The New Auction Model The Internet Auction Law Commercial Essay

Published Date: 02 Nov 2017

Law School

COURSEWORK COVER SHEET ELECTRONIC SUBMISSION

FOR STUDENT USE

Unit Code and Title: (LAWDM0079_2012_13) Law of E-Commerce 12_13

Coursework 2

Candidate Number: 55754

Degree: LLM in law Year: 2012-2013

Date due for submission:

____Wednesday 13 March 2013__________________________________

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Penalty for late submission:

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Question number and title:

Q1 "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest." Ultimately, the only truly effective consumer protection device for e-commerce will be Adam Smith’s ‘invisible hand’.

Discuss in relation to Internet auctions.

Actual word length:

_____________________3019__________________________________________

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MARK: MARK:

Introduction

When the public comes to realize the importance and advantages of the Internet, electronic commerce grows up with an unpredictable speed, which contributes to the development of all aspects of economy and social life. As information exchange and communication technologies lower the entrance standard for general consumers to participate in the electronic business, a significantly new auction model is formed. The distinctive effects of the Internet auction, compared to the traditional auction, are that the online model reduces the transaction costs and is accessible for participants from the whole world. Any eligible sellers can post advertisements and auction information through those websites. As a result, the electronic marketplace has been created in which multiple sellers transact with multiple consumers for various goods [1] . Thus, it also raises a problem of management. The difficulty of tracing the participants’ addresses, the different jurisdictions of the parties and the absence of definition of the Internet auction result in the uncertain application of the law. Recently, it is suggested that the only truly effective consumer protection of electronic commerce will be Adam Smith’s ‘invisible hand’, which also called market forces, rather than laws. Although the market forces indeed manage to regulate the process of the online auction and the behavior of the parties involved, such as the ‘eBay law’, the self-regulation seems impossible to cover all the issues arising from the new auction model and eliminate the related illegal behavior where national courts and the alternative dispute resolution are essential to protect the consumers’ rights. This essay, focusing on eBay as the most typical Internet auction platform, firstly compares the Internet auction with the traditional auctions and introduces their differences. Secondly, it analyzes the effectiveness of the existing consumer protections and the loopholes in the law. Then the essay evaluates some well known market forces, for instance the ‘eBay law’ and feedback system. After discussing the positions of the legal regime and market forces, it can be concluded that neither laws nor market forces can resolve all the disputes of the online auction and the appropriate method is to use the two mechanisms on the basis of mutual complementarities.

The new auction model: the Internet auction

In the year of 1995, an online auction website called eBay which is known throughout the world was established, where registered users can sell and buy any goods through the online auction process [2] . It provides an opening electronic platform for sellers to advertise and post the information of goods, as well as potential buyers to take part in. Owing to the exceedingly spread Internet, the improvement of communication technologies and the diversity of information collection, the involved parties of an online auction are not required to meet together or wait for the fall of the hammer [3] . As a consequence of cutting the transaction cost of hosting a meeting for buyers and sellers, as well as facilitating the procedure of the transaction, the online auction model has been adopted all over the world and plays a momentous role in electronic commerce. Sellers may deal with buyers from different countries through the Internet so that the online auction websites can manage more complex transactions by the online mechanism. As one of the auction models, the Internet auction shares the same feature with the traditional auctions that the institution provides a platform for buyers and sellers to negotiate and contract and sets rules about the procedure of auctions and the participants’ behavior. For instance, in the UK, the seller in an auction offers an item for sale with a starting price and the buyers submit their bids with higher prices as they wish. At the end of the process, the highest bid beats the lower bids [4] .

However, as a modern auction model, compared with the traditional auctions, the Internet auction has distinctive characteristics. The key point is that the role of the auction websites, for instance eBay, is merely service providers who provide tremendous services and opportunities, without stepping into the actual transaction, for sellers to post offers and buyers to submit their bids after consulting the system. It seems that the relationship of agency does not exist in the Internet auctions, which distinguishes the online model from the traditional auctions in France [5] . Harvey and Meisel [6] regard eBay, to a limited extent, as an auctioneer on the basis of the fact that eBay receives payments from sellers after sales. However, the payments eBay receives are for the software and the website services it provides, rather than hosting the auctions for the parties. Numerous websites themselves state in their user agreements or participation agreements that they are not auctioneers [7] . On the other hand, the absence of overarching definition of the online auction, especially in English law, increases the uncertainty of the application of the law and the related regulations. Moreover, the participants of the online auction may come from diverse jurisdictions that arises the issue of the choice of law.

The existing consumer protection in the legal regime

The noticeable increasing of the online auction activities forces the public pay more attention on consumer protection [8] . The first main question lies in the application of the law. In order to encourage consumer confidence of online transactions and reinforce trust in electronic commerce [9] , the Electronic Commerce Directive 2000/31/EC, which was implemented in the UK by the Electronic Commerce (EC Directive) Regulations 2002, was published. The Directive creates a legal framework of freedom to establish the online market and provide online services [10] . Moreover, the Consumer Protection from Unfair Trading Regulations 2008 implements the EU Unfair Commercial Practices Directive 2005/29 and prohibits the post of false information and misleading omission [11] to misguide consumers. However, the absence of the definition of the Internet auction leads to the uncertainty of the application of the law. For instance, Regulation 5 of the Consumer Protection (Distance Selling) Regulations 2000 states that any contract concluded at an auction is excluded which means the application of the Regulation 2000 depends on the legal nature of the Internet auction [12] . Moreover, under Regulation 6 of the Electronic Commerce (EC Directive) Regulation 2002 [13] , the information requirements do not appear to cover C2C contracts, which occupy a noticeable part of the contracts concluded under the online model. Although the German Supreme Court in the case of Bundesgerichtshof VIII ZR 375/03 allowed the claimant to return the diamond bracelet brought from the auction on eBay during the statutory period after the sale regarding the online auction without the scope of auctions [14] , there is still no definition and no specialized law for the Internet auctions that can be referred to by all the countries. English law has not yet possessed a statutory definition of the online auction via statute or case law, which means that the answer of the question that whether a specific provision applies to a case of the Internet auction may be quite different and the absence of certain legal regime application reduces consumer confidence in auction websites [15] . The issue becomes more complex when the parties from different jurisdictions are involved because it comes to the choice of law. The general rule is that the parties can choose the governed law by the expressed terms of contracts [16] . Otherwise, it will be decided based on the circumstances of the case. Thus, the problem occurs in the contracts without terms of the choice of law. This is detrimental to consumers as it leaves the users unknown of the classification of the transactions and unsure whether the existing regulations can be applied.

Despite the ambiguous liabilities of the auction websites like eBay, another considerable problem of consumer protection, rather than the application of consumer laws, is the difficulty of enforcement. Considering the rapidly increased number of small scale transactions in online auctions, consumers benefit little from the courts because of their inability to enforce their rights, especially when the sellers are in foreign countries [17] . In the field of monitoring information, the liability regime established by the Electronic Commerce (EC Directive) Regulations 2002 is detrimental to consumers because it attributes the responsibility of discovering the misleading and fraudulent information to consumers [18] . Although the Court of Justice of the European Union in the recent case of L’Oreal SA v eBay International AG [19] gave a warning to online marketplace operators that they might be liable in related to hosting of information, Regulation 19 which states that the information service provider shall not be liable if it does not have actual knowledge of illegal activity or information, leads to the online auction websites shirking the liability considering the impossibility of the websites to control the truth of all the posted information. Consumers are required to submit the precise details to the courts. However, the nature of the Internet increases the difficulty in tracing online transactions while the enormous amount of consumers cannot afford to do it. Even if the consumer manages to receive an injunction from the court, it is hard and inefficient to enforce his right with the counterparty in other countries.

The ‘invisible hand’: market forces

Generally, effective dispute resolution mechanisms and efficient consumer protections are significant of enhancing consumer confidence in online transactions. Due to the uncertain legal regime of the Internet auction, problems of jurisdictions and enforcement in cross-border world, and the shortage of finance and knowledge of legal assistance, it is reasonable that consumers are reluctant to bring the disputes of small value transactions before the courts [20] . Thus, the other mechanism to regulate the promotion of the market, the so-called ‘Adam Smith’s invisible hand’, comes into people’s attention. It is a self-regulation mechanism where the market entities create internal rules for themselves, regulate their behavior and establish supervision systems based on the regular pattern of the market.

Rulemaking and enforcement

As an online service provider, the auction websites process their user agreements when providing a place for users to exchange goods and services. EBay, as one of the most successful auction websites, has been generally known for its systematic user agreement and other related policies like eBay Buyer Protection policy, which are commonly called the ‘eBay law’. Under the user agreement, eBay can limit its users’ activities during auctions, terminate the users’ registration and remove any false information posted on the website when one of the rules is breached [21] . EBay also enforces a list of prohibited and restricted items to put out a warning against the sale of illegal or restricted items, for instance animals and wildlife products [22] , and remove before they are sold. Moreover, recognizing users’ need of alternative options other than going to the courts, when a dispute arises between the users and eBay, eBay encourages the users to visit the eBay Customer Support page at first. Then in accordance with the article of ‘Legal Disputes’ under the user agreement, it may be submitted to alternative dispute resolution procedures (ADR) like mediation or arbitration. ADR plays an effective and efficient role in the process of dispute resolution with low cost, short length and convenient accessibility, whose advantages become more distinct when it transfers to the online dispute resolution that enables the organizers to manage more complex disputes even in different languages [23] . Nevertheless, the roles of eBay and other auction websites as online service providers limit the protections they can supply for the consumers. These organizers attempt to achieve a balance between providing freedom for the users to attract more transactions to success in the competition between the online auction marketplaces and making restrictions to safeguard the consumers from misleading information and fraud.

The feedback system

In order to trace the details in transactions and attract more potential consumers, an increasing number of organizers establish the feedback rating system, for example eBay, which gives users the right to assess the transaction. When an auction is completed, the seller is asked to write a feedback on the behavior of the buyer and the buyer can post a review of his feeling for the transaction. What the website does is to guarantee the truth of the feedback. Once the review is posted, no modification can be made and any user, no matter where he is, is able to learn the previous performance of the counterparty. There is no doubt that this reputational system benefits the consumers through the mechanism of selection and the sellers’ threat of failure in competition [24] Hence, the feedback system which is regarded as a warning sign for consumers is not fully reliable. Nikitkov and Stone’s study in 2006 [25] illustrates that the consumers who give negative feedback are often asked to change it to the positive side; otherwise the buyers might receive negative feedback of themselves. This means that the rating system runs under the control of the sellers which gives rise to the difficulty for the auction site to trace the process of transactions.

There are more measures in the field of market forces, for example charge backs and the ‘Paypal’ in the payment system, that have been widely adopted to provide the consumers with alternative remedies and protect their interests. Thus, it is claimed according to the Adam Smith’s ‘invisible hand argument’ that if all the market entities pursue their own interests to be the greatest value without regard to the general good of society, then the market forces will promote an end of gaining the public interest [26] . It seems that market forces become the only effective way to provide consumer protection in Internet auctions, considering the loopholes of the legal regime mentioned above. Unfortunately, the characteristics of pursuing their own interests and attracting the potential transactions determine that the auction websites like eBay are impossible to a perfection structure of consumer protections. It will be more noticeable when the issue arises in the conflicts between users and the auction websites themselves with a low level of democracy in the process of the contractual negotiation. To sum up, market forces have some inevitable defects since all the market entities pursue the benefits from the commercial competition, resulting in the imperfection of the self-regulatory mechanism.

Conclusion

The mechanisms upon which the sellers post information about the goods and services as offers and the buyers submit bids are going through a dramatic reform under the spreading prevalence of electronic communication technologies and electronic commerce. The new auction model, the Internet auction, provides a reinless platform for individuals all over the world to make deals and exchange goods, resulting in a new commercial market in the online environment. As a fresh market for all the countries without precedents to refer to, the existing rulemaking systems and the supervisory mechanisms do not satisfy the public, especially in the field of consumer protection. A uniform regulation relating to the online auction is required by the globalization of the electronic commerce, particularly in the area of the defining the legal nature of the Internet auction which leads to the certainty of application of the law. Unfortunately, the existing legal regime leaves this issue unambiguous and provides limited benefits to consumers who are reluctant to bring small claims to the courts, considering the high litigation cost and the prolonged proceeding. On the other hand, the improved self-regulation mechanism, for example the auction websites’ policies, the feedback system, charge backs and refunds by payment service providers, shows a significant effect on increasing the consumers’ confidence. However, as one of the market participants, neither the auction websites nor the payment service providers could draw an exhaustive protection policy for consumers. In conclusion, in order to catch up with the rapidly updated commercial environment, the truly effective consumer protection needs the cooperation between the legal regime and market forces at an international stage.

Bibliography