As eBay prepares to go public, a state attorney general's office has notified the online auction company that it has received customer complaints about its advertising practices and its role in sales that occur on its site.
Any liability for such transactions is unclear, according to legal experts, largely because the Internet's commercial uses are relatively untested. As more consumers turn to e-commerce, regulators are grappling with how to apply established consumer-protection laws to the Net.
Along with consumer groups, investors also are closely monitoring such issues as online auctioneering becomes one of the hottest businesses in electronic commerce. The profit potential has sparked a rise in the auction-related stocks and prompted some players such as eBay to go public.
Based in San Jose, California, eBay received a letter from a state attorney general's office on August 3, according to a recent filing with the Securities and Exchange Commission. It was not apparent which state was involved in the case, though one source said it was not California.
"These complaints revolved around whether the company was adequately informing its customers that it is merely a venue for online person-to-person auctions and does not act as a guarantor regarding the completion of such transactions on its site," the filing said.
"Although the company believes that it has made adequate disclosures on this point, there can be no assurance that this, or similar inquiries, will not ultimately result in the company's incurring fines or penalties that could have a material adverse effect on its business or results of its operations," it continued.
In its filing, eBay also notes that the company has "received in the past, and anticipates that it will in the future, receive notice from customers who did not receive the purchase price or the goods that were to be exchanged."
General counsel Brad Handler defended the company's practices. He said customers are repeatedly notified that eBay merely acts as a site, or "venue," for people to buy and sell goods.
The company takes no responsibility for delivery of payment or goods to any user, states a disclaimer encountered by users during the registration process.
"Our site acts as the venue for sellers to conduct auctions and for bidders to bid on sellers' auctions," the disclosure reads. "We are not involved in the actual transaction between buyers and sellers. As a result, we have no control over the quality, safety, or legality of the items advertised, the truth or accuracy of the listings, the ability of sellers to sell items, or the ability of buyers to buy items."
The disclosure has been posted on the site since it was launched in 1995. Handler also noted that buyers can educate themselves about a potential seller by visiting the company's feedback profile, where they can see what other customers have said about that seller.
Sellers who receive four negative reviews are bounced from the site by eBay. In cases of suspected fraud, it is the customer's responsibility to notify authorities, not eBay's, Handler said. However, if contacted by the authorities, eBay will work with them, he added.
Meanwhile, the liability for the transactions is being debated.
"eBay is just setting up a marketplace for buyers and sellers in an auction setting. They are just giving them this common place to do it," said Net Law author and attorney Lance Rose. "If users are told this before they get involved they can't turn around and say eBay is responsible."
Not all online auctioneers are the same, either. eBay and Onsale, for example, have different business plans. eBay brings buyers and sellers together, much like a message board or classified ads.
Onsale offers this service as well, dubbed the Onsale Exchange. But it also maintains an auction site that sells goods from its own inventory of products, simply called Onsale.
"The one type of site is taking possession of the goods being sold and selling out of inventory for their own account," said Eric Goldman, an attorney at Cooley Godward who represents companies that are working with both strategies. "The other are sites that merely provide a venue for users to buy and sell between each other.
"The legal requirements between these two different types of companies are very different," he added.
Brick-and-mortar auction houses based in California must pay sellers within 30 working days after a deal closes, disclose any liens on the property being sold, and take responsibility for any misleading or untruthful statements about the goods being sold. In addition, if a customer buys a item that they didn't expect to receive, they must receive a refund within 24 hours after returning the product to the auction company.
"You have to very clearly define what your policies are, and we do that on all of our sites," said Brian Fawkes, vice president of corporate communications for Onsale.
"With our person-to-person site, however, we are a third-party operator providing a service to buyers and sellers to use our Web site as a marketplace," he added. "It is identical to a newspaper that sells classified ads. If a person sells a car in the San Francisco Examiner, the paper is not liable for that transaction taking place [just] because you pay money to place the ad."
Still, eBay calls itself an auction site, and people openly bid on items. Until a court makes a determination, it may not be clear whether eBay is subject to the same liability as a site that sells from its own inventory, such as Onsale.
Until then, eBay could continue to be the target of complaints.
"If eBay changes the way they do business, it could resolve some customer complaints," said Craig Froelich, a senior technical consultant at WebVision, a leading online auction software company.