Congressman G. K. Butterfield Calls on the Federal Trade Commission to Investigate Penny Auction Websites

Washington, DC – Today Congressman G. K. Butterfield (D-NC) sent a letter to the Federal Trade Commission (FTC) asking for information related to the Commission’s oversight of penny auction websites.  Penny auction websites have grown in popularity in recent years and has evolved into an extremely profitable industry. 

“These websites lure consumers with the prospect of winning expensive electronics, sporting goods, gift cards, and other merchandise at deeply discounted prices through an auction-like process,” Butterfield said.  “I am concerned that consumers do not understand the bidding process and often lose money simply because the terms for such auctions are unclear or misleading.”

The websites function by selling ‘bid packs’ of 30, 50, or 100 bids to consumers for an upfront cost.  Each bid only increases the total cost to win by one penny, but each bid actually costs the consumer $.55 to $.90 depending on the ‘bid pack’ they purchased.  Butterfield explained that unlike traditional auction websites, if a consumer loses the auction, their bids are not returned to them and their losses are not refunded.  The “winner” of the auction pays for the purchase of each bid he or she cast, plus the amount of the winning bid for the item. 

Butterfield also expressed concern over allegations that some penny auction websites employ software that make fake bids and artificially raise the price of the item.  Doing this not only raises the final price of the item, but also extracts additional bids from unwitting consumers wrongly costing them additional money. 

Butterfield specifically requested that the FTC provide information about its efforts to uncover potentially unfair and deceptive practices by these websites and particularly whether, and to what extent vulnerable populations are at an increased risk.

Text of the letter follows:

October 4, 2011

The Honorable Jon Leibowitz

Chairman

Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC 20580

Dear Chairman Leibowitz:

I am writing to express concern regarding the business practices of some penny auction websites.  These websites lure consumers with the prospect of winning expensive electronics, sporting goods, gift cards, and other merchandise at deeply discounted prices through an auction-like process. 

But as recently reported by The Wall Street Journal (“Penny Auctions Draw Bidders With Bargains, Suspense” by Ann Zimmerman, August 17, 2011), these websites are not only selling merchandise, they are selling consumers the chance to bid on the merchandise.  Bids are sold in “bid packs” of 30, 50, or 100 bids and consumers pay a range of $.55 to $.90 per bid.  Even though each bid only pushes the purchase price for an item up by one penny, each bid generally costs 60 to 100 times that amount.  If a consumer loses the auction, their bids are not returned to them and their losses are not refunded.  The “winner” of the auction pays for the purchase of each bid he or she cast, plus the amount of the winning bid for the item. 

I am concerned that consumers do not understand the bidding process and often lose money simply because the terms for such auctions are unclear or misleading.  Some consumers are also reporting that even when they do win, the company is slow to ship their purchases, and sometimes fails to ship their purchases at all.  

Most disturbing, however, is the use by some sites of fake bids to drive up prices, with some companies even going so far as to use electronic programs to unfairly extract higher bids from unwitting consumers.  Claims like these have led to some sites being forced to close, as with PennyBiddr, a penny auction site that was shut down by the State of Washington’s Office of the Attorney General.  PennyBiddr was forced to issue refunds to customers following allegations that the company was using fake bids to artificially inflate prices.

Piecemeal legal action seems to be the only type of oversight of this new and growing market.  The industry has failed to enact self-regulatory safeguards to protect consumers, as evidenced by the lack of membership in the Entertainment Auction Association.  This association requires members to submit a detailed audit of their business practices.  Unfortunately, the association currently has three members, out of the approximately 165 websites in the industry.  

I am pleased the Federal Trade Commission issued a Consumer Alert in August that warned against the practices described above.  I respectfully request that you provide information, to the extent you possible, about your efforts to uncover potentially unfair and deceptive practices by these sites, and in particular, whether vulnerable populations are particularly at risk.

Please contact me or Saul Hernandez on my staff at (202) 225-3101 or saul.hernandez@mail.house.gov with the information requested or with any questions.  I look forward to working with you to protect the American people from potentially predatory websites.

Thank you very much.

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About George Fisher

George is a freelance writer, an author and a Democratic political consultant. He has worked as Deputy Communications Director for a Senatorial campaign and Campaign Manager for several NC House races and one congressional race. He previously worked as a news producer for a local television station.
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