Legal Insights into Penny Auctions
There is always some hot item in the internet world. Recently it was Acai, and now it is Penny Auctions.
When a friend of mine first put one up and I saw it, it felt like I was gambling. When I asked about it, he assured me that they were totally legal.
One of my good friends asked his attorney to write us an article about them.
I hope you find his opinion insightful. It is totally the attorneys opinion and not mine.
Legal Aspects of Penny Auctions
Penny auction websites are popping up by the dozen. Is it safe to get in on the action, or are these “entertainment shopping” sites too risky for owners and bidders alike? Here is an overview of penny auction sites and their standing under various state and federal laws.
Mixed Messages: Credit Card Processors and the BBB
The penny auction (PA) business is raising eyebrows. Some people regard penny auction sites as gambling havens that will inevitably be shut down. In fact, PayPal is denying service to certain penny auction sites, perhaps overzealously protecting themselves from charges of violating the 2006 Unlawful Internet Gambling Enforcement Act. Other merchant card processors, such as Authorize.net, may also be getting cold feet as the penny auction action heats up.
At the same time, it’s not unheard of for a penny auction site to earn the Better Business Bureau’s seal of approval, and merchant processors such as FirstData and Amazon Check Out have provided solid service for a number of penny auction business owners. Processors that consider a PA site to be high-risk can protect themselves from excessive chargebacks by requiring a security deposit or having the site owner keep a rolling reserve of about 10%.
Most of the online penny auction establishments seem to operate by the letter of the law and will find ways to stay in service. Securing written permission from a credit card processor, even before the website is launched, can be a proactive way of ensuring that service is not denied.
Are Penny Auctions Legal? States Weigh In
Do penny auction websites really constitute online gambling? While state laws are murky, the penny auction sites seem to be in the clear. PAs are operating out of California, Georgia, Illinois, New Jersey, and a number of other states.
As of 2010, online gambling has been expressly legalized in New Jersey. In other U.S. states, gambling has not necessarily been legalized, but that probably doesn’t even matter when penny auctions are concerned. That’s because they don’t count as gambling; they just don’t involve enough chance.
In California and most other states, a game is considered a game of chance if it’s “dominated by chance.” Being dominated by chance is different from being determined entirely by chance, and that helps to bolster the argument that the websites are legal under state law. After all, people do not bid randomly on auction items; they bid strategically. The process isn’t comparable to blindly pulling a slot machine lever or participating in a random jackpot drawing.
Another type of relevant state law concerns the penny auction bids. Since these go to the website and not to the other bidders, they are not technically part of a bet. This protects users from being charged with illegal gambling. Of course, if a website were operated unethically, it could draw more bids out of participants. This could be achieved by populating the site with bots or having an employee use phony accounts.
Penny Auctions and Federal Law
Penny auctions are relatively new to the United States, and they haven’t been outlawed under federal law. Gambling is not expressly prohibited online either, although a 2006 law, the Unlawful Internet Gambling Enforcement Act, prohibits banks from transferring funds to gambling websites. Thus, if penny auctions do become declared a form of gambling, the websites may have trouble routing funds from users’ financial institutions.
The Federal Trade Commission and other branches of the federal government are presently concerned only with fraudulent penny auction websites. They have responded to several reports of unethical websites that deceive customers with shill bids.
The Jury Is Out
Although the auction sites remain legal for now, their opponents remain in an uproar. What can opponents say? They argue that users pay a fee but receive nothing of value. That’s why penny auction sites are now touting themselves as a form of “entertainment shopping”: with each bidding right purchased, they would say, the user also gets a bit of a thrill.
As more disgruntled users file complaints, the new auction business model is likely to catch the eyes of legislators. In addition, many well known industry players have already gotten in on the action…specifically those who were tied to the “Acai” berry fiasco that prompted the FTC Guidelines in 2009. Still, PA site owners who follow the law, keep a tidy paper trail, and treat their bidders properly should have clear skies ahead. Meanwhile, potential consumers should carefully research a penny auction site’s reputation and its terms before deciding to get in on the action.
The Kelly Law Firm, L.L.C.
13430 N. Scottsdale Road, Suite 106
Scottsdale, Arizona 85254
Licensed in Arizona and Michigan
I never thought in a million years it would be considered gambling. Though it is unfair how people at certain auction sites purchase bid packs and if they don’t win the prize they end up loosing all their bids they placed anyways.
Reply@Goran P:
These auction sites that offer these bid packs are a joke. I can’t believe they’re allowed to advertise an iPad for $23.00 or iPhone for $7.24. They should be called raffles or sweepstakes rather than “auctions”, intentionally misleading customers is wrong but common these days.
ReplyI say, let the Penny Auction sites do their thing, and if anyone is silly enough to think that they’re a good way to go shopping online, than that’s their right. I would love to bid and maybe score something for a few pennies, but I know I’m not that lucky!
ReplyI don’t see the point of penny auctions … just go to a casino to gamble
ReplyPenny auctions sound fun! I don’t see the problem.
ReplyPenny auction is a rapidly growing industry and its very lucrative to promote this kind of business. Affiliate commissions are huge comparing to normal shopping sites like Amazon.
ReplyThey even have an affiliate network that is specialized in penny auction http://www.pennyauctionaffiliates.com
Legal or not, it is a parasitical business that will find little love and support from the media and from legislators (other than those in Utah, anyway) when the first big sob story hits the airwaves.
When some Grandma has dropped her last $50,000 on the sites and has a garage full of random merchandise worth $2000, the beginning of the end will be here.
ReplyI feel these websites are very misleading nothing is ever actually close to the price they advertise it at. I feel like these sites should be banned or have some sort of warning about mis truth in their product’s price or value.
ReplyI’d have to agree with Kristen on this. Just let Penny Auctions be. As far as I can tell from visiting their site, it is perfectly legal. It’s your own discretion if you want to shop or bid on their site. If you don’t feel comfortable doing so, then don’t. To each his own…it’s a matter of choice.
ReplyAs long as the site is legal then I think it’s okay. It is really up to the people who are browsing their site. I agree with Olivia, “It’s a matter of choice.”
ReplyI agree with Olivia.. Why don’t they mind their own business?? All of us have our own choice. If they want to patronize and bid, then let them do it.. As long as they do not harm others..
ReplyI wish Mr. Kelly was available in the golden state of California to handle Penny Auction cases and what not.
My first experience with penny auction was with swoopo. Though I didn’t win anything I felt like I was in extasy while bidding I was having fun till I ran of bids. What I hated about that site was the bot they use.
For example I tried using automated bid because I thought I can walk away for a bid and “automatically” bid for me so I can win. Unfortunantly for me the bot wasted my bids by placing them all at the same time. Hadn’t that bot been there maybe I may have continued to use their site for the thrill I felt. But since then I feel reluctant on comming back.
In business I see this as a viable operations compared to traditional auction sites such as eBay where the seller is under eBay’s fee mercy as well as Paypal (same co). On eBay when you want to sell something you risk of loosing money from low bids and high fees and commision from eBay then you have to pay an additional cost to actually ship the product. When you refuse to complete your transaction to your highest bidder (but extreamly low bid) you are lowballed an offer and your perfect feedback score goes from 100% to 80% within just one sale (my exact experience). Then it is against eBay policies for a seller to one charge extra for eBay and Paypal fees because it must be included in the price, and two you can’t charge obessivly insane shipping cost (even just enough to cover your actual expenses) because eBay wants you to pay them for a buy it now fee and other add on
Replyfor as long as its legal, i dont hold anything against it.
Reply“buyer beware” if you think its too good to be true then its too good to be true.
ReplyNot a fan of buying online— not even online window shopping… but I hope people would be intelligent enough to consider thinking twice or even thrice before buying something of “significant” value.. Think. Breathe. think again!
ReplyLikes penny auction even though not tried of it yet.It’s cool bidding on the item but lost it!hahaha
ReplyPenny bidding is hot!!! 😉
ReplyI wonder…if I go to a carnival or the circus and play one of the games where I can win a stuffed animal, is that gambling? Hundreds, and perhaps thousands of customers play these “games”. Some win, but most lose, but ALL pay. Is this gambling?
ReplyTotal Gambling and will be illegal one day.
@Kristen – you’re not that “lucky”. If you say that in any sentince….it’s gambling.
Say their max bid per item is $10. A person can bid on 100 items. If they don’t win, the company gets $1000 and the bidder gets NOTHING. The person could have just went out and bought 2 iPads cash!
Say 10 other people bid on those same items and lost. that’s $10,000 the company receives for items that are worth maybe $500 each. Penny stock companies are rolling in the dough and there are alot more poor people today than yesterday.
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