Consumers Sue to Stop eBay from Using “Shill” Bidding to Inflate Auction Prices
Reed R. Kathrein filed a class action suit in California Superior Court in Santa Clara on Feb. 18, 2005 against eBay. The Internet auction company is illegally using “shill” bidding against its own customers to force up prices, and thus increase its fees and finance service charges, a consumer suit charges.
The case was brought on behalf of a Pennsylvania man who was harmed by eBay’s shill bidding practice on at least two occasions. Despite having been notified that he was the highest bidder, eBay raised the buyer’s bid without any further competing bids. In these cases eBay effectively acted as an invisible shill bidder so as to pump the auction price higher.
“Shill” bidding is the practice of bidding on an item with no intention of buying it, merely to raise the price. In the case of eBay, these transactions result from computer-generated responses that encourage the high bidder for an item to raise the ceiling on his bidding to insure that he is not overtaken by another buyer.
Here is how the fraudulent bidding system works:
When placing a bid, a buyer is required to enter the maximum amount she or he is willing to pay for the item. The system then places bids on the buyer’s behalf. According to eBay’s Web site, it uses “only as much of your bid as is necessary to maintain your high bid position (or to meet the reserve price). The system will bid up to your maximum amount.”
When a new, high bid is submitted, the bidder is notified, “You are the current high bidder.” But eBay also sends a warning: “Important: You are one bid away from being outbid. If another user places a bid, you will not win. To increase your chances of winning, enter your highest maximum bid.”
eBay then prompts the high bidder to raise the maximum. When a user does so, eBay then often acts as a shill bidder on behalf of the seller, forcing the high bidder to pay more. Buyers can determine whether they have been harmed by this practice by reviewing the bid history for their auction purchases, looking for instances where the buyer is listed as last two bidders for the auction.
On April 29, 2005, defendant eBay filed a Demurrer and Alternative Motion to Strike Portions of Plaintiff’s Complaint on several grounds, including that plaintiffs Block did not allege a cause of action under the CLRA because eBay did not make any representatives about the good purchased nor did plaintiffs identify an unconscionable provision in the contract between eBay and class members. In addition, defendant argued that plaintiff Block had failed to meet the standing requirements under the UCL, as the plaintiff had not suffered an injury in fact as a result of eBay’s alleged conduct. eBay also demurred on the grounds that California law does not recognize causes of action for unjust enrichment or restitution. Lastly, defendant argued that plaintiff had failed to allege indebtedness in a specific amount as required to support a common count for money had and received. Defendant simultaneously moved to strike portions of plaintiffs’ Complaint.
Although the parties entered settlement negotiations in June 2005, the settlement negotiations stalled and it was decided that the Court should rule on defendant’s demurrer and motion to strike. On February 14, 2006, the Court heard defendant’s demurrer and motion to strike and overruled the demurrer as to the first through fifth causes of action (the Auction Act, CLRA and UCL claims), but sustained the demurrer as to the sixth and seventh causes of action (the claim for Unjust Enrichment/Restitution and the common count for money had and received). The Court reasoned that first, restitution is a remedy and not a cause of action under California law and, second, that plaintiff had failed to state a cause of action for a common count for money had and received because he had not adequately pled that defendant eBay had received any of the funds from the shill bidding. Plaintiff Block was given leave to amend as to both causes of action. The Court overruled defendant’s motion to strike in its entirety. Shortly after the Court’s ruling on the demurrer and motion to strike, settlement discussions between the parties resumed.
In accordance with the Court’s direction, on April 17, 2006, plaintiffs filed an Amended Complaint for Damages and Injunctive Relief (“Amended Complaint”), conforming with the Court’s order on the demurrer, and substituting three additional plaintiffs, John Rockers, Mark Rawling, and Brian Mork.
A. Contacts with Potential Class Members
Throughout their factual investigation and the course of the litigation, Plaintiffs’ Counsel received inquiries from and made contact with dozens of potential class members. Particularly after the cases were filed and the public became aware of the action against eBay, consumers and eBay users contacted Plaintiffs’ Counsel to learn the details of this class action and to voice other complaints against the defendant. Plaintiffs’ Counsel interviewed dozens of potential class members as a part of their ongoing investigation.
In addition to telephone conversations with class members, Plaintiffs’ Counsel received hundreds of emails and inquiries from class members and eBay users, each relating frustration and concern over eBay’s business practices. The factual details of these conversations and emails assisted Plaintiffs’ Counsel in articulating and solidifying plaintiffs’ legal theories against the defendant.
B. Settlement Negotiations
While Plaintiffs’ Counsel believed that the detailed allegations in the Complaint adequately pled a cause of action, Plaintiffs’ Counsel are sufficiently experienced to recognize that substantial risk existed that: (1) the complaint could be dismissed in whole or in part; (2) certain or all claims could be ruled uncertifiable under C.C.P. §382 or Cal. Civ. Code §1781; or (3) the case may be lost at summary judgment or trial. Faced with these prospects, Plaintiffs’ Counsel, in consultation with the named plaintiffs, believed it reasonable to discuss settlement on terms favorable to the class. As a result, on June 30, 2005, the parties stipulated and the Court ordered that certain case management activities be continued, including defendant’s demurrer and motion to strike, pending the parties’ agreement to mediate their claims.
On October 26, 2005, a face-to-face mediation between the parties occurred at JAMS, before the Hon. Read Ambler (Ret.). The case was not resolved on that day, and negotiations continued directly between the parties for the next 13 months. Negotiations involved the preparation of extensive mediation statements, consultations with experts, conference calls with employees of the defendant, and the review of defendant’s internal documents made available to plaintiffs by the defendant for settlement purposes. In addition, plaintiffs deposed Christopher A. Rogaski, the Senior Manager of Global Product Metrics at eBay to confirm the amount of damages suffered by the class.
During the mediation process, the parties extensively debated the merits and defenses of the litigation. The settlement negotiations made clear that while the parties were prepared to address the strengths and weaknesses of the case, Plaintiffs’ Counsel would continue to litigate rather than settle for an amount that was not in the best interests of the class.
The terms of the Stipulation of Settlement were extensively debated and negotiated, and included the assistance of several outside experts on the plaintiffs’ side. Plaintiffs’ Counsel are actively engaged in complex federal civil litigation, particularly of class actions. We believe that our reputations as law firms unafraid to zealously carry a meritorious case through trial and up through the appellate levels gave us a strong position in engaging in settlement negotiations with the defendant, even under the difficult and challenging circumstances presented here.
The settlement will provide class members with an immediate relief from defendant’s misleading disclosures in the form of injunctive relief, while disgorging a substantial amount of defendant’s ill-gotten gains into a cy pres fund to be distributed to several charitable organizations, for the indirect benefit of the class.
C. A Summary of the Results
1. The Settlement Class
This settlement is on behalf of a class of all eBay users nationwide from February 16, 2001, who claim to have been harmed by eBay raising the eBay bidder’s existing bid where no higher competing bid had been made and where raising the bid was not necessary to meet a reserve minimum. Excluded from the class are those persons who timely and validly requested exclusion pursuant to the Notice of Settlement of Class Action.
2. Monetary Relief
Recovery in this case totals approximately 50% of the class’s damages. The settlement requires that eBay pay $2.1 million to a cy pres fund, which will be distributed to one or more federally tax exempt charities chosen by Plaintiffs’ Counsel and approved by the Court.
Plaintiffs’ confirmatory discovery showed that the $2.1 million which is to be paid into a cy pres fund represents approximately 51% of the total $4,113,097.82 in damages suffered by the class. During confirmatory discovery, plaintiffs deposed Dr. Christopher Rogaski, Ebay’s Senior Manager of Global Product Metrics.
The $2.1 million settlement represents the damages for users of eBay based in the United States alone. Each country served by eBay has its own web site, which are distinguished, among other things, by different languages, different currencies, and different Internet addresses. In addition, eBay identifies each international web site with a unique numeric identification. By this unique numeric identification, Dr. Rogaski limited his calculations to solely those occasions where consumers accessed eBay through the United States web sites.
15. Dr. Rogaski’s calculations were based on the transactions from two web sites the main United States web site, www.eBay.com and the associated web site on which motor sales took place in the United States. The time period for Dr. Rogaski’s calculations mirrors that of the class period – February 16, 2001 to October 11, 2005.
16. The amount of overpayment on eBay’s main web site during the class period was $3,217,084.47. The number of affected listings during the class period on the main website was 5,034,087.
17. The amount of overpayment on eBay’s motor web site during the class period was $896,013.35.
The number of affected listings during the class period on the motor web site was 241,365.
18. The total amount of damages during the class period for both the main United States web site and the motor sales web site is $4,113,097.82. The total number of affected listings for both the main United States web site and the motor sales web site is 5,275,452. This makes the average harm per instance of shill-bidding equal to $0.78.
19. This case is ideally suited for a cy pres recovery fund. The high costs of administering direct cash payments to millions of consumers relative to the average likely award to those consumers ensured that any payment to consumers would be largely lost by administrative costs. As revealed by Dr. Rogaski’s calculations, the average harm to class members was $0.78. If class members were to receive 51% of their damages (i.e., the equivalent amount of money distributed to class members as is available for the cy pres beneficiaries), the average amount owed to each class member would be approximately $0.40. The cost of first class postage alone would be $0.39 cents per check mailed to a consumer. These administrative realities made both parties amenable to the cost-saving measures and greater impact of using the money for the direct and indirect benefit of the class through a cy pres fund.
3. Injunctive Relief
20. In addition, although eBay continues to deny any liability to plaintiffs and the class, the settlement provides that eBay shall cease the conduct complained of in the Complaint by making the following curative disclosure:
In response to a system prompt, if a high bidder attempts to raise his maximum bid when such bidder is then between bid increments, eBay shall first disclose to such bidder the exact amount of any resulting bid increase that would otherwise occur by virtue of the bidder raising the maximum bid. By way of illustration only and using the facts set forth in paragraph 23 of the original Complaint, upon raising the maximum bid once plaintiff had reached his existing bid maximum of $111.00, eBay would disclose whether raising the maximum bid level would result in the $111.00 bid being raised to the next bid increment over the last competitive bid of $110.00 and, if so, specify the exact amount to which the bid would be raised – that is, $112.50.
21. The period of time for this injunctive relief is four years commencing within 90 calendar days of the Court’s entry of the notice order. eBay does have the right, however, to make periodic editorial, organizational and stylistic changes to the foregoing disclosure provided that the material substance and manner of the disclosure remains unchanged. Nothing in the agreement shall prevent eBay from making modifications to its bid increment system.