Last month saw a civil complaint filed against a number of online penny auction sites in federal court in the Northern District of Illinois. This is the same district in which the Crespo v. Seth et al case was filed last year. It\’s too soon to say if these cases are starting a trend, but they may be harbingers of creative and enterprising plaintiffs\’ attorneys\’ attacks on the gaming and entertainment industry.
The penny auction case is Bryant v. Entertainment Shopping, Inc., and it names a number of bigger players in the sector, including the owners of www.swoopo.com and www.bidcactus.com. For the uninitiated, penny auction sites are websites that auction off consumer goods and services (including popular electronic devices like tablets and MP3 players). Typically, these auctions have three key features that set them apart from some other types of auctions: 1. you pay a fee for each bid you place (e.g., $0.50); 2. each bid raises the bid price by only a small amount (e.g., a penny); and, 3. each bid placed extends the bidding for a period of time (say, ten seconds). Many of these auctions come down to a frenzy of participation in the final seconds of the auction. A winner will often walk away with a good purchased for well below the retail price, even with the cost of the bids factored in. Many more people will have bid for the good and paid for the privilege of doing so, which is how the penny auction site more than pays for the auctioned item and makes a profit.
The complaint seeks recovery on behalf of individuals resident in Illinois, Massachusetts, Georgia, and Washington for \”losses\” from illegal gambling pursuant to state laws in Illinois, Massachusetts, Georgia, Ohio, and New Jersey. There is no indication that any of the plaintiffs ever played on any of defendants\’ websites. In fact, the complaint states, in paragraph 7, that the plaintiffs \”did not enter into any contracts with\” the defendants, suggesting that the plaintiffs did not agree to the terms of service on any of the sites and that they, therefore, never played on any of them. As with Crespo, presumably Illinois was chosen as the venue because Illinois is one of only a handful of states with third party recovery statutes, i.e., purportedly allowing persons other than \’losers\’ at illegal gambling to sue the \’winners\’ for the losses and for triple damages in repsect of those losses.
If this case goes forward, it will be decided on the basis of the various state laws (mostly non-Illinois) that are alleged to apply to a combination of plaintiffs (some with no connection to Illinois) that won from losers everywhere, not just in Illinois. And again: there\’s no indication that the plaintiffs ever played on any of these penny auction sites. This post will not get into the relevant state laws quoted in the complaint, and there is scope to recast and amend pleadings in the future, but I do want to touch on what I think are a few of the problems with the facts as recounted in the complaint.
First, in an attempt to skew the facts and make the defendants look more like purveyors of a game of chance, the complaint alleges that, unlike a \”normal auction,\” the winner in all of the defendants\’ auctions is the last player to bid before the time runs out, not the highest bidder. This is only half-true. The winners on the sites with which I\’m familiar (including some of the defendants) are both the last individuals to bid and the highest bidder. Plaintiffs\’ counsel presumably thinks that the fact that the highest bid is a mere penny or nickel more than the last bet is irrelevant, but it isn\’t. If the winner weren\’t the highest bidder, then there would be more systematic chance in the auction and the auction would probably be more like gambling. Having the winner be both the last bidder and the highest bidder makes this more like the \”normal auction\” posited by counsel.
On the subject of chance, the complaint is replete with allegations that bidding on any particular item purchases the bidder only a \”chance to win.\” In paragraph 36, the complaint states as follows: \”It does not matter how many times someone bids, or at what price someone bids, since each bid is a separate chance to win. Each bid is nothing more than a lottery ticket, policy or game of chance purchased for the chance to win a prize.\” At another point, the auctions are compared to slot machines. These are interesting analogies, and flawed. When I buy a lottery ticket, I buy a chance to win on a random draw of lots, for example, numbers to match the numbers that I chose or was assigned. However, if I bid on a good at auction (including at a penny auction), I have an absolute right to acquire that good at the bid price. Someone may come along and outbid me, but there is no chance in the bid itself; if no-one else bids, I get the bid lot based on my highest and last bid. This is a crucial feature of the penny auction business model that plaintiffs\’ counsel is skating over without addressing. If this stays in federal court, the defendants are going to make him and his clients explain how exactly this is the same as a lottery ticket or a slot machine.
Finally, the complaint also alleges that what makes the auctions work \”is the tendency of players to think of the bids that they have already put in as a \’sunk cost\’ – money that they have already put toward buying the item. This is an illusion.\” A sunk cost isn\’t a down-payment, installment, or a resource \”put towards\” buying anything. A sunk cost is the opposite: a retrospective cost that has already been incurred and that cannot be recovered. (Sunk costs are \’gone;\’ they can\’t be recovered and should be ignored in prospective economic decision-making. If players viewed bids already placed as sunk, they would be behaving rationally.) What the plaintiffs mean to allege is that the players don\’t view bids that have been placed and beat out by other bids as sunk costs. This is a pretty broad statement. Is it true? These types of Internet auctions have only been around for a few years. Is it really clear what drives consumers and how they see failed bids in this kind of setting? It seems to be an awful lot to allege with a lawyer\’s throwaway line in his client\’s pleadings.
I shouldn\’t be taken as saying that none of the penny auction business models are flawed, but a broad attack on a group of businesses relying on factual half-truths and failing to distinguish one site from another is intellectually dishonest and poor advocacy.
Again, it\’s too soon to say whether Crespo and Bryant are outliers or a sign of things to come. If they succeed – either in court on their relative merits or in producing settlements for the plaintiffs – then we can expect more of these and other unconventional civil cases to be brought against winning players and gaming and entertainment website operators.
