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Sarah has worked four straight weeks without a weekend off. This coming weekend, she has both Saturday and Sunday to herself, and plans to have fun not working.

Saturday arrives, and Sarah goes out to her car in order to drive to her weekend destination. She pulls up to a parking place just outside the front door, and enters a large building with lots of other cars parked nearby.

As she enters the front door, she sees a large front desk and people everywhere. Sarah walks past the front desk and grabs a seat for her afternoon’s entertainment.

Sarah is asked to “buy in.” She takes out her purse and finds her credit card. She purchases $100 in credits and is ready to play. Sarah thinks to herself, “I’ve waited a long time for this, and I’m ready …”

Sarah plays for an hour or so, but fails to win — even once; nearly all the $100 in credits is gone. Sarah has noticed other people winning and wonders why she hasn’t won anything yet.

As Sarah’s credits continue to dwindle, Sarah has time to reflect on what is going on here. “Surely not every one can win,” she thinks to herself. In fact, she realizes her losses help fund both those who are winning, and all the overhead and profit of the folks responsible for the facility.

Now, you might be thinking Sarah is at a casino. In fact, many characterize what she is doing as, “gambling.” Yet, Sarah is not at a casino, and she isn’t gambling in a traditional sense.

Sarah is participating in a Penny Auction. Her computer was broken, so Saturday she went to the local library to use a computer there. She signed on to a Penny Auction site, and used her credit card to purchase bidding credits. Yet, as she bid on various items for about an hour, she didn’t win anything …

What is a Penny Auction?

Penny Auctions involve items being sold by auction (competitive bidding) via the Internet. Yet, Penny Auctions are different from other, more traditional style auctions, in that the bidders are required to pay for each bid they make, and the bid increments are controlled completely by the software and are usually $0.01 or other small amounts.

Each bidding credit can cost as much as $1.00. The bid increments are small in order to maximize the number of bids each item will receive. Toward the end of the auction, bidding is typically extended each time a bid is made, to allow time for others to raise that last-second bid.

The final highest bidder when the auction closes is deemed the winner.

Here’s an example from one of the numerous lawsuits that have been filed against Penny Auction firms. From a class action complaint (5:10-cv-01277-W) filed in The United States District Court for the Western District of Oklahoma:

    QuiBids [A Penny Auction Firm] cites a customer winning a $20,000 Honda Civic automobile for $1,740.78 in a two-cent QuiBids auction. That price means QuiBids sold 87,039 bids which were used in that auction. At $0.60 per bid, QuiBids grossed $52,233.40 from the bids alone, an amount that dwarfs not only any savings realized by the winning bidder individually, but the retail cost of the car.

To make matters worse for participants such as Sarah, it has been discovered that some Penny Auction firms use automated software techniques to increase the bids automatically, even if there are no other actual bidders. For example, if Sarah bid $0.12 the computer would automatically bid $0.13 (appearing to Sarah as another legitimate bidder). Sarah would then bid $0.14 and the computer would bid $0.15, and so forth.

The aforementioned lawsuit notes further in the complaint:

    Consequently, for the overwhelming majority of customers who play QuiBids’ [A Penny Auction] game, the money they will spend to purchase bids and pay for any items which they are lucky enough to win will greatly exceed the retail value of any items they win and purchase.

Most contend that this is much like gambling. Most who play loose money, and even many of those who win take home less than they paid out.

Should Penny Auctions be legal? I think they should be legal just as much as I think playing Craps at the Riviera should be legal, outside of the computer software bidding against participants without their knowledge and/or consent.

The central issue for most is the lack of disclosure. One lawsuit put it as, “fraud by omission,” in that participants lacked the reasonable knowledge of their true chances to win (buy something), and the true typical costs of participating.

I think it’s fair to say that most who gamble at casinos, buy Keno tickets, bet on horse races, play poker, or otherwise gamble, realize the approximate chances of winning. For Penny Auctions, it appears those who have been losing have claimed the contrary — that they didn’t know the chances of winning nor the true typical costs to participate.

This will be interesting to watch, as cases against Penny Auction firms move through the courts, and the public becomes more educated about how they work.

Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.