MISLEADING ADVERTISING BETWEEN CONSUMER RIGHTS AND BUSINESS NEEDS: THE CASE OF ON-LINE AUCTIONS

26 May 2016 - 19 minutes read

HOW ON LINE AUCTIONS WORK

In the case of on-line auctions several kinds of items are put up for sale, usually starting at an initial price of € 0.01. In order to participate in such auctions, users must register themselves and acquire a certain number of “bids”, so every offer implies a cost for the participant. Unlike traditional auctions, in which an offer is made for the goods intended to be purchased, in the so-called “penny auctions”, each bid makes the price of the item go up a cent of a Euro and at the same time, activates a timer whose duration decreases along with every single bid. The auction is closed and the goods are sold to the last bidder having made a bid right before the time is over.

Nevertheless, there are websites that allow those who have previously taken part in an auction without being awarded the goods, to buy such goods at a later date, often by discounting from the item’s price the amount spent to purchase the credits. Thus, the person who is awarded the goods ends up paying the final price besides the price of the bids already made, whereas those who were not awarded the goods in question have nonetheless paid the price of the bids they made.

It should be noted that penny auctions which are the subject of this article fall within the category  of auctions between business professionals and consumers (business to consumer), in which the goods belong to the auctions’ manager. Other types of on-line auctions, either those among companies (business to business), those taking place between consumers and companies (consumer to business) or among consumers (consumer to consumer) – as well as in such cases where the auction’s manager provides IT infrastructure or the website to carry out auctions without being the owner of the goods put up for sale -, do not fall within the scope of the present article.

ITALIAN LAW

As regards to retail, on-line auctions are banned by Italian law, as specified in art. 18, paragraph 5 of Legislative Decree 114/1998, which states that “Auction sale transactions carried out through television or other networks are forbidden.”

Such prohibition is neither applicable to wholesalers nor to those not selling to end consumers since art. 18 of the aforementioned Legislative Decree applies exclusively to retail. Furthermore, according to Circular no. 3547/C of the Ministry for Productive Activities, dated 17.06.2002, the said prohibition would be additionnally inapplicable, within certain limits and subject to certain conditions, to artisans and to agricultural and industrial manufacturers – in the case of the latter, provided that retail sales take place within the production premises or those adjacent – as well as to all others specifically mentioned within art. 4, paragraph 2 Legislative Decree 114/1998.

Nevertheless, both said Legislative Decree 114/1998 and the explanatory Circular mentioned above, preceed the implementation in Italy of the Directive E-Commerce 2000/31/CE, that came into force with the Legislative Decree of 9 april 2003 no. 70, which has set specific rules aimed to regulate e-commerce and in particular, has set limits to the applicability of the prohibition set forth under Italian law. Art. 3 of the Directive E-Commerce establishes indeed that “Member States may not, for reasons falling within the coordinated field, restrict the freedom to provide information services from another Member State.” The prohibition stipulated under fifth paragraph of art. 18, Legislative Decree 114/1998, in as much as an infringement of the general principle of free exchange of services within the European Union, and in particular, breaching the provisions of art. 3 of the Directive E-Commerce, shall not be applicable, at least to those who, with business headquarters abroad, ban auctions to Italian consumers.

The Directive 2011/83/UE about consumer rights, adopted with the Legislative Decree of 21 February 2014 no. 21 is also applicable to penny auctions. Let us remember, for instance, the right of withdrawal, equally applicable to on-line auctions, extended to 14 days from the date in which the purchased goods were materially acquired, as well as the introduction of a European standard model to exercise such right, and in general the establishment of rules which increase consumer protection and price transparency, the ban of pre-ticked boxes on Internet websites, and so forth.

The Antitrust authority in Italy (“Autorità Garante della Concorrenza e del Mercato”, hereinafter “AGCM”) holds powers of investigation and sanction, conferred by the legislator, for the protection of consumer rights within the scope of on-line auctions and the safeguarding of the same.

THE PROCEEDINGS BEFORE THE ANTITRUST AUTHORITY (“AGCM”)

The AGCM has specific powers with regards to misleading advertising and unfair commercial practices defined pursuant art. 21 and subsequents of the Consumer Code, as laid out within the  “Regulations for preliminary investigation procedures regarding comparative and misleading advertising, unfair commercial practices and breach of consumer rights in contracts, violation of the principle of  non-discrimination, unfair clauses” adopted by the AGCM by resolution no. 25411 of 1.04.2015. Furthermore, of capital importance is the role of the AGCM in safeguarding consumer rights, which is precisely the object of said Directive 2011/83/UE.

The proceedings are initiated through an “application to intervene” and are made up of several phases.

The preliminary stage’s object is mainly to verify the regularity and completeness of the application to intervene and to seize every single element that may be useful to value the facts of the case, the investigation stage and the sanction phase. For every stage of the proceedings there is a responsible person designated.

During the preliminary stage, the AGCM evaluates namely the presence, at least prima facie, of the facts described at the application to intervene and the possible unsuitability of the conduct.  It is aimed to determine the key elements of the possible unfair commercial practice and whether it materially distorts or is likely to materially distort the economic behaviour of the average consumer whom it reaches or to whom it is addressed.

It should be noted that, among other things, the preliminary stage may result in the closing of infringement proceedings in the event that it is appreciated that the trader’s conduct does not fall within the categories of possible misleading behaviour or unlawfulness of the advertising or unfairness of a commercial practice.

On the contrary, if the proceedings are not closed, the preliminary stage is followed by a truly investigation stage during which it operates a reversal of the burden of proof : it is the trader who must prove the truthfulness of the statements linked to the commercial practice deemed unfair by the AGCM.

In the course of the investigation stage, the person designated as responsible for the proceedings verifies the existence of either misleading and unlawful comparative advertising, or unfair commercial practices, such as referred to in the Consumer’s Code.

The beginning of the preliminary stage takes place within 180 days of reception of the application to intervene and such term is suspended in the event of any request for information and until the reception of such information.

At this stage the trader is asked to provide certain information and documents, which shall be submitted within 20 days from the date on which he received the notice, the infringement of which shall incur a financial penalty rising from 2.000 to 20.000 Euros, or from 4.000 to 40.000 Euros, if the trader provides untruthful information and/or documents. In addition, the trader must send to the AGCM a copy of the latest approved financial statements in as much as, besides taking into account the seriousness of the practice adopted by the trader, such financial statements are also examined in order to determine the possible sanction.

During the preliminary stage the trader still may, within a term of forty five days from the reception of the notice of initiation of the proceedings, propose commitments in order to reduce the illegality of the advertising or commercial practice.

The commitments submitted in detail using the standard form, must allow the AGCM to verify that all possible conducts violating regulations protecting consumers, or the unfairness of the adopted commercial practice, have been eliminated.   The AGCM assesses the specific commitments and if deemed suitable decides, with an ad hoc act, to accept them making them mandatory for the trader, and filing the proceedings without assessing the infringement. Otherwise, if the AGCM deems the commitments are only partially adequate, it shall establish a deadline for the trader to implement such commitments.

In the case of serious and manifest misleading or illicit advertising, unfair commercial practice or inappropriateness of the commitments set to eliminate the contested conduct at the initiation of the proceedings, the AGCM deliberates and may decide the refusal of the same, notifying the trader in a timely manner.

The prodeedings conclude within 210 days from the date of reception, by the trader, of the notice to initiate proceedings.

Within such term the AGCM adopts its decision, which may be either definitive or provisional.

In cases of special urgency the AGCM may decide, on its own initiative and by reasoned act, the  cessation of the advertising considered misleading, the comparative advertising deemed illicit, and/or the commercial practice considered unfair.

The financial penalty laid out in the Consumer Code in cases of assessment of an unfair commercial practice varies from 5.000 to 5.000.000 Euros, on account of the seriousness and the duration of the infringement.

The decisions of the AGCM may be contested before the Court of Appeals of Lazio, pursuant art. 135, paragraph 1, b) of the Administrative Procedure Code (Legislative Decree 2 july 2010, no. 104), within sixty days from the notice of the administrative decision, without prejudice to what is established in art. 41, paragraph 5, of the above mentioned Code. Otherwise, there is the possibility of an extraordinary appeal before the Republic’s President according to art. 8 of the Republic’s Presidential Decree, of 24 november 1971, no. 1199, within 120 days from the date of notice of the administrative decision.

Over the last few years there has been a proliferation of websites offering penny auctions which, for  the reasons explained above, are managed by foreign companies trying to gain access to the Italian market. This arises significant problems with regards to the harmonisation of the different regulations among States and ultimately, with respect to consumer protection.

For instance, contracts found over the websites are usually mere translations in the Italian language of contracts drafted for other jurisdictions. Indeed, the companies managing these websites not only have their main place of business outside the Italian territory, but often operate worldwide and tend to ignore the importance of the conformity of the contractual terms to the imperative Italian law. A relevant illustration is the issue of the applicable law and the competent forum. The Italian consumer law clearly and precisely states that the applicable law to a consumer resident in Italy is the Italian law and that the competent forum is that of the consumer. Any contractual provisions to the contrary are null and void and may well be considered by the AGCM as lacking transparency and potentially harmful to consumer rights. Similarly, consumer protection regulations provide specific rules on the issue of the right of withdrawal which are hardly ever observed by foreign traders.

In this context it is obvious that the growing interest of the AGCM draws parallels with the increasing interest of the Italian legislator about the effective protection of consumer rights.

When judging the possible inclusion of the particular situation in the present case, the AGCM assesses the degree of offence of the conduct in question, paying close attention to misleading information and the omission of details particularly relevant to economic choices made by consumers. Furthermore, the AGCM evaluates the possible aggresiveness of conduct referring to the eventuality that such harmful conduct may hinder the exercise of contractual rights by the consumers.

The AGCM requests that the trader provides clear, complete and accurate information with respect to the nature, main features, operating method and price of the service offered. However, the AGCM takes an interest not only in the specific commercial operation of the penny auction business activities, but also in the way such activities are publicised through advertising banners, blogs and Internet websites. The AGCM assesses in detail not just advertising texts (claims) but also the context in which the same are inserted, or possible links to other websites as well as the relevance and the diffusion of the websites in which the advertising messages are inserted. For instance, the conduct of having published a misleading advertising banner is aggravated by the fact of having included such advertising deemed misleading in a website with broad national diffusion and respectable reputation (such as the website of a well-known and widely circulating national daily newspaper).

Recently the AGCM has issued a precautionary measure concerning the company Flamingo Intervest Ltd with business headquarters in the British Virgin Islands, operating within the sector of on-line auctions through several websites, among others www.dandybids.com and www.wippy.com. The AGCM, in close collaboration with the Italian Finance Police (“Guardia di Finanza”) special unit for market protection, has resolved that the trader cease any activity aimed at increasing adherents to their own websites by means of inviting the public to participate in opinion polls, feedback requests and the like, submitted to consumers through the display of pop-up windows while surfing the Internet, messages sent by email and other methods.

The AGCM has received various complaints declaring that the trader had allegedly sent consumers an invitation to participate in a market survey : having verified the availability of the interlocutor and upon receipt of the requested information, Flamingo Intervest Ltd had envisaged the possibility of giving a “prize” to those adhering to the initiative, upon the payment of a small sum in comparison to the value of the goods, to cover shipping costs and fees. Afterwards the company, besides never dispatching the promised product, had used the consumer’s credit card details to charge several amounts, immediately or later, with respect to the amount agreed, and even sent payment notices: thus, by agreeing to receive the prize, consumers had unwittingly concluded a paying subscription, to the on-line auction service.

This has been the first case of a decision by the AGCM in relation to websites offering on-line auctions. Moreover, recently the AGCM has concluded the proceedings against Flamingo Intervest Ltd essentially confirming the precautionary measures and ordering the company to pay a pecuniary administrative sanction equal to € 700 000. Therefore, the attention of the Authority for these events calls for a careful verification of compliance with the Italian legislation.