Is this gambling?
The applicable standard for determining whether a “game of chance” is indeed a “lottery,” and therefore prohibited in California (and other states), is whether “the game is dominated by chance, not whether the winner of the game is determined solely by chance.” In that case, the “lottery” at issue was a jackpot element of a lowball poker game. A fixed sum was withdrawn from each pot until two players held specific sets of cards at the end of a particular hand. The winner of the jackpot was determined not by the winner of the hand, but by the value of the cards held by the players who had not yet folded at the end of the hand. Various experts were called to testify that there was no way to improve the 1 in approximately 20,000 chance of winning the jackpot even if the players were to agree to play towards winning a jackpot (the court also noted that the odds of winning a jackpot were similar to those of winning the lottery game DECCO).
A penny auction, or pay-to-bid auction, starts with either no reserve or a reserve price of 1 cent. While each bid only raises the price by a penny, bidders generally pay somewhere between 50 cents and a dollar to make each bid, and each bid extends the time of the auction. So while the final price of an item worth $100 may be around $6, that final price represents hundreds of bids made at $.50 or more a piece. Even if the auctioneers purchase items for full retail value the profit margin can be extremely large.
While a certain element of chance is present there are actions that bidders can take to either increase or decrease their odds of winning. These auctions are not dominated by chance in the same way as a jackpot game and take into account additional factors such as the time remaining to bid on a particular item, the time of day, and the traffic to a particular website.
Additionally, to classify the bids as a “bet” or “wager” in California, the money paid to bid would have to become part of the “winnings” of the auction. Because these fees are paid to the auctioneer, the bidder is not technically placing a bet and the auction is less likely to be analyzed under existing gambling laws. There is, however, a lot of room for unscrupulous website operators to take advantage of its visitors through shill bidding and bots. Because the profit for auctioneers is derived from bids, and an auction time limit is extended with each bid, some operators use bids by insiders (employees and agents of the auctioneer) and computer programs to induce participants to continue bidding.
While penny auctions are probably not covered by existing gambling legislation, their popularity online is growing rapidly, and with that expansion comes a rise in disgruntled users. Every auction represents potentially hundreds of bidders who paid money for an item but received nothing of value. Because of the similarities of this auction model to gambling, and the inevitable number of unhappy users who participated without fully understanding the process, it is likely that the legislature will take notice of this business model in the near future.
Regulation in the U.K. may come even sooner than in the United States, which will create an additional burden on auction operators to block certain jurisdictions.