity (23%) were acting as major obstacles to courts being used. Those same reasons were used by citizens who declared not wanting to go to court, regardless of the amount at stake.⁶

But those are not the only issues making courts less than desirable to solve disputes concerning online auctions. The distance between the parties, which may involve a cross-border lawsuit, may dissuade consumers from claiming even when they are perfectly entitled to.⁷ In a Eurobarometer survey from 2008,⁸ only 2% of respondents had been involved in proceedings outside of their Member States. The vast majority of respondents (83%) did not see themselves involved, in the future, in a cross-border dispute. While the survey did not exclusively focus on consumer disputes but covered civil justice in general, it gives a good indication of the kind of factors that hindered consumers seeking redress outside of their national borders. The low appetite for cross-border justice was linked primarily with the perception that access to civil justice abroad was difficult.⁹ The survey highlighted that lack of knowledge of procedural rules, language barriers, costs and lack of trust in proceedings were the main reasons for avoiding cross-border disputes.¹⁰ Issues surrounding enforcement were also a hindrance. Although those were not directly mentioned in the survey, the difficulties associated with choice of law or jurisdictions in cross-border disputes come directly under concerns about rules of procedures and enforcement. In the online environment, those issues are well documented¹¹ and apply to online auctions with the same difficulties. They, no doubt, would also play a role in the consumer’s psyche and the decision to resort to courts.

Further, the chance of success of a case may also weigh against the use of courts in online auction disputes. For example, consumers may factor who they are buying from (proprietary website or business or consumer on intermediary platform) in their decision to pursue the case in court. This is because not all will present the same prospect of recovery should the consumer win the case. The financial clout of online auction platforms varies greatly, and so does that of their users on intermediary websites. The rights granted to the consumer and the redress available will also vary depending on what is being purchased and the capacity for the goods to be repaired, replaced or sent back for a refund. Second-hand goods for example cannot easily be replaced.

As a result, courts will only provide assistance in a niche number of cases, mostly for high-value items, and moslty where both parties are located in the same Member State. This points to the need for alternative methods of dispute resolution enabling consumers to access some form of redress when shopping on online auction sites.

Alternative dispute resolution (ADR) covers out-of-court schemes designed to facilitate speedy and low-cost solutions that are more time-efficient and flexible than ordinary procedures before the court.¹² The European Commission has been encouraging reliance on ADR in the resolution of consumer disputes,¹³ culminating in the adoption of the ADR Directive¹⁴ and the Regulation on Consumer Online Dispute Resolution (ODR) to assist consumers in resolving cross-border disputes.¹⁵

EBay used to provide alternative dispute solutions via Square Trade. When using Square Trade consumers could choose between a human mediator and an online process of dispute resolution where automated negotiation took place. At its peak, Square Trade’s online mediation tool dealt with over 2 million disputes with parties situated in 120 countries,¹⁶ although I was unable to ascertain how many were originating from eBay and other online auction platforms. Despite the many advantages that ODR/ADR solutions presented, ADR on online auction sites has not retained consumers’ attention as a method of resolving disputes. Square Trade indeed stopped offering its ODR services on eBay back in 2008 despite having been a precursor and the leading provider in consumer mediation.¹⁷ Out of the 28 sites included in the studies I conducted, none offered an ADR solution or recommended access to one, at the time of the survey in 2013. An earlier list of ADR mechanisms established by the OFT in 2010 also revealed the absence of such ADR mechanisms for the online auction industry (intermediary and proprietary websites alike).¹⁸

I am therefore sceptical about the future use of ODR/ADR under the European Commission initiative, in the online auction sector.

This is primarily because the survey conducted by Edwards and Theunissen, at the time Square Trade was still operational, concluded that there was no convincing evidence that the availability of ‘ADR is what consumers want’.¹⁹ The survey, spanning 400 eBay users, reviewed the impact of ADR in creating trust and satisfaction on eBay. According to Edwards and Theunissen there was a very low uptake of ADR procedures amongst their respondents, with only 3% of buyers having used Square Trade. This was despite the fact that ‘a case can be filed there for free, remains free throughout negotiation, and even if mediation is commenced it costs only 30USD or less’.²⁰ The survey showed that internal resolution mechanisms operated by eBay had a better uptake. Indeed, 67% of the respondents who had encountered a problem buying or selling on eBay had engaged in one or more of eBay’s own dispute resolution mechanisms.²¹ The rest of the respondents preferred to resolve their disputes by contacting the other party directly (51.9%). The remainder did not engage at all, either considering the amount at stake was not worth it or because of lack of knowledge of the procedures in place.

Based on the websites included in the study, ODR could offer some assistance to consumers. A number of penny auction sites in particular are based outside the UK but within the EU. However, because the ODR Regulation is limited to cross-border purchases and does not extend to national disputes, it is unlikely that it will find a more favourable reception with online auction users. In any event, this geographical limitation of the ODR process means that it would be a potential solution for only a fraction of online auction users.

As a result, it seems that despite ADR and even ODR being best suited for dispute resolution on online auction sites, those cannot be seen as the ‘holy grail’ as the European Commission seems to portray it. Further, ADR is largely shunned by consumers in other fields. The Eurobarometer on Consumer Empowerment from 2011 found that out of the 77% of consumers that did take action against a provider, only 5% chose to pursue the matter using an ADR solution against 2% using the courts.²² While ADR solutions can have some use for disputes, they will remain discrete responses in the arsenal used by consumers wanting to obtain redress on online auction sites. This low uptake is, in turn, what causes the risk of demise of such tools, since critical mass is required for ADR or ODR solutions to be profitable.

1.3 User Feedback as a Dispute Resolution Mechanism on Intermediary Platforms

Part of the demise of ADR on intermediary online auction sites may be linked with the correlative high take-up of feedback as a mechanism for complaints. Feedback is a process used by intermediary online auction platforms to build trust between users. It can be used as a mechanism for voicing complaints, because after each transaction buyers can leave an evaluation of their experience. Half of the intermediary websites surveyed use a three-point scale where the feedback left can be positive, neutral or negative.²³ Another 43% of sites use a 1–5 star scale on which the top two grades (5 and 4) are considered positive feedback, the lower grades (1 and 2) are negative and grade 3 is neutral feedback. Only one intermediary (7%) used a two-point scale where users choose between positive or negative feedback. Although feedback ratings are often based on more sophisticated calculations, feedback scores are, by and large, calculated on a points system, where a positive rating is worth +1, negative feedback -1 and neutral feedback is 0.

1.3.1 Value of feedback as a dispute resolution mechanism

Many studies have shown that a seller’s reputation has a positive economic impact. Resnick and Zeckhauser demonstrated that there is a significant correlation between a high feedback score and the successful conclusion of auctions.²⁴ There is a statistically significant relationship between the seller’s overall reputation and the buyer’s willingness to pay.²⁵ For example, a study on vintage postcards sold on eBay showed that sellers with an established reputation fared better. Buyers were prepared to pay an extra 8.1% on average on the selling price.²⁶ Worse, Lucking-Reiley et al. established that the effect of negative feedback is much greater than that of positive feedback.²⁷

Negative feedback, as a complaint mechanism, could yield better results than any other form of ADR because it is valuable to sellers. It could have the power to directly affect the bottom line of any trader. However, it does not give consumers a direct remedy if they have been wronged. This therefore limits the ability that feedback mechanisms have at replacing contractual liability and judicial or ADR enforcement mechanisms.²⁸ Furthermore, feedback mechanisms have a number of flaws that make them less attractive as a tool for dispute resolution.

1.3.2 Feedback systems flaws

There are principally two main flaws in feedback systems that may influence their reliability as dispute resolution mechanisms. Note that all the surveys carried out on feedback to date have focussed on eBay as a reference point. It goes without saying that many of the findings would be applicable to other intermediary platforms, and therefore the flaws identified are likely to present an obstacle to the use of feedback across the industry.

1.3.2.1 Fear of retaliation. Feedback is often deemed unreliable because sellers and buyers rate each other using the same feedback mechanism (positive, negative and neutral). Melnik and Alm note that ‘buyers may be hesitant to leave negative feedback because of the perceived expectation that the seller would then leave a negative retaliatory comment as well’.²⁹ Research indicates that online market participants rarely post negative feedback to public forums, a fact possibly explained by the fear of retaliation.³⁰ Some sellers are leaving many feedback comments, in response to negative feedback, that belittle the aptitude of the buyer as an eBayer, or worse threatened buyers with negative feedback.³¹ However, since 2008 traders on eBay are no longer able to post negative comments on buyers. Meanwhile, buyers continue to be able to post negative comments on sellers, whose only ‘retaliation’ is to post a response to the negative comments left, in order to explain their position. This could put an end to discussions about the chilling effect of negative feedback for fear of retaliation; but feedback as a system continues to display a bias towards positive comments, for which fear of retaliation is only one potential contributor.

1.3.2.2 Unreliability of feedback. Gillette explains that feedback is skewed in favour of a disproportionate percentage of positive reviews. The cause is primarily found in the way eBay invites feedback itself. At the time of the study, Gillette explains that the notice appearing at the point of leaving feedback mentioned defamation laws and the user’s responsibility. Those comments are, according to the author, geared towards leaving positive feedback rather than negative comments. The author deems the statement and other practices on eBay as ‘discouragement’ tactics explained by the fact that too much negative feedback may have ‘spillover effects and imply that eBay traders generally have suspicious reputations’.³² When I checked the FAQs for the purpose of my study, I found a number of statements to the same effect. Those are effectively discouraging users from leaving negative feedback and nudging users into leaving positive feedback.³³ It follows that if all feedback left is skewed towards positive feedback, the accuracy and reliability of the information gathered on each seller is doubtful. Further, eBay reserves the right to remove or adjust feedback in certain circumstances.³⁴

In addition, another issue concerns the fact that ‘not every transaction results in a feedback comment since there is little economic motivation for buyers to provide feedback after a transaction has been completed’.³⁵ The difficulty in eliciting information from participants is a well-documented problem, the reach of which is disputed.³⁶ It remains a fact that not all buyers and sellers engage in leaving feedback, and only 40% of unhappy buyers will leave feedback according to Edwards and Theunissen.³⁷

Gillette is also sceptical that feedback forums can provide customers with a reliable means of transmitting accurate information about a trader’s commercial reputation and sanctioning those who do not engage in reasonable commercial conduct in online auctions. One of the reasons for this scepticism is the finding that participants under-report their dissatisfaction with online auctions.³⁸ This is particularly problematic in cases where users are changing their internet identities. In those cases it is very difficult to clearly distinguish between seller fraud and honest mistakes.³⁹ Indeed, it is tempting for opportunistic sellers to obtain multiple accounts and self-post positive feedback from one account to the next.⁴⁰ The practice of positive feedback cross-fertilisation, whereby an individual or a group self-posts or exchanges fake feedback, is indeed widely reported.⁴¹ Further, Resnick and Zeckhauser found that:

items that did not match their description were somewhat more likely to receive neutral than negative feedback, perhaps reflecting that buyers may have thought discrepancies were honest mistakes on the part of sellers. Similarly, slow shipment was more likely to lead to a neutral than negative feedback. Not following through on a sale, or worse, not sending the item after receiving payment, tended to yield negative rather than neutral feedback.⁴²

More worryingly Nikitkov and Stone highlight the case of an opportunistic seller who went on trading on eBay despite sustained negative feedback for over eight years, showing that bad sellers and fraudsters may be hard to spot.⁴³

The feedback system does not always provide a complete and reliable indicator of a seller’s quality and is open to manipulation on both parts.⁴⁴ This state of affairs is troubling, as relying on feedback may be potentially misleading consumers in their choice of vendor. Worse, because the rating systems can be manipulated, consumers may be lured into transactions by unscrupulous sellers. Negative feedback left by a genuinely unhappy consumer has a limited impact and is unlikely to provide the adequate satisfaction that could be derived from obtaining a refund. Feedback is, at best, an opportunity to vent dissatisfaction and to some extent coerce traders who value their feedback ratings into better behaviours. The use of feedback however cannot be substituted for contractual enforcement or other means of redress.

The demise of ADR mechanisms on eBay, coupled with the fact that the use of feedback remains insufficient to resolve disputes, may explain why, in recent years, the use of insurance mechanisms and internal dispute resolution systems has developed.⁴⁵ Online auction users have showed great interest in reaching resolution via the use of internal systems. Ultimately, the best kind of remedy is the one that enables the consumer to recover the monies paid and send back the unwanted goods acquired via auctions. There are two main models available to protect consumers. One model protects the consumer by holding the payment until the consumer has indicated that he is satisfied with the goods received. These are more popularly known as escrow services. The other model relies on reimbursing the disgruntled consumer. This can be done via the use of payment protection mechanisms. These, as their name indicates, are allied to the payment service the consumer used in his transaction. This may include a ‘chargeback’ on a credit or debit card (see 1.5 below) as well as a buyer protection programme, for consumers using eBay and PayPal.

1.4.1 Escrow services

The survey found two sites using escrow services. On CQout, the scheme is allied to the payment provider SecurePay. The monies received from the consumer are put on hold until he has had a chance to verify the merchandise sent to him and agrees that it has been delivered and corresponds to its description. The system works like an insurance mechanism because the buyer pays a fee to the escrow service. EBid also uses an escrow service (PPPay.com) that enables buyers to receive and verify the goods before a payment is released. Under this model, it is the consumer that needs to shoulder the cost of the insurance for the transaction. It is therefore consumers buying their own peace of mind. They can also opt for using other payment methods that may provide some form of insurance. Depending on sellers, this may include PayPal as well as major credit and debit cards.

Under this type of scheme, the burden of the cost of insuring the transaction is displaced from the consumer to the trader. According to Edwards and Theunissen’s survey, over half of those who responded agreed that eBay should be legally required to compensate a purchaser or seller when something goes wrong with a transaction.⁴⁶ Unsurprisingly, this is what underpins the development of payment protection mechanisms developed on eBay and PayPal. EBay is the only online auction site to operate a buyer protection programme. The site claims that ‘you can shop with confidence on eBay. We guarantee you get the item you ordered or your money back.’⁴⁷ According to Del Duca, Rule and Loebl, eBay handles over 60 million disputes, of an average of $70–100, annually. The number of disputes being resolved through eBay’s online platform is expanding steadily as the transaction volume of the site increases.⁴⁸ This internal resolution system facilitates communications between sellers and disappointed buyers and intervenes if no amicable resolution can be found to assist the parties. The assistance provided consists in gathering information and evidence of the transaction and its payment and reaching a decision on whether or not a refund is required and if the consumer needs to return the goods. Consumers and traders normally comply because going against eBay’s decision may result in their accounts being suspended or closed. This mechanism can be efficient because it enables consumers to obtain a refund on the goods, although it cannot enable the recovery of damages.

PayPal also offers a buyer protection programme, and it is in fact the most used payment system on all online auctions sites.⁴⁹ PayPal offers buyer protection for a number of purchases. PayPal is eBay’s payment system of choice, and in fact the two money back guarantees are linked, although they remain distinct. The description of eBay’s money back guarantee explains that: ‘if anything does go wrong, we’ll make sure that you get the item you wanted or your money will be refunded in full, including postage costs when you pay with PayPal’.⁵⁰ Consumers have to elect what avenues for redress they wish to pursue, as all schemes exclude double recovery. PayPal may also be a stand-alone payment protection mechanism when used on other online auction sites.

First, some exclusions concern the payment service used itself. To benefit from the service consumers on eBay need to pay using PayPal. If they do not, such guarantee does not work. A fortiori, all consumers who do not use PayPal are also excluded from the PayPal guarantee.⁵¹ Consumers using a debit or credit card to pay the seller directly are also excluded from this system of protection. Yet, some transactions made with a debit or credit card on eBay will be processed by PayPal (a fact disclosed on the payment page) but are excluded from the money back guarantee scheme. There is a difference between a payment from a PayPal account and a payment processed by PayPal. It is the use of the account that is a determinant factor in the guarantee being available. EBay also excludes protection for consumers who have used PayPal as guests only and are not using an account.⁵² This is unclear to the untrained eye on eBay. On other sites such restrictions also apply, since SecurePay and PPPay.com only escrow payments made via their interface.⁵³ This may be confusing to consumers, since it was not clear on all websites that the site may offer assistance but that ultimately such guarantee was linked to a payment system. The choice made by consumers as to how they are going to pay for their goods and services on online auction sites may determine the assistance and peace of mind they get.

Another shortcoming of these insurance mechanisms resides in the fact that the guarantees mostly work for a limited number of tangible goods. The eBay money-back guarantee only functions for ‘purchases that are usually sent by post’ and excludes vehicles, real estate, businesses for sale and digital content, intangible items and services.⁵⁴ The PayPal buyer protection also excludes a number of similar items. Their policy excludes: intangible items, services, real estate, businesses, vehicles, custom-made items, travel tickets, items prohibited by the PayPal acceptable use policy, licences, access to digital content and items equivalent to cash (including gift cards).⁵⁵ On CQout, the escrow mechanism does not cover intangible items, club memberships or timeshares, or counterfeit items for example.⁵⁶ Yet for many counterfeits, it is often only on receipt of such an item that the consumer will be able to assess that it is not genuine.

In addition, the protection normally is restricted to two main issues with the goods. The insurance mechanism is available if the buyer does not receive an item, or receives one that does not match the listing description or is ‘significantly not as described’. In both cases, establishing the proof that the goods do not match the description may be difficult and there is some risk associated with sending goods back to the seller, as may be required. The schemes offer some leeway for the seller to claim that the goods have been damaged by the consumer and vice versa, since the goods are not seen by the payment provider or the intermediary website. One main shortcoming of the schemes is to exclude goods that a consumer has a right to return (under distance selling legislation for example) and that the seller refuses to take back. The payment protection mechanisms also do not take into account that in the case of a product that does not conform to the contract under the Sale of Goods Act 1979, the consumer is entitled to return the item free of charge.⁵⁷ Most schemes require that returns are at the charge of the consumer, although they will reimburse the price of the original items as well as its delivery.⁵⁸

In addition, payment protection mechanisms may only cover items paid for in one single transaction.⁵⁹ Thus any transaction for which the consumer paid a deposit before paying the balance will be excluded. There is also a time limit on claims. The PayPal or eBay protection will only work if the case is opened within 45 days of payment. This may exclude goods where delivery times are longer, since the delivery of goods is not the starting point but rather the payment date.

for the year ended December 31, 2012 and the nine months ended September 30, 2013, PayPal’s payments transaction losses (including both direct losses and buyer protection payouts) totalled $281 million and $264 million, representing 0.19% and 0.21% of the net total payment volume, respectively.⁶⁰

It is unlikely that, without the PayPal buyer protection, the consumers in question would have gone to court to recover the $264 million that PayPal reimbursed. Regrettably, those systems remain unsatisfactory and unable to cater for all consumers. Dispute resolution on online auction sites continues to be a challenge. This is primarily because payment protection schemes are only available on a limited number of intermediary online auction sites, and because of their narrow scope. Further, for escrow services in particular, the schemes are unsatisfactory because it is for the consumer to pay to insure the transaction.

1.5 Chargeback Mechanisms on All Online Auction Platforms