Online Auction Fraud: Are the Auction Houses Doing All They Should or Could to Stop Online Fraud?

I. INTRODUCTION In April 1998, the Federal Trade Commission (FTC) released a consumer alert pertaining to the increasing problem of online auction fraud. The consumer alert notified prospective online auction users that fraud was becoming more prevalent as the number of online auction participants burgeoned. The FTC, in the consumer alert, suggested tips that the consumer should consider when bidding in an online auction. Since this consumer alert, the online auction industry's awareness of fraud has grown considerably. While the FTC has had limited success in policing the auctions and bringing prosecutions of fraudulent merchants, little has been done to address whether or not the provider of the online auction site should be held accountable for providing the arena in which the fraudulent practices occur. Part II of this Note examines the online auction industry and the fraud that is becoming all too commonplace. Statistical evidence clearly indicates that online auction fraud is continuing to grow. Part II then identifies a variety of different fraudulent practices that frequently occur in connection with online auctions. While not an exhaustive list of all the different possibilities of fraud, there is a representative group of practices that will clearly indicate the creativity associated with online auction fraud. Faced with the prospect of online auctions becoming a breeding ground for the unscrupulous and ill willed, Part III of this Note is a detailed analysis of the various efforts to stop online auction fraud. The online auction houses themselves, as well as consumer protection groups, and the FTC have undertaken efforts to curb fraudulent use of the online auction sites. Part IV undertakes a comparative study between online auction fraud and the abuse of the pay-per-call industry in the early 1990s. FTC officials warn that the near demise of the 900-number industry due to fraudulent use could be a foreshadowing of the fate of online auctions if the FTC does not promptly address the fraud occurring online. In Part V, this Note ultimately concludes that the existing efforts of online auction industry self-regulation do not provide adequate recourse against the online auction houses for fraudulent practices occurring on their Web sites. The only effective method to stop the increase of online auction fraud is for the FTC to promulgate guidelines and standards that would put the industry on notice that its members will be held responsible for future acts of online auction fraud committed through the use of their Web site. II. COMPLAINTS OF ONLINE AUCTION FRAUD INCREASE AS THE PERPETRATORS BECOME MORE CREATIVE A. Statistical Evidence of the Increase in Online Auction Fraud Nothing evinces the urgency of curtailing the spread of online auction fraud more than the increase in complaints over the past three years. Both the FTC and the Internet Fraud Watch (IFW), operated by the National Consumers League (NCL), serve as reporting agencies for consumer complaints pertaining to fraud. According to Lisa Hone, staff attorney for the FTC, using Internet-based auctions to defraud people is "`a new type of crime.'"(1) "Hone said that in the first half of 1998, the FTC's Bureau of Consumer Protection received about [three hundred] complaints involving online auction fraud."(2) In the first half of 1999, the FTC's Bureau recorded about six thousand complaints.(3) This represents a two thousand percent increase in just one year's time. According to Susan Grant, director of the IFW project, the number of reports alleging auction fraud are increasing at its offices as well.(4) Consumer complaints to the IFW regarding online auctions increased 600% from 1997 to 1998.(5) In 1997, constituting 26% of the total frauds reported, auctions were the number one Internet fraud complaint.(6) While online auctions maintained the number one ranking in 1998, the percentage of reports pertaining to auctions increased to an alarming 68%. …