Fiduciary Duties of an Auctioneer

An auctioneer’s fiduciary duty is to the seller. This means the auctioneer is an agent for the seller and must act in the best interests of the seller.

This falls back on the basis of general law, widely accepted in all courts of law throughout the U.S.:
(1) “Fiduciary” means an agent, trustee, partner, corporate officer or director, or other representative owing a fiduciary duty with respect to an instrument (i.e. “contract”).
(2) “Represented person” means the principal, beneficiary, partnership, corporation, or other person to whom the duty stated in subdivision (1) is owed.

In addition, the field of real estate is usually quoted in many examples because they are basically the only industry that allows for “dual agency”. However, to completely understand this “agency”, you must understand that the Broker has ultimate responsibility for all transactions by any salespersons working under the supervision of the Broker’s license, therefore the actual Broker is undertaking the role of dual agency (not the individual salespersons, as I will explain). In other words, the Broker can not be a direct party in the transaction (in any way and must remain neutral, or without specific directions to either salesperson) and will appoint two different salespersons to work for the seller and the buyer, since an individual agent cannot represent a fiduciary to both. On the same basis of law, if a RE salesperson has not specifically contracted to act as a buyer’s agent, then it is automatically assumed that the salesperson is acting on behalf of the seller, therefore is the fiduciary only for the seller.

To support that last statement, the Federal Trade Commission (FTC) speaks of this in numerous publications, one of which is:
http://www.ftc.gov/os/comments/realestatecompetition/518795-00391.htm
“Fiduciaries are held to a higher standard under common law. Upon visiting, for example, a store, a consumer does not expect, or have any right to expect, the store’s salesperson to be looking out for the consumer’s best interest. But in hiring a trusted lawyer or real estate agent or investment trust company (you may also add “auctioneer”) to act for him, a client expects full fiduciary responsibility, including undivided loyalty, with no undisclosed conflicts of interest. Consumers are more easily misled when, as clients, not just customers, they are giving their trust to their own professional fiduciary.“

In addition, you can find additional commentary on the basis of fiduciary duties at:
http://en.wikipedia.org/wiki/Fiduciary
“Conflict of duty and duty
A fiduciary’s duty must not conflict with another fiduciary duty. Conflicts between one fiduciary duty and another fiduciary duty arise most often when a lawyer or an agent, such as a real estate agent (also add “auctioneer”), represent more than one client, and the interests of those clients conflict. This usually occurs when a lawyer attempts to represent both the plaintiff and the defendant in the same matter, for example. The rule comes from the logical conclusion that a fiduciary cannot make the principal’s interests a top priority if he has two principals and their interests are diametrically opposed; he must balance the interests, which is not acceptable to equity. Therefore, the conflict of duty and duty rule is really an extension of the conflict of interest and duty rules.”
Also see:
http://en.wikipedia.org/wiki/Conflict_of_interest

In other words, as a sole individual/entity, you can not have a conflict of fiduciary duties between the parties, or you are subject to a dereliction of duty to one or both parties. Therefore, under the basis of general law, it basically means that when an auctioneer signs a contract with a seller (the principal), the auctioneer has a fiduciary duty to the seller to act as their primary agent on their behalf and in their best interests or “as they would act”.

Now, this does not mean that if the seller misrepresents something, that the auctioneer doesn’t have a “duty” to the buyer to correct the problem. However, the auctioneer and the seller are both responsible for providing a reasonable duty to provide said goods in the condition stated for the agreed upon price/trade, as this falls under the Fair Trade Agreement statutes (that you can also search for under the FTC’s website). However, this does not create a fiduciary duty to the buyer, but only serves to treat the buyer fairly under the FTC’s Fair Trade Agreement.

The primary point regarding the auctioneer’s fiduciary duty to act on behalf of the seller. The difference between the Fair Trade Act regarding buyers and fiduciary duty to the client (seller) is the same, regardless of whether it is a real estate transaction or the sale of any other type of property.

A Fiduciary can not represent two different parties with opposing intents. The primary fiduciary is to the client that has contracted the auctioneer to sell (act on their behalf for the sale of) their goods.

Some have attempted to imply that the Terms and Conditions of Sale implies a fiduciary duty. This is not the case, as the FTC’s Fair Trade Act specifically demonstrates that it is only an agreement for the terms of the sale and creates no other duty upon the seller (or their agent) as a representative of the buyer, as they are opposing parties until the final agreement has been reached. The Terms & Conditions (terms of their agreement) for an auction are only the conditions of finalizing the transaction, which both, the buyer and the auctioneer (seller’s fiduciary agent) are agreeing to as part of the sale, with only price being the final factor and determined upon the call of “Sold”. Therefore, the auctioneer has only “perfected a sales agreement” (that’s how a lawyer would state it) with the buyer on behalf of the seller (the principal fiduciary).

The primary point is regarding the auctioneer's fiduciary duty to act on behalf of the seller. The difference between the Fair Trade Act regarding buyers and fiduciary duty to the client (seller) is the same, regardless of whether it is a real estate transaction or the sale of any other type of property.

A Fiduciary can not represent two different parties with opposing intents. The primary fiduciary is to the client that has contracted the auctioneer to sell (act on their behalf for the sale of) their goods.

Some have attempted to imply that the Terms and Conditions of Sale implies a fiduciary duty. This is not the case, as the FTC's Fair Trade Act specifically demonstrates that it is only an agreement for the terms of the sale and creates no other duty upon the seller (or their agent) as a representative of the buyer, as they are opposing parties until final agreement has been reached. The terms of their agreement are only the conditions of finalizing the transaction. Therefore, the auctioneer has only "perfected a sales agreement" (that's how a lawyer would state it) with the buyer on behalf of the seller (the principal fiduciary).

Running the Bid to Protect a Reserve

The following is my response in a forum, concerning the way some auctioneers "run the bid". Some auctioneers feel that this is okay, because so many others do it, as well as some of the "big" auction houses. As you will note in my response, I do not concur with this manner of auctioneering.
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Just because a particular "big" auction company does something, does not make it right, ethical or legal. You will recall that it wasn't so long ago that one of the "big auctions" was fighting court battles due to their "normal" activities, not to mention selling illegal/stolen goods. The old adage, "just because everyone does something, doesn't make it right" certainly applies to this.

As I stated, no one is reinventing the wheel. Some auctioneers sell to a house number, while some "pass" the item. We use the "pass" as opposed to using a house number. It doesn't make things flow any differently. However, this is not the point that I find a problem with.

One of the most controversial subjects about auctions is the use of phantom bidding, which is utilized in "running" a bid. There are a lot of articles on the internet, many from law firms, discussing the legalities of this practice and it's associated meaning.

Steve Proffitt is general counsel (lawyer) of J.P. King Auction Company, Inc. is also an auctioneer and instructor at the Reppert School of Auctioneering in Auburn, Indiana, and at the Mendenhall School of Auctioneering in High Point, North Carolina. As a Virginia auctioneer and lawyer, Steve Proffitt, makes some good points in some of his articles. As he states in one article...
"History shows that auctions have a long record of bad conduct. Indeed, I have often said that when it comes to auctions, fraud is Public Enemy Number One. This includes the widespread use of shills, phantom bids, hidden buy-ins, selling unannounced reproductions and fakes, allowing unannounced seller bidding, abuses in the advertising and conduct of absolute auctions, intentional clerking errors, and other forms of deceit, misrepresentation, and trickery that often occur."

Let's take a closer look at the phantom bidding practice and similar practices used by various auctions.

Auction sales psychology works because it is based on perceptions of the the public (as does all other marketing and sales). This is also where problems lie and potentially bear the implication of dishonesty and possibly fraud. Yes, the auctioneer posts notices of reserve bidding in their terms and conditions (as required by law) and they may even announce it at the beginning of the auction. But, we also know that most people don't necessarily understand what it means, nor do they question it. Most sit through the opening announcements chatting with others, while they wait for you to get through the boring statements and 'get on with the auction'. They come to the auction with the perception that "everything sells to the highest bidder and there are BARGAINS! to be had". So, when bidders start looking around and notice that no one actually seems to be bidding, they feel that the auctioneer is just another one of "those crooks."

The problem: "running" a bid, when no one is bidding... How can this be justified?
At auction, it is the "competitive" bidding which determines the final selling price. Of course, if there is a reserve (and appropriate notice is given in the terms of sale), then the owner or agent, i.e. auctioneer, may bid against other bidders, up to the reserve price. They may do this if they are BIDDING against someone who is actually bidding, which in effect means the seller is "buying back" their own property if it does not reach the reserve.

Is "running the bid" ethical? If you are calling for the next bid, and the current high bidder mistakenly holds up their bid card again, do you accept this bid against their previously held bid? I assume most auctioneer's answer to this is "NO", as most ethical auctioneers will let the person know that they already "have the bid".

The act of competitive bidding must occur between two or more persons. How can one person (the seller) bid against their self, as is the case with "running" the bid?
Therefore, how can an auctioneer justify "running" the bid against the reserve? This in effect is the seller bidding against himself, as there is no competing bid.
Since this implies that the seller is bidding against their self, this is where it becomes phantom bidding, which makes it appear unethical.

Now, keeping in mind the previous statements about marketing psychology, we have to look at it from the buyer's perceptions...
To make the point, I'll reference another article from Steve Profitt, in which an auction-goer sends him the following question:

I've been going to auctions with reserves for over 20 years. What's bothered me all this time is how auctioneers deal with reserves when the reserve price is not met.

I have no problem with the practice of using reserves. Reserves are part of the auction business because they protect the seller against a weak market where there is little or no demand for the item. However, in my experience, the majority of auctioneers call "sold" and use a "buy-back" number when the reserve is not met. Most bidders assume the item has been sold. In my area, I know of only two auctions where the auctioneer explicitly states, "Pass" or "The reserve has not been met." In these auctions, the bidders know the item was not sold.

Webster's dictionary defines "sell" as: "To give up to another for money or other valuable consideration." An owner cannot buy something he already owns. So to use the term "sold" as a buy-back for the owner is deceptive and misleading. It causes bidders to falsely believe that the auctioneer actually sold the item for the price stated. I think this practice is as egregious as phantom bidding.

What is the legality of "buy-back" bidding? If it's legal, wouldn't it be more ethical for an auctioneer to let bidders know that an item did not meet the reserve, rather than call "sold" under a phantom buy-back number?

You can read the entire article and Steve Proffitt's response at:
Auction Law and Ethics: Do You Want to Know a Secret?

I provided this reader's question only to show my point, that even educated auction-goers find such tactics as potentially dishonest.

Therefore, this is where I try to set myself apart from others. I do not "run the bid", although I will bid on behalf of the reserve only against a sole bidder. If the item doesn't make it to the reserve, I normally just "pass" the item, rather than sell to a "house number." Of course, I've also had bidders complain about this and heard such statements as "wasting their time". So, one might question if their perception of an item being "sold" is worth their time.

I have to agree with Steve Proffitt on this particular point:
"The knowledge that many auctioneers have about legal requirements and ethical duties has largely come from other auctioneers. That's unfortunate, because a good amount of this "knowledge" is wrong. Indeed, some auctioneers have done so much wrong for so long they've come to believe it's right—but it's not. It's just repetitious wrong."

The biggest problem with the "norm" is that it can continue to cause potential damage to the auction industry due to the public's perception. My biggest advantage to the "norm" is that, as more people learn about these things, the more I will benefit, as I will be one of the few that they will be seeking out as an "honest" auctioneer. I am not implying that all other auctioneers are dishonest, but you can bet that I'll use that perception to my own marketing advantage to stand out from the rest. One of the best testimonials I ever received was when a retiring auctioneer, Del Lemons, announced to his crowd at his last auction "Folks, I want to introduce you to an honest auctioneer... Jim Ford. If you want to attend a good, honest auction, then see him and get one of his business cards." I want all my customers saying the same thing!
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If you're looking for an Honest Auctioneer, you can find me at http://www.t-na.com