TO BID, OR NOT TO BID

"Mr. Proffitt, what do you think about an auctioneer, his staff, and relatives bidding on the items offered during an auction? It makes me and plenty others very unhappy."

The best education I’ve ever had on auctions has come from the mail that readers send in response to my columns. I annually receive hundreds of letters and emails from folks on the other side of the auction block and this is a surefire way to learn what they think about auctions and auctioneers. The opening paragraph of this column was excerpted from such a letter.

The practice of auctioneers bidding (including their staffs and relatives) in their auctions rankles the public. Auction-goers strongly dislike the practice and it’s one of the most frequent complaints I receive. Whenever an auctioneer, staff member, or relative bids, someone in the crowd is going to be upset.

Perception.

There are two primary reasons auction-goers feel this way.

First, many bidders believe that an auctioneer who bids against them does so simply to run the price up. They see the auctioneer using his own bids as a ruse to make the lots more expensive for them to purchase.

Second, when an auctioneer, staff member, or relative actually buys something, bidders object on the ground that their chance to buy for a bargain was taken away. They see the auctioneer who bids against them as their competitor and they’re right. That’s what an auctioneer becomes when he bids against the crowd.

If a store advertised a great sale on televisions and you wanted one and made the trip to buy it, you would probably be pretty unhappy if the store manager stepped in front of you and claimed the last one himself. When an auctioneer bids, the result is the same – the next-high bidder will likely feel cheated out of the bargain she came to purchase. This could become a public-relations problem for the auctioneer.

Legality.

There are also several points to consider on the legal side of the coin.

First, the laws of the states differ on whether auctioneers may bid in the sales they conduct. Some jurisdictions prohibit the practice. Others permit it so long as the auctioneer bids with a good-faith intention to buy.

Second, the sad fact is that auctioneer bidding is sometimes done for the purpose of artificially inflating bid prices. This occurs when an auctioneer bids with no bona fide intention to buy the lot. His purpose is to force the highest bidder into paying more money than legitimate, competitive bidding would require. This is not only unethical it’s fraud.

This leads to one of the biggest problems with auctioneer bidding, even when it’s done in good faith. How does the public know whether the auctioneer is genuinely bidding to buy, or just trying to escalate prices? It’s easy for a disappointed bidder or a “pushed” buyer to conclude that it’s the latter.

Third, yet another issue that comes into play with auctioneer bidding is manipulation. This is the ability of the person controlling the lots to determine the moment of offering as well as the introduction and description that a lot will be given.

Auctioneers can obviously control when the lots are offered. Likewise, ground workers frequently have the ability to determine the order in which lots come to the block. An unscrupulous person can hold a desirable item back until the crowd is thin and the money largely gone. If a desirable piece is put up then, it will almost certainly sell for less than it would have brought in the heat of the auction. If the person making the decision on the selling order ends up purchasing the lot at a sweet bargain, the conclusion others (including the seller) will draw is obvious.

Likewise, when a lot is only partially, or even incorrectly, described at the time of offering, the same result can occur – a lower selling price. Does a piece of pottery bring more money when it’s described as “a planter,” or as “a beautiful piece of old Roseville?”

When people working at auctions do things like this for their own gain, it’s dishonest and wrong. This is because their gain comes at the seller’s expense. Remember, the auctioneer is an agent for the seller and owes the seller a far-reaching fiduciary duty to advance and protect the seller’s interests.

Even “good” people can be lured into poor practices like this simply through the pull of self-interest. This is why a body of law exists to deal with the issues that come out of the “insider dealing” people do for self gain, whether it’s an estate settlement, asset liquidation, securities sale, or auction.

Perception.

In the law, we often speak of the appearance of impropriety. This becomes an issue when something looks bad, even if it’s not.

Canons of ethical conduct prescribe that acts should generally be avoided when they might appear improper to others. Sometimes auctioneer bidding falls under this umbrella of just looking bad. Auctioneers need to be ever mindful that the public is much against this practice and distrusting of it. Public mistrust readily “sees” the appearance of impropriety, even where none exists, because perception often trumps reality.

Practice Suggestion.

Here are four suggestions for auctioneers who want to bid, or allow their staffs or relatives to bid, in their auctions.

First, never bid if the law of the jurisdiction prohibits it.

Second, always make full and clear disclosure to the crowd that you, your staff, and relatives may bid during the sale. Full disclosure cures many ills.

Third, always give the audience more than reasonable opportunity to win the bid.

Fourth, don’t ask the crowd if anyone objects to this bidding and then rely on the inevitable silence as an endorsement. Many people who do object won’t say so publicly.

If you have the nerve, place a comment box in a remote location at each auction and ask attendees for their written comments. If your “mail” is anything like mine, you’ll hear that some people strongly dislike “insider” bidding.

Steve Proffitt is general counsel of J. P. King Auction Company, Inc. (www.jpking.com) in Gadsden, AL. He is also an auctioneer and instructor at both Reppert School of Auctioneering in Auburn, IN and Mendenhall School of Auctioneering in High Point, NC. This information does not represent legal advice or the formation of an attorney-client relationship and readers should seek the advice of their own attorneys on all legal issues. Mr. Proffitt may be contacted by email at sproffitt@jpking.com.

John Stephen Proffitt III

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