THE chances are that you know someone who is bidding on an eBay online auction right now. eBay is a colossal phenomenon: it is talked about in newspapers, offices, bars and gyms across the world. Last year its gross profits were $1.75 billion, there were 971 million items listed for sale, and about 41 million people used the site.
Perhaps the most surprising thing about eBay is that its phenomenal success has been built on an unlikely commodity: trust between two individuals who have never met or spoken. On eBay, buyers and sellers know little more about each other than what they see online. Yet at the end of the auction, these total strangers are prepared to trust each other enough to exchange money and goods, confident that they will not be cheated.
It is this trust that makes eBay work. But there are inevitably fraudsters and crooks who attempt to abuse it, and to counter them the company employs a team of security experts who work in ways that are unprecedented even online. This team cooperates closely with law enforcement agencies and other businesses, mostly copyright owners anxious to protect their legitimate interests where they relate to items traded on eBay. But this cooperation means eBay traders pay a price to use the site: they lose the right to privacy. Some may even be blocked from carrying out trades – even legal ones. That’s because eBay regularly hands out information on its users to law enforcement agencies and certain companies that have registered their copyright interests with the site. eBay users who value their privacy or require unhindered trading need to read the company’s policy documents carefully. Anyone unaware of the scope they grant eBay by accepting its user agreement risks getting a nasty surprise.
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No one denies that eBay had to do something about fraud. Shortly after the site opened in 1995 it suffered a series of high-profile scams. In the most frequent and blatant fraud scenario, sellers collected payments but never sent the goods. Occasionally, they shipped stolen, bogus or copyright-infringing items. The company is uncompromising about fighting such fraud, says its spokesman Kevin Pursglove. “Occasionally you will find individuals who are here to engage in fraudulent activity and we have made it very clear that we are going to use all the tools at our disposal to combat those individuals.”
The trouble is, the company has no direct control over its buyers’ and sellers’ actions in the offline world. In an effort to ensure that they act according to their legally binding trading contract, the company invented a “feedback” system in which buyers and sellers who have completed a trade rate each other by posting comments about their opposite number. These comments form part of an eBayer’s publicly available trading history that other potential buyers or sellers can refer to before deciding to do business with them. eBay’s user agreement states that anyone giving false feedback, or lending or transferring accounts with feedback to someone else, may be suspended from eBay.
But people trade on eBay under “account names” rather than their own names. This cloak of anonymity may be the main attraction for fraudsters, criminals and sellers of pirated goods: once an online auction is over, the onus is on the winning bidder to send their payment and on the seller to send the goods as described, and if they have falsified their details or use borrowed accounts, it can be difficult to do anything about it. Now however, the cloak of anonymity is attracting another kind of user: undercover agents. In the US, the company’s anti-fraud activities have moved beyond the strong words and threats of its customer feedback system and it will now, for instance, cooperate in sting operations on traders suspected of acting unlawfully.
In a case in March this year, Edward Fedora, a trader in military decorations, was in court in the US facing a sentence of up to five years in jail, following a sting carried out with eBay’s cooperation. Fedora, using his eBay account name “redlancer”, had offered a Congressional Medal of Honor for auction on eBay. This is the highest US military award for valour in action, and selling these decorations is illegal in the US. Fedora was registered on eBay’s Canadian site, but the location stated on his listing placed him across the border, in the Buffalo region of New York state. After an FBI agent contacted eBay, the company provided Fedora’s real name and his residential address in Mississauga, Ontario. In line with its stated policy on such matters, eBay revealed this information without a subpoena.
The agent bought the medal in the online auction, in Canada, and then persuaded Fedora to make a similar sale on US soil. Court documents log Fedora’s extreme reluctance to make that sale, knowing that it would be illegal. But eventually the agent talked him into it, saying that he was working for an out-of-town buyer who would not travel to Canada. Fedora was arrested, tried and convicted. He was sentenced to time already served and fined $25 after his attorney argued that he had been punished enough by the confiscation of his two medals and by being banned from eBay.
Despite the dismay of some medal-selling eBayers at what happened in the Fedora case, Pursglove says the company will continue to cooperate with stings. “We certainly know law enforcement have set up so-called sting operations on eBay and we will allow them to occur. There may be isolated cases that individuals may question about the priorities of the arresting party or the strategy that might be used but those are questions for the prosecuting party and not for eBay.”
Pursglove says the Fedora case must be understood in its wider context. In 2002, US consumers were defrauded out of more than $14 million in online auctions. eBay reacts positively to overtures from law enforcement agencies to try to limit this problem, he says. “If you put it in perspective, the lion’s share of issues we deal with are when eBay users have been defrauded out of their money and that’s why we cooperate with law enforcement officials in trying to find them.”
The company’s stance has certainly effected a remarkable turnaround in official attitudes to the business. Nowadays, prosecutors, police and the FBI are as likely to thank eBay for its vigilance as to caution consumers against the site. eBay estimates that of the 971 million items for sale on its website in 2003, only about “1 per cent of 1 per cent” were fraudulent. “Fraud presents much less of a problem to eBay now than it did nearer the beginning,” says Jeff Fischer, co-founder of Complete Growth Investor, an investment advice service.
eBay’s action against illicit activity stretches beyond cooperation with law enforcement agencies. Through its Verified Rights Owner Program (VERO) it has entered into agreements with copyright and trademark-owning companies who are worried about their rights being infringed by activity on the site. If these businesses suspect their copyright is being infringed, eBay will grant them access to the personal details – names, addresses, user IDs and telephone and email contacts – of the eBay users involved.
Last year, for instance, some eBay buyers received an email from the company saying that some of the transactions of a seller going by the name of VHODG, who was selling cookie moulds, could be infringing copyright law. The recipients were all in the middle of transactions with VHODG; the communication suggested they might want to drop these transactions. At least one also received an email asking customers to return anything they had bought from VHODG. That communication came from Garfield Goodrum, secretary of Hill Design, a company that makes cookie moulds. “Hill Design is investigating certain pirate and infringing activity by VHODG,” Goodrum wrote.
The alleged pirate was Vivian Hodgdon, who was selling cookie moulds on eBay. Hodgdon had been an employee of Hill Design for 10 years until, in 2001, the company laid off a number of workers, including Hodgdon. From late 2001 until April 2002, Hodgdon and Hill Design discussed the idea of Hodgdon setting up a new company, and continued to cooperate in the making and selling of cookie moulds that she had helped design while working for the company.
But in April 2002, the business relationship fell apart following a disagreement over whether Hodgdon was allowed to sell Hill Design patented moulds that she had cooperated in producing. According to court records, Hill Design learned about Hodgdon’s eBay listings around July 2002. Then, in February 2003, Hill Design filed a suit and called for an injunction against Hodgdon’s business. It was denied by a magistrate in a federal court, who upheld Hodgdon’s claim to have licensed the mould design, giving her the right to sell the moulds. A final jury opinion on the case is pending.
Hill Design’s complaint to eBay was more straightforward. By the end of February 2003, Hill Design had joined VERO. In its privacy policy, eBay warns users that it will de-list items on request from a VERO member and provide the member with names, addresses, phone and email details behind account names to assist them with investigating suspected copyright infringements. Hodgdon’s is just one of many auctions that have been shut down at the request of a VERO member. “We do it every day,” Pursglove says.
Karen Dudnikov has had similar experiences. She makes bespoke aprons, scrunchies and tissue-box covers from fabrics depicting popular trademarks such as cartoon characters or baseball team logos and sells them on eBay. Even though trademark owners license the fabrics and there is nothing illegal about her trades, Dudnikov has had her eBay auctions de-listed at the request of VERO members no fewer than nine times.
Since 2002, Dudnikov and her computer programmer husband Mike Meadors have brought successful lawsuits against VERO members Disney and Major League Baseball Properties. In both cases, the couple forced settlements that required the VERO member to withdraw their complaints to eBay. They have used similar legal arguments to convince several other companies to withdraw complaints to eBay, resulting in at least seven more sets of auctions being re-listed.
Pursglove defends eBay’s act-first, ask-questions-later policy as a straightforward response to US law, as laid out in the Digital Millennium Copyright Act (see “Copyrights and wrongs”). “The party that can best establish whether copyright is being infringed is the company or individual that owns the copyright. That’s why the programme was established in the way that it was,” he says. “It’s not eBay’s call, it’s the VERO member’s call.”
The majority of eBay’s millions of bona fide users are, of course, glad to see the company dealing aggressively with criminal activity. But it’s not just criminals who need to watch out: in eBay’s fight against crime, some entirely law-abiding users have been caught in the crossfire. So if you are one of the 150,000 or so people who depend on eBay for their livelihood, and you derive legal profits from copyrighted material, you might want to stop and think about your position. Unless you are prepared to fight your corner, playing David to the corporate Goliaths, you might wake up one day to find you have lost your marketplace.
Copyrights and wrongs
While some sellers accuse eBay of being no friend to the small trader, many lawyers point to the US Digital Millennium Copyright Act as the true villain. The act contains a controversial procedure called “notice and takedown”, which gives websites immunity from liability for copyright infringements that occur on their site if they genuinely did not know about them and if they remove them as soon as a complaint is made. In view of this, says Kevin Pursglove of eBay, the company’s only reasonable course of action, to avoid potential legal problems, is to act fast on receipt of complaints. Anyone who is the subject of a takedown notice can then issue a counter notice, on receipt of which a website may re-list an item.
Some online businesses stand or fall by their willingness to protect the privacy of their users, however, and so are more willing to challenge the act. Internet service provider Verizon, of Reston, Virginia, for example, recently won a landmark case. The recording industry had subpoenaed the names and addresses behind Verizon email addresses that it suspected were being used for illegal file sharing. The act allows copyright holders to subpoena this information if those users are guilty of copyright infringement. Verizon appealed the subpoena and won, successfully defending the identities of its users. The victory came about through a technicality, however: the court found the DMCA did not cover file sharing, only websites.
The Verizon case is unlikely to provoke a flood of similar challenges. Companies like eBay are expected to see that their interests lie in avoiding legal risk by interpreting the law in a way favourable to copyright holders. “These notices to take down are being used to restrain new competition,” says Nimrod Kozlovski of New York University School of Law. “eBay is being used as a player in the hands of the stronger party.”
Pursglove disputes this analysis. “It makes no difference to eBay whether the seller is generating $1000 per month or $5000 per month. If they’re in violation of the rules they’re in violation of the rules.” If small sellers find it harder to institute the legal process required to have a VERO member withdraw an unjustified complaint, that isn’t eBay’s fault, Pursglove says. “That’s not a decision that eBay is taking. We are simply following the dictates of the law.”
