eBay's Day In Court: No Soup For You

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Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

Some retailers sell products. Some retailers sell services. But companies like eBay (NASDAQ:EBAY), Amazon (NASDAQ:AMZN) and Craigslist sell something more—a marketplace. They are not simply a "store" but the entire mall—the downtown retail zone. If you can't sell on eBay, Amazon or Craigslist, then, to a great extent, you can't sell online. So what happens if you are banned for life from one of these marketplaces? A recent California Appellate Court decision substantially impaired the rights of consumers to have access to these marketplaces when the merchant/marketplace owner determines that the consumer did not follow the rules.

Linda Genesta was a long-time eBay seller. For 18 years, beginning in 1999, she sold what she described as "high-end, high-quality, imported authentic European and American antique and vintage textiles, fabrics, pillows and trims." Everything was fine until July 2008, when eBay allegedly removed Genesta's items from the marketplace, alleging "unspecified 'misrepresentations'" in violation of its Terms of Service. After what Genesta called a "sustained campaign by [her] competitors to discredit [her] with eBay through unsubstantiated complaints about the authenticity of the antiques," eBay put a "permanent sales block" on her account, which prohibited Genesta from selling items on eBay. As a result, she says, she is effectively "out of business."

That's the problem with an online marketplace. If you get banned from the marketplace, you have few opportunities to get back on. Sure, Genesta could have gone to Craigslist or eBid or uBid, but they have neither the market share nor the name recognition of eBay. Even though the Internet is an open market, and Genesta could have created a Web site to sell her wares online, quite frankly, the open Internet provides little opportunity for small merchants to reach a large market. So when she was banned from eBay, Genesta sued the online forum for interference with a business relationship and antitrust violations under California law.

This is similar to the episode of Seinfeld when the "Soup Nazi" imposed a set of rules of behavior on those who wanted to get soup. Violate those (ever changing) rules, and you were banned from buying soup—often for life. "No soup for you!" Indeed, a number of economics professors have put up a Web site that addresses the case of the Soup Nazi in terms of antitrust barriers to entry and monopoly power. Of course, if you are denied soup from the Soup Nazi, you can still get soup somewhere else—just not the same soup.

And that, in essence, is what the California Appellate Court held in denying Genesta's antitrust claim against eBay. eBay was entitled to create its own rules of engagement, just as the Soup Nazi was entitled to his (stand to the right, step up, order, pay, leave). Violate the rules (ask for bread), and—you guessed it—"No soup for you!" eBay's rules indicate that, if the company suspects you are selling counterfeit merchandise (or, worse, if others—including competitors—simply complain loudly enough that you are), it could ban you from the marketplace.Indeed, eBay is not required, either under the contract or by law, to engage in any particular inquiry—just as the Soup Nazi's rules did not have to make sense. As the court noted:

Nothing in eBay's alleged policy actually prohibits sellers such as plaintiffs from freely offering their items for sale through other means, or from developing and maintaining independent relationships with customers.

So Genesta could still sell her wares, eBay could enforce its rules, and all is good with the world, right? Not necessarily.

The problem with both eBay and the Soup Nazi is that there may be no meaningful alternative to what they are offering. Each, in their own way, dominates their respective marketplace—eBay, the online auction market; the Soup Nazi, the "quality" soup in midtown Manhattan. If a merchant is kicked off eBay or Amazon, that merchant may still ply its wares, but not in an effective way. Now, eBay and Amazon have a vested interest in keeping merchants online, and in keeping them happy. If there is nothing to sell, then there is no reason for them to exist. The companies also have a vested interest in ensuring merchants' claims about their products are valid and in minimizing the scope and extent of fraud or deception on their sites (I take no position about who is right here, just that eBay has legitimate interests).

But eBay has a vested interest in enforcing a host of other provisions contained in its Terms of Use, too. Indeed, any violation of these terms, or any alleged violation of these terms, could lead to a merchant being barred from an almost exclusive marketplace. And that could be a problem.

The other problem for eBay users, like the customers of the Soup Nazi, is the unavailability of an independent enforcement mechanism. eBay (like the Soup Nazi) writes the rules of the road to suit its own interests. It can choose to investigate, or not, claims of violations of its rules. eBay can change the rules at will. It can ban merchants for good reasons, bad reasons or no reasons at all. eBay can decide that, to make one merchant happy, it will deny a competitor access. It doesn't need to take all comers. eBay may not even be required to comply with its own Terms of Use—because it doesn't have to enter into a relationship with a merchant or seller in the first place.

The difference between the Soup Nazi and eBay is that, if the Soup Nazi kicks you out, you are denied an awesome Turkey Chili. If eBay kicks you out, you are out of business.

So online marketplaces need to have fair and reasonable policies, along with fair and reasonable enforcement mechanisms, that provide a reasonable degree of "due process" to all parties. There should be some type of independent review or, in the words of the late Mayor Ed Koch, a way for E-tailers to find out "How'm I doin?" And if they end up dominating the marketplace, regulators may come sniffing around, too. And that's not great for retailers, or soup stores.

If you disagree with me, I'll see you in court, buddy. If you agree with me, however, I would love to hear from you.