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EBay Charged with Shilling

Ebay's automated bidding system can pit bidders against themselves, a class action suit claims.

As a result of its improper bidding arrangement, eBay buyers pay inflated prices for their goods, eBay receives larger transaction fees and eBay's financial subsidiary PayPal gets extra revenues, according to the suit filed in California Superior Court in Santa Clara, Calif., on behalf of lead plaintiff Glenn Block.

The suit accuses eBay of "shilling," the practice of bidding on an item with no intention of buying it, merely to raise the price. It hinges on eBay's practice of encouraging high bidders to raise their maximum bids.

"[Lead plaintiff Glenn] Block came to us," said Reed Kathrein, a partner in Lerach Coughlin Stoia Geller Rudman & Robbins, the law firm that filed the suit. "He had gone through this practice with eBay a couple of times, talked to them and tried to get it rectified. They told him, basically, 'Tough luck.'" Kathrein said his law firm did an investigation, finding hundreds of examples, and decided that the suit had merit.

Kathrein estimated that the class might include hundreds of thousands of eBay buyers.

eBay spokesman Hani Durzy told internetnews.com, "We haven't seen the lawsuit and therefore can not comment on specifics, but from what we have heard, it appears that the plaintiffs misunderstand the functionality of the eBay bidding system."

Bids on eBay must be raised by minimum increments; for example, if someone wants to top a bid of $100, he must bid at least $102.50. Bidders can wait and watch to see if anyone else places a higher bid, or they can set a maximum bid amount and let eBay's system automatically bid for them. According to eBay, the system will only bid enough to maintain the bidder's top rank, that is, one minimum increment above the second-highest bid.

When bidders reach their maximum bids, they get an automated e-mail confirmation that they're the highest bidder. But it includes the 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."

The bidder would assume that his bid would only be raised again if someone outbid him. However, in some cases, the system automatically increases the bidder's already high bid by enough to meet the minimum increment.

Said Kathrein, "Essentially, they're saying, 'even though we don't tell you this, when you place that next highest bid, we'll put it a full increment above the bid behind you.'"

For example, if that person with the $100 bid accepted the invitation to raise his maximum, the system in some cases would immediately raise the bid to $102.50 -- even if no one else had bid in the meantime.

"If a user accepts eBay's request to provide a higher maximum bid, eBay then acts as a shill bidder on behalf of the seller at the price level of the highest former competing bidder. As a result of eBay's hidden shill bid, eBay automatically raises the hapless buyer's bid so as to out-bid eBay's shill," the suit charges.

Marsha Collier, author of several eBay for Dummies books and an approved eBay instructor, said she'd experienced this herself, although she was not aware of the lawsuit.

"It has happened to me, and it's frustrated me," she said, although the amount has never been more than $0.50. She pointed out that most of the excess money goes to the seller, not to eBay, which takes a cut of between 2.5 and 2.75 percent of the transaction. "EBay isn't exactly hugely profiting in my opinion," she added.

But Lerach Coughlin said that, with eBay's approximately 126 million registered accounts, those nickels and dimes add up to serious money.

David Reiley, associate professor of economics at the University of Arizona, and an expert on eBay bidding, said, "What eBay is doing is a little bit glitchy, not [that] it's real cheating. It could fix this problem by requiring people to submit bids on a fixed grid."

In other words, to eliminate this flaw in the system, eBay should require bids be made in standard increments, such as $97.50, $100, or $102.50. That way, "these oddities would never happen," Reiley said.

"They had this problem in their system before, and they've exacerbated it by encouraging people to raise their bids if they're less than one bid increment away," he added. "They should fix it, so it's transparent and nobody feels like they've been hurt by doing what eBay suggests they do."

In addition to the charge of inflating bids, Lerach Coughlin will have to convince the judge and jury that eBay is an auctioneer and therefore subject to California laws that govern auctioneers and auction houses. EBay claims it isn't an auctioneer, because it doesn't control the final price and doesn't handle the goods being sold.

The suit also charges eBay with violating the state's Consumers' Legal Remedy Act and California's Unfair Competition Law.