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Analysis: eBay fraud lawsuit raises questions

Industry Standard

(IDG) -- Operation Bullpen was born in early 1997 when FBI special agent Timothy Fitzsimmons set up a phony Pacific Rim business called Nihon Trading Company. His plan was simple: Use undercover agents wired with tape recorders to purchase fake sports memorabilia from forgers, convincing them that their wares would move quickly out of the country and into Asia.

"We were getting into a lot of the deceased people," says Fitzsimmons, recalling the forged signatures on baseballs, bats and scraps of paper that he and his agents collected. "Mickey Mantle, Joe DiMaggio, Hollywood people who've passed away. ... The best forgers that we were investigating were using ink from virtually every decade."

What struck Fitzsimmons as the investigation progressed (beyond the oddity of finding forged Mother Teresa signatures on baseballs), was how the criminals' method of selling changed over time. The upshot? Forgers were increasingly peddling goods on eBay and other online sales sites. Four years later, that discovery has grown into a big headache for the San Jose, Calif.-based auction site. It is facing a potential class-action suit from buyers who learned through the investigation that they may have been defrauded. Now there are renewed questions about eBay's responsibility for the authenticity of merchandise auctioned on its site.

Fraud on eBay is nothing new. But whether eBay must guarantee authenticity - and to what extent - falls into a legal gray area. Gentry vs. eBay, a lawsuit that examines that question, may render that area black or white, affecting other Net companies along the way. The case also pushes eBay, a company that could not exist offline, to argue in court that it's not an auctioneer, a legal category that eBay has studiously avoided embracing because of the liability requirements that accompany it.

Attorney Jim Krause filed the Gentry suit against eBay in April in San Diego Superior Court several days after the FBI went public with forgery charges against 26 individuals. His firm quickly became the counsel for six plaintiffs who purchased fake sports memorabilia on eBay. A seventh joined the suit in October. Today, the case against eBay is battered but still alive. A judge will determine Nov. 17 whether to dismiss it or award it class-action status.

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Having faced similar challenges - though none that threatened to become a class action - eBay's defense remains the same as it has always been. The company insists it's not an auctioneer, according to briefs filed with the court. And more important, its lawyers say that eBay is protected under a statute in the Communications Decency Act of 1996. That statute, often referred to as the "safe harbor for interactive computer services," was pushed by America Online (AOL), which feared it would be vulnerable to lawsuits filed by parties offended by content posted on its site.

It's far from clear, however, just whom the safe harbor statute is intended to protect and where to draw the line between content provider and retailer. Even a former attorney for eBay, whose allegiance falls squarely on the side of the Internet company, admits that this statute is hopelessly muddled. "I, as someone who holds themselves out as an expert on this topic, cannot tell you with certainty if a Web site is covered under this statute," says Eric Goldman, now the general counsel for consumer review site Epinions.com. "That should strike you as odd."

Confusion reigns too among the plaintiffs over the extent eBay is responsible for auctions held on its site. Take one plaintiff, Jed Conboy, the district attorney of Montgomery County in upstate New York. He confesses that he was one of those tricked into buying a falsely autographed Ted Williams bat. An avid collector of sports memorabilia, he was immediately suspicious of the autograph. Yet during his months of detective work to confirm the authenticity of the bat - an effort that ended when the FBI named the seller in its Operation Bullpen indictments - he never thought to contact eBay directly.

"I feel that [eBay] certainly should have been more vigilant in guarding the authenticity of the product that was sold on their site," says Conboy, who hopes to recover his $361 in the lawsuit. Yet in the next breath, he admits the company is merely a conduit for commerce. "I'm not buying it from eBay, I'm buying it from the vendor," he says. "Ebay's just the bulletin board."

Is it an auctioneer?

Though eBay takes care to call itself a "trading community," it's safe to say that many of its 19 million registered users and its competitors think of eBay as an auctioneer. After all, the company provides the technology to run thousands of auctions every day, sends users notices about bids they've placed and deletes illegal auctions hawking everything from kidneys to guns. Unlike an offline auction house, though, eBay holds no inventory, does not generally have products assessed for authenticity and does not handle money from sales.

The one significant exception to eBay's hands-off policy is the company's Great Collections division, which specializes in high-end auctions. Great Collections, which can be reached via a tab on eBay's homepage, guarantees the authenticity of every painting, vintage poster and ceramic sold online there. In rare cases, eBay has provided an arbitrator when a buyer says the item's description doesn't match its appearance. Geoff Iddison, general manager of Great Collections, says no case has yet required the seller or eBay to reimburse the buyer. Iddison, who came to eBay after a stint at Sotheby's, considers such safeguards critical to growing Great Collections' business.

EBay's Great Collections' policy mirrors that of other high-end online auctioneers, who take pains to reassure buyers that items sold online come with the same guarantee as those sold offline. Sotheby's, which recently split from its joint venture with Amazon.com, has sold $50 million worth of merchandise on its Amazon and Sothebys.com sites. Sotheby's works with 28 sports dealers who sell memorabilia through the auction house, vetting each one. "We have to be really, really careful about what goes up on the site," says Leila Dunbar, the director of the collectible department at Sotheby's.

Still, Dunbar points out that eBay, unlike Sotheby's, was never conceived of as an auction house. She adds that because eBay's average sale is just $50, compared with $600 for Sotheby's, customers probably aren't as concerned about authenticity. That may change as eBay pushes more expensive items like cars and real estate.

EBay has good reason to want to avoid falling under the definition of an auctioneer. Auction houses are heavily regulated. With 3 million items for sale at any given time, many by individual sellers all over the world, eBay would have enormous difficulty complying with laws that define how auctions can be advertised and inventory managed. In the sports memorabilia case, Krause, the plaintiffs' lawyer, contends that eBay is an auctioneer because it posts descriptions of items up for auction on its Web site. But Rob Chesnut, eBay's associate general counsel, dismisses that argument, noting eBay neither sees the items nor writes the descriptions itself.

If eBay isn't an auctioneer, then what is it? Judge Linda Quinn, overseeing the sports memorabilia case, is allowing eBay to argue that it is protected under the safe-harbor statute as an Internet services company. Quinn last month rejected eBay's effort to dismiss the case, but she also threw out three of Krause's arguments and asked him to refile his complaint, which he did a few days later.

Krause contends that thousands of individuals nationwide have purchased phony sports memorabilia from eBay; that eBay received multiple warnings from individuals and government agencies that forged sports items were being auctioned on its site; and that eBay ignored the warnings. Finally, Krause argues that eBay must abide by an obscure California statute, which states that auctioneers cannot sell fake sports memorabilia.

EBay says it reacts quickly to all credible complaints of fraud, and it plans to argue that the company is simply a place where buyers and sellers convene and send messages to one another. EBay is using the same argument in another case in San Francisco in which an individual is charging that the company is responsible for pirated music sold on its site.

Ripples beyond eBay

Still, whichever way the case in San Diego goes, it raises a fundamental question for Net companies. In Goldman's words, "When is an intermediary liable for the actions of others?"

In addition to dot-coms that conduct auctions, a host of other Net firms claim they are not responsible for messages posted on their sites by users. These include some of the Internet's biggest players, such as AOL, Lycos, Yahoo and other portals. If Quinn rules that eBay is not fully protected under the safe-harbor statute, it becomes unclear who is, and companies should start worrying about whether they'll be held accountable for the inappropriate or criminal behavior of their users.

Neither Yahoo nor AOL returned calls seeking comment, though Amazon's auction division seems unconcerned that the case will have any impact on its business practices. "I've heard about it," says Eric Orpet, the quality listings assurance manager for Amazon's auctions. But Orpet refuses to discuss the eBay case further, emphasizing only that "the bottom line is we rely on the customers - buyers specifically - to contact sellers before a bid is placed."

While Quinn may find this attitude to be legal, Web companies still have to act when their users misbehave. EBay ran into this problem about a year ago when three men were caught illegally auctioning securities. Officials from the Securities and Exchange Commission, brought in to manage the case, found that eBay was responsive to their concerns: The site now states that selling securities is prohibited.

In its efforts to prevent auction fraud, eBay works to strike a balance between protecting consumers and scaring off potential buyers and sellers. "At the very least, they're morally responsible for ensuring that their services aren't used to rip people off," says Susan Grant, director of the Internet Fraud Watch, a division of the National Consumers League in Washington. EBay has voluntarily instituted a number of safeguards to protect against fraud, including free insurance for a purchase up to $250 and authentication services for a fee. One in every 40,000 sales results in a paid insurance claim, says Kevin Pursglove, an eBay spokesman.

At least one site goes further than eBay in offering protection to buyers. Business-to-business auctioneer Freemarkets actively vets every one of its sellers, sometimes visiting the companies themselves. But Freemarkets is facilitating deals worth millions of dollars, a far cry from eBay's typical sale. Given the tens of thousands of individuals who post items for sale on eBay, it would be difficult, if not impossible, for eBay to check the veracity of the claims without radically changing the eBay experience.

As FBI agent Fitzsimmons continues to track forgers through Operation Bullpen, he marvels at how easy the Internet has made it to sell fraudulent sports memorabilia. His message to consumers is pretty much the same as eBay's, and one that Gentry vs. eBay may not alter: Buyer beware. Nevertheless, the case could at least begin to clarify who is responsible for what online. Says Goldman, the Epinions lawyer who used to represent eBay: "Everyone's watching this case in the industry because it gives us very deep insights into an unbounded black box."




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