Why Amazon is now pledging to make good on bad third-party products

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Amazon has long contended that it shouldn’t be held legally liable for defective products sold by third-party merchants on Amazon.com, maintaining that the liability rests with the seller, not with the marketplace facilitating the sale.

It’s a legal argument with parallels to those made by Facebook and other social networks about their own liability for content on their platforms.

But in a surprise twist, Amazon recently announced that it will directly compensate customers for valid claims of property damage or personal injury caused by third-party products sold on its platform, up to $1,000, or more in certain situations.

The program begins next week.

“It’s a big deal because Amazon is coming to the table,” offering to handle the problem for consumers and third-party merchants, said Venkat Balasubramani, a Seattle-based technology attorney and co-founder of the Focal PLLC law firm. 

However, as he notes, Amazon isn’t accepting legal liability. In that way, it’s also a strategic move that addresses Amazon’s own legal and regulatory challenges.

Amazon is taking voluntary responsibility for defective third-party products on its own terms, trying to show that it’s addressing the problem without the need for regulation or legislation. By maintaining that it’s actually “going far beyond” its legal obligations, it’s also seeking to avoid playing by other people’s rules.

The move comes as a series of court rulings threaten to subject Amazon to greater liability for products sold on its platform, which could have vast financial implications for the company.

Legal commentator Eric Goldman once warned that it could even force the company to shut down its marketplace, focusing on first-party retail sales.

Another important backdrop for the policy is a suit recently filed against Amazon by the U.S. Consumer Product Safety Commission (CPSC), seeking to force the retailer to accept legal responsibility for recalling defective products sold on its marketplace.

“This is just Amazon seeing the storm coming, trying to get ahead of it, and covering their butts,” said Jason Boyce, a former Amazon seller, founder of Avenue7Media, and author of “The Amazon Jungle.”

Asked why the company decided to launch the new program now, a spokesperson said the move “builds on the continued investment we’ve made in helping sellers grow their businesses, and in protecting our store from fraud and abuse.”

Amazon says it spent $18 billion in 2020 on logistics, tools, services, programs and personnel to support third-party sellers.

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On this episode of Day 2, GeekWire’s podcast about everything Amazon, we discuss the new policy with Balasubramani and Boyce, and explore the implications for consumers, third-party sellers, and the company.

  • Balasubramani, a regular contributor to Goldman’s Technology & Marketing Law Blog, is a lawyer specializing in tech issues including intellectual property, privacy, social media and Section 230, under which social networks are protected from liability for activities on their platforms. 
  • Boyce is GeekWire’s collaborator on the Day 2 podcast, a former top 200 Amazon seller who now advises and works with third-party sellers. He was cited as a source in the U.S. House antitrust report on Amazon and other tech giants last year.

Listen above, subscribe to Day 2 in any podcast app, and keep reading for details. 

Seattle-based technology attorney Venkat Balasubramani, Focal PLLC.

Big picture: “I think this is one of the rare instances where Amazon is coming proactively to consumers and saying, ‘Okay, we’re going to try to fix this for you even though we may not be liable, and $1,000 dispute is relatively easy for us to deal with,” Balasubramani said.

However, he added, “in the realm of product liability lawsuits, which often involve personal injury or bodily harm, this dollar amount probably is not designed to capture those types of disputes.”

The fine print: Balasubramani said Amazon’s terms and conditions for claims under the new policy are more favorable to consumers than he might have expected. They preclude consumers from filing additional arbitration or court cases over the issue while Amazon is reviewing the claim, but the terms don’t require consumers to waive those rights indefinitely.

For example, someone could withdraw a claim or decline to accept Amazon’s offer to resolve the claim, then take the company to court. 

However, Amazon is ultimately in control of the claims process, reserving the right to determine the amount of the payment and to reject claims that it considers “unsubstantiated, frivolous, or abusive.”

Compensation is limited to the purchase price of the product and “up to $1 million for medical expenses, lost wages, and property damage proximately caused by a defective product.”

Claims to Amazon must be made within 90 days of the incident giving rise to the claim.

Jason Boyce, Avenue7Media

What this means for third-party sellers: Amazon’s new policy is an extension of its “A to z” return program for third-party sellers.

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Announcing the new policy, Amazon emphasized the need for third-party sellers to have their own product liability insurance. Amazon offers a program to help sellers obtain insurance.

Boyce remembers needing to provide proof of a substantial product liability insurance policy when he started selling on Amazon in 2002, which was a considerable expense for his small business, but over the years he noticed that the company stopped asking sellers for that proof until recently.

Amazon says it will cover up to $1,000 in claims from consumers, without seeking reimbursement when sellers have appropriate insurance and comply with Amazon’s policy.

However, Boyce said he thinks Amazon saw the writing on the wall, given recent legal and regulatory decisions against the company on this issue, prompting the company to take action on its own to prevent further action in Congress or the courts.

“That’s what businesses do. I can’t really blame them,” Boyce said. However, he said he wishes the company would have taken consumer safety and accountability for defective products “more seriously, earlier on.”

Amazon and the CSPC: One of the backdrops for the new policy is a complaint that was filed against Amazon in July by the Consumer Product Safety Commission seeking to have the company designated as a distributor in such a way that Amazon would be required to recall products determined defective even if they were sold on the marketplace.

Acting Chairman Robert Adler wrote that he voted in favor of the complaint with “great reluctance.”

“Clearly the current approach is not sustainable,” Adler wrote. “To continue product‐by‐product is like using an eyedropper to empty the ocean—ineffective, inefficient, and frustratingly insufficient to protect consumers. The best solution to this problem would be for CPSC and third‐party platforms to work together to craft agreements that establish a framework for dealing with these products.”

The solution that Amazon proposed to the CSPC was to create a “Recalls Pledge” for the industry. The company said the pledge would call on online marketplaces to execute recalls for third-party products. Amazon said it “would be proud to be the first signatory and to assist in promoting the pledge and encouraging others to join.”

Amazon issued this statement on the CSPC suit:

We disagree with CPSC’s assertion that we are a distributor under this statute, and our perspective was reinforced by Chairman Adler’s statement. However, more importantly, Amazon has always believed that we have an obligation to our customers to provide the safest shopping experience. This is why Amazon has messaged customers and covered the cost of refunds when selling partners failed to engage with regulators about recalls. We did this for the products noted in the lawsuit, and worked with CPSC staff to finalize an agreement that would establish a new-norm for recalls of third-party products. We are unclear as to why the CPSC Commission rejected that offer, particularly as its staff worked hand-in-hand with us to develop it.

Legislative alternatives: Amazon says it’s open to legislative changes to apply product liability to online marketplaces, if they are adopted across the industry.

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“Under the current legal framework, sellers are liable for the products they sell and we have advocated for legislative changes that would hold all stores—online and offline; traditional retailer or marketplace—to the same standard of liability,” an Amazon spokesperson said in a statement to GeekWire.

Last year, the company supported a California product liability law on the condition that it apply to “all online marketplaces regardless of their business models.” Competitors and critics pointed out that Amazon would be in a stronger financial position to comply with such a law, putting its competitors at a disadvantage.

Where is this headed? The fact that Amazon takes possession but not ownership of third-party goods supports its argument against assuming product liability.

But unlike some other marketplaces, Amazon’s extensive fulfillment operations make it tougher for the company to make the case that it’s merely a platform for the sale, Balasubramani said.

Product liability is largely a function of state law, which is one of the similarities to Amazon’s previous battle against collecting state sales tax for online purchases. Amazon ultimately capitulated and started collecting tax across the country.

Balasubramani said he believes the tide is turning against Amazon on product liability, as well.

“More and more courts are perfectly willing to hold Amazon liable. They’re going to increasingly face liability in multiple forums. I don’t know what the fix would be from their perspective,” he said. “But from a legal standpoint, I think they’ve got to be looking at this and saying, “OK, we’re losing this battle in terms of not being held liable as a seller/distributor; what else can we do now?”

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