Smokoo, penny-auctions and Consumer Protection Regulations

Proposed consumer protection regulations could leave sites like BidChaser, Kooldeals, Smokoo and ViaZiz unable to operate as auctions, Lance Michalson of Michalsons Attorneys explained.

Compounding the issue is that such websites might also be illegal in terms of South Africa’s gambling laws.

“Smokoo and other auctions sites like it are termed as ‘penny-auctions’ or bidding fee auctions,” said Michalson. “They appear to be getting a lot of attention, and there appears to be calls to make them illegal.”

Penny-auctions operate by charging the bidder a fee to place their bids. Typically bidders purchase bundles of bidding ‘credits’ which are spent every time a bid is placed.

The consumer protection regulations contain two clauses which may mean such types of auctions run afoul of the consumer protection act.

The first clause states: “No fee may be charged for participation in an auction, but this does not apply to refundable deposits.”

Another section of the regulations describes “mock auctions,” which the proposed regulations say “no person may promote, take part or conduct.” One of the definitions given for a mock auction is an auction where “the right to bid for goods is restricted to persons who have bought or have agreed to buy other goods.”

Michalson said that he would argue the bids that one has to pay for would be considered as goods. He added that even if this was not the case it would be very difficult to prove that the participants are not paying a fee to participate in the auction.

Since the regulations are only in draft and not yet in effect, Michalson said that he thinks it is more interesting that Smokoo may be illegal in terms of the gambling laws.

Are penny-auctions gambling?

In terms of the Gambling Act, a gambling game is a game that requires one to pay (in any form) to play the game, and if by playing the game the person would be entitled to receive a “pay-out,” Michalson explained.

According to Michalson, whether the game requires skill or chance to become entitled to the “pay-out” is irrelevant in terms of the Act.

The Act also defines the pay-out as “any money, merchandise, property, a cheque, credit, electronic credit, a debit, a token, a ticket or anything else of value won by a player.”

“To my mind, these auctions appear to fall into these definitions and could well be considered as a gambling game,” Michalson said.

“If this is the case then Smokoo would need a licence from the gambling board to operate. If they do not have such a licence then it would be an illegal gambling game under the Gambling Act and Smokoo could be in for some very serious fines.”

However, South Africa’s National Gambling Board (NGB) disagrees with this interpretation.

A member of the NGB confirmed that they have received enquiries regarding Smokoo and that it was found that penny auctions were not gambling.

According to the NGB member this topic is to be discussed through the various channels that exist within the next few weeks.

Michalson acknowledged that there is an argument that an auction is not a game as defined in the Gambling Act, strictly speaking.

“This may very well be the case, but looking internationally, Italy has moved to close down similar sites as they believe it falls foul of Italy’s gambling provisions,” Michalson said.

This doesn’t bode well for penny-auction sites like Smokoo as they might soon find themselves operating outside the consumer protection regulations for auctions without being able to legally operate under other regulations.

As Smokoo is arguably the most prominent penny-auction site in South Africa we contacted them for their opinion on the matter, but received no reply by the time of publication.

Public comment on the consumer protection regulations are open until 31 January 2011.

The Department of Trade and Industry requested that members of the public send their comments to [email protected] or Fax (012) 394 2383.

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