RECENT LAWSUITS PREDICT LIABILITY PROBLEMS FOR AMAZON SELLERS
The Pennsylvania Supreme Court recently ruled that Amazon can be held liable for defects in products sold on the platform by third parties.
Don’t expect Amazon to shoulder this burden by itself. No, it will generously pass the liability and risk onto the multitudes of third parties using its platform. It will be more demanding that sellers be able to prove their identities and show that they operate a real business. Amazon will also step up its demands that sellers undertake due diligence towards the products that they put on the platform.
First, some legal context. This latest ruling bucks the trend in Amazon’s legal history. The company has been sued over exploding hoverboards and batteries that caught fire. Until now, Amazon has always prevailed, usually by claiming it is not a seller but a technology platform to facilitate sales.
In the Pennsylvania lawsuit, Amazon made the case that it is protected from product liability legal action by Section 230 of the Communications Decency Act, which generally shields platforms from the actions of people using those platforms.
But the majority of Pennsylvania Supreme Court justices didn’t buy that rationale. Instead, they found that while Amazon is protected for third-party speech on its platform, Section 230 does NOT protect it for its role in the sales chain.
It’s important for brands and sellers to understand the distinctions. There is a difference between wide-ranging First Amendment protection for political or social commentary and much more limited protection for commercial speech. Actual commercial transactions (buying/selling) rate no First Amendment protection.
That brings us to another court ruling that has implications for Amazon, too. Earlier this year, the Connecticut Supreme Court ruled that gun manufacturer Remington can be sued for how it marketed the Bushmaster XM15 Rifle, the weapon used in the 2012 Sandy Hook Elementary School shooting that left 26 people dead.
Gun manufacturers get wide immunity from lawsuits over how their products are used thanks to the 2005 Protection of Lawful Commerce in Arms Act. While the Connecticut high court agreed with a lower court ruling tossing most of the complaints against Remington, it allowed the wrongful marketing claim to go to trial.
It looks like a few people have managed to find a chink in what previously looked like impenetrable legal armor of the gun manufacturers and Amazon. Since Amazon may no longer be able to avoid legal liability for products sold on its platform, here is how the change may affect sellers and brands.
Inevitable Seller Crackdown
I see five main ways these rulings will impact Amazon sellers:
- Increased liability for the products we sell
- Tougher verification/vetting of Amazon sellers
- Increased enforcement on listing/product marketing on the platform
- Enforcement of insurance requirement
- More inauthentic, linked accounts and product safety crackdowns
- Fewer reinstatements
- More FTC lawsuits and scrutiny
Amazon’s contract with its sellers already pretty much says sellers are liable for anything that goes wrong. What happened in this lawsuit was that the seller could not be found in the case of a defective dog leash (blinded a buyer). The seller was from China and fake to boot. The case found that Amazon was liable because they didn’t sufficiently verify the seller, and they didn’t take sufficient measures to ensure product safety.
Normally if you resell a defective product, it is the manufacturer, not the seller who is liable. However, if you are not buying directly from the brand, manufacturer or authorized distributor/wholesaler, then those entities can claim they are not liable because you are not selling authentic product. This opens up a world of potential liability for Amazon sellers – especially those who buy from the gray market or liquidation sources. I’ve said this before, but it bears repeating: where you buy your product matters.
You can bet your account that Amazon will be stepping up its game on seller verification as a result of this court ruling. At present, only people opening new seller accounts must verify that they are who they say they are. Thousands of long-time sellers were grandfathered from this requirement. I expect to see that change – especially if Amazon suspects that the seller is a bad actor. I predict more sellers will need to verify themselves even if they’ve been selling for years.
Not only that, I anticipate stronger verification methods. Sellers fail verification every day on the platform – usually for ignorant mistakes rather than deception – and I’ve just told you it’s going to get even harder. Frankly, it needs to. So many bad actors are able to fool the system right now. I know sellers who literally have hundreds of fake accounts. This should not be possible, but it is. This is a worldwide problem, but you definitely see a lot of it in India and China.
I have no idea what Amazon is going to do about the China problem, but they better think of something fast. Part of the reason bad actors flourish there is because it is so easy for them to set up fake accounts. Without going into details of how, just know that they can register totally bogus companies in the Chinese business registers. Amazon then checks the registers and approves them.
The Chinese are also very skilled at creating forged documents. They have services there that will create fake verification documents like invoices, utility bills and ID cards that pass Amazon’s usual protections. To be fair to Amazon, its software is pretty good. Amazon catches a lot of fake documents – even documents that have not been forged – but the Chinese are better. Many bad actors in other countries go to Chinese service providers to get fake documents.
And let’s not forget the internal corruption problem. You can buy a fully verified stealth account for a few thousand dollars from a dealer who is bribing internal Amazon employees. Vendor Central accounts can be bought for about $25,000, just to give you an idea. These accounts will never get caught because they were created by Amazon itself.
This is a known problem and Amazon has not fixed it. I expect that to change now with greater requirements for verification and more punitive action for sellers who do not keep their seller information updated. This is why I predict more linked account takedowns, more verification of established companies and less forgiveness of mistakes.
Every year many new sellers to the platform fail verification – mostly honest sellers who either don’t understand what Amazon wants or whose documents are confusing, don’t match their account, etc. – and they lose the ability to ever sell on the platform. They wait too long to get help, and Amazon has closed their case. Seemingly the bad actors never get caught. I suspect this problem will get worse as Amazon tries even harder to root out fraudulent sellers.
I’m worried for my linked account clients. The ones we take on have generally made mistakes rather than having stealth accounts or otherwise being bad actors. One client, for example, did not realize an employee had set up an account years ago. Nothing was sold through it and it was closed down a few months later, but when my client set up his new account last year, the two were linked. Unlike previous cases where it was fairly easy to explain to Amazon what happened, Amazon is playing hardball with them. I’m wondering if this is a sign of things to come.
Amazon has so many sellers that have not gone through verification that it would be a big problem to demand that all of them do it now. Instead, I suspect seller verification will now become part of any reinstatement that a seller might face. If a seller gets suspended for any reason, then most likely that seller will have to prove his or her identity to be reinstated. This is purely speculation, but it makes sense to me.
I can’t imagine that Amazon will ever want to be in a product defect situation again and not be able to find the seller, as it was in this latest court case.
My prediction about fewer reinstatements is based on observation as much as intuition. We are already seeing that it is harder and takes longer for many of our clients to get reinstated. In addition to bad behavior by seller performance (don’t get me started), Amazon is saying “no” a lot more often. They are less forgiving or understanding of mistakes. They are playing whack-a-mole with the bad actors and honest sellers are paying the price.
More Scrutiny from Regulators
Taking a wider view, I think this ruling will embolden regulatory agencies that are having any thoughts about going after Amazon for violations within their purview. Any agency wanting to make changes would obviously pursue a big dog like Amazon, and then everybody else would fall in line.
The FTC is actively monitoring Amazon and has been for a while. Amazon is cracking down hard on fake reviews because those are an FTC violation. Especially the positive ones, but even the negative ones. It’s a lie if it is false, positive or negative. That is why I suspect this recent court ruling is quite a blow to Amazon. I’m sure one way Amazon has gotten out of liability before is by laying out all the steps it takes to comply, to keep bad or unsafe products off the platform, and to keep track of its sellers.
Another big issue is dietary supplements, which tend to make extravagant promises like lose weight, regrow hair, or boost testosterone. For a long time, Amazon has cracked down on sellers who do not word such claims properly. Amazon would take the products down and make the sellers fix the product claims. Amazon definitely does not want a huge FTC lawsuit. Recent announcements indicate that a lawsuit is coming, however. I expect to see even more suspensions for listing problems.
Amazon has been trying to avoid government regulation through self-regulation. Every time the FDA issues an ingredient warning, for example, Amazon quickly takes down all the products with that ingredient in it. Amazon already has practices to ensure that products on the platform are safe and not misleading to consumers, but the liability lawsuit proves they are still vulnerable…which means we are vulnerable.
Seller Best Practices to Limit Liability
Most sellers who get into trouble with Amazon are vulnerable. They follow (or don’t follow) practices that put them at risk. They are either not aware of the danger or think it won’t happen to them.
Sellers need to be a lot more thoughtful about the products they sell. Over the years, we at eGrowth Partners have been shocked and appalled at times over the products that some of our clients sell. They really didn’t question anything about these products. There was no quality control at the manufacturer’s, they don’t ever test their products, and they are unaware of laws and regulations that apply to their product.
They believe the manufacturer who states they have a patent or the rights to sell that product without investigating for themselves. Later when they are sued for patent infringement, they discover they are on their own and the manufacturer can’t/won’t be held responsible for lying to them.
Private label manufacturers who aren’t testing their products regularly are just a lawsuit waiting to happen.
One of my clients is really conscientious. He routinely tests every product batch. And he manufactures in the US so he doesn’t have to worry about toxic/impure ingredients or bad quality control…or so he thought. One time he tested a batch and the product results showed high levels of lead and heavy metals in his skin lotion. Fortunately, he had not yet shipped any of the product to Amazon.
The shocked client asked the manufacturer what happened. Turns out, the manufacturer had bought some raw ingredients from China and had not tested them. Had my client not been so diligent, things might have turned out a lot worse.
This smart seller had good processes to avert disaster, but many sellers coming to Amazon don’t. They might not have a business background, or even if they do, they don’t have experience in product development or manufacturing. They think, Great. I can buy this cheap from a company in China, and everything will be fine.
Furthermore, it’s not just topicals or edibles that are a problem. Lead can be found in everything from jewelry to clothing to toys, for example. Exploding batteries and appliances that set fire to someone’s house are also a problem if you can’t prove they are manufactured under rigorous safety guidelines. Blankets can be drenched in toxic chemicals and made by child labor. It is up to you to make sure your supply chain is clean, ethical and safe.
My expectation is that Amazon is going to require testing data from more products, even if there hasn’t been an official complaint. Be sure to use one of the independent labs that Amazon recommends and test every batch/manufacturing run.
One simple best practice is to have insurance. I’m often surprised at the businesses who don’t. Amazon requires a certain level of insurance, but it is mostly focused on loss and damage to your inventory. Now is a good time to check the liability clauses for lawsuits and product defect claims. Be aware that many of them are voided if you are not following safety best practices.
Generally, Amazon has not enforced against sellers who have not provided their insurance certificate. I expect this to change. If you haven’t provided yours yet, take care of it before Amazon asks. Your level of sales may not be high enough yet for Amazon to require it. If you are selling a private label product, however, you had better have insurance regardless of the level of your sales on Amazon. I imagine the reseller of the dog leash never in a million years thought his product could hurt someone, let alone blind them.
Last best practice, and the most important: think of yourself as a business from day one. Many sellers – me included – came to the platform with an idea they’ll sell some stuff on Amazon and make some money. They get so focused on the mechanics of finding inventory and selling it on Amazon that they don’t step back and think of themselves as a business. They’re not incorporated so they have no corporate protections whatsoever. They don’t have insurance; they don’t test their products or research regulations that affect their products and categories. They don’t understand truth-in-advertising laws or labeling laws, so their products, listings and marketing are all non-compliant.
They don’t think about trademark, copyright or patent laws and suffer for it. Many of them decide it is “too expensive” to protect their intellectual property, buy insurance or test their products. They don’t pay sales tax and find out too late how expensive it is to get caught.
They don’t vet their suppliers/manufacturers and find out too late that they are buying stolen goods or counterfeits. They write colorful marketing copy without realizing that commercial speech is not protected and that they MUST tell the truth. They think they are anonymous on the platform, but they are not. Amazon turns over seller names to law enforcement and brand information to subpoenas every day.
Now a new risk has been added to our list of possible risks as business owners. We can be held responsible for the misdeeds of our suppliers. Amazon will take us down with them if they get pulled into a liability lawsuit.
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