On The Case

Amazon backs proposed Calif. product liability law for online sellers (with conditions)

(Reuters) - Less than two weeks after a California appeals court ruled in Bolger v. Amazon that the online retail leviathan can be liable for defective products sold on its site, Amazon issued a surprise announcement this weekend: It offered conditional support for a proposed California law that would make it easier for consumers to hold electronic retailers responsible for allowing defective products to reach the marketplace. As long as other online retailers can’t evade the law based on how they earn revenue for selling products from outside vendors, Amazon said in a blog post, it will back the bill.

The logo of Amazon is seen on a building in San Jose, Costa Rica March 21, 2018. REUTERS/Juan Carlos Ulate

The law, known as AB 3262, has passed the California assembly and been approved by the state senate’s judicial committee. The entire state senate is expected to vote on the proposed law – which is opposed by Etsy, eBay, the California Chamber of Commerce, the Internet Association, the National Federation of Independent Business and several other business groups – later this week. Amazon's late-breaking support is considered a boost to the bill's prospects, which were already pretty rosy in California's pro-consumer legislature.

On Monday, presumably in response to Amazon’s blog post, lawmakers amended the proposed law to strike an exemption for websites that merely receive a fee for advertising a vendor’s products and to clarify that online sellers can be liable for “facilitating” the sale of defective merchandise from outside vendors.

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Amazon, as you know, has spent years warding off product liability suits by consumers who used its website to buy merchandise from third-party vendors – whose products comprise nearly 60% of Amazon’s sales. The company has mostly managed to convince courts that even though it stores vendors’ products in its warehouses, processes customers’ payments and ships goods to consumers in Amazon trucks, it can’t be liable as a “seller” under state tort laws because it does not actually take title to products offered by third-party vendors. Amazon lost a case at the 3rd U.S. Circuit Court of Appeals in 2019, but the appeals court subsequently vacated its ruling and asked the Pennsylvania Supreme Court to weigh in. Ohio’s Supreme Court is also considering the issue.

The California law would resolve any uncertainty in favor of consumers. The bill’s author, Assemblyman Mark Stone, has presented the proposed law as an alignment of liability for brick-and-mortar retailers and online marketplaces, which accounted for more than $600 billion in sales in 2019. Without assuring that online marketplaces face the same responsibility as an actual store, the bill said, more retailers will abandon physical shops and more consumers will be without recourse if they buy a defective product from a third-party vendor. “Strict liability on the manufacturer and the electronic retail marketplace alike affords maximum protection to the injured plaintiff and works no injustice to the electronic retail marketplace,” the bill said.

The law contains carveouts for used or pre-owned merchandise that is clearly labeled as such, for handmade products and for goods sold via auction. But according to the bill’s proponents, the Amazon competitors eBay and Etsy are not otherwise exempt. Those sites, like Amazon, take in revenue from the sale of new products manufactured by third-party vendors, so, according to AB 3262’s supporters, they should be held responsible when products are defective.

Etsy and eBay vehemently oppose the bill, arguing in a joint letter last month to the state senate that the law would stretch liability for online sellers beyond the limits faced by brick-and-mortar stores. Etsy and eBay emphasized the differences between their business model and Amazon's: They don't have warehouses to store products from outside vendors, they don't act as go-betweens for buyers and sellers and they don't ship products. They described themselves as neutral platforms that Simply enable buyers and sellers to connect with one another. According to eBay and Etsy, buyers at their sites, unlike Amazon buyers, should have no reasonable expectation that they are acting as sellers or retailers.

The California senate report on the bill noted the eBay and Etsy arguments but said the bill’s proponents contend the two sites have adopted practices akin to those of retailers, not “peer-to-peer” platforms. Ultimately, the senate report said, every case will turn on particular facts, especially the degree to which the online retailer controlled the sale of the defective product.

But this week’s amendments, apparently driven by Amazon’s blog post, will make it harder for eBay and Etsy - and other websites that derive revenue from facilitating online transactions between buyers and third-party vendors - to avoid liability for defective products. Amazon could even end up benefiting from the law because it’s better positioned than small competitors to weather exposure to liability for defective products.

AB 3262’s opponents are as adamant as ever that the bill is a bad idea. Jaime Huff of the Civil Justice Association of California, who signed a letter against the proposed law for a coalition of business groups, said by email that the bill is a radical departure from established product liability law. “The bottom line is that this bill would increase barriers to entry for online sales, hurting small businesses, shutting down small online marketplaces, and increasing the cost of goods purchased online by consumers,” Huff said.

EBay said in a statement that AB 3262 goes far beyond the liability California courts imposed on Amazon in the Bolger case. The bill “applies the same standard for Amazon to dozens of third-party marketplaces that simply enable small businesses to reach customers,” the statement said. “This is a one-size-fits-all solution that during a critical time would only disadvantage California small and micro businesses who depend on ecommerce to thrive.”

And Etsy CEO Josh Silverman said in a post on Medium that Amazon is using the guise of consumer safety to crush competitors. “This is an abuse of market power play,” Silverman said. “Amazon is taking bold steps to wipe out its competitors by promoting complex, hard-to-comply-with legislation that only they can afford to absorb. Amazon’s goal is to be the only place to buy stuff online.”

Amazon public policy executive Brian Huseman, who authored the blog post conditionally backing AB 3262, did not respond to my email query. Amazon’s press office also did not respond.

If California passes AB 3262, it’s going to be interesting to see whether Amazon continues to contest its liability outside of California after publicly announcing that liability for online retailers is a boon for consumer safety.

COVID-19, as AB 3262’s drafters pointed out, has only accelerated U.S. consumers’ shift to online buying. It’s a big deal that Amazon now agrees consumer safety will be enhanced by holding websites responsible when they sell defective merchandise.

This story has been updated to add comment from Etsy.