The Amazon Effect   /   May 7, 2021

How a California court ruling could impact Amazon — and other e-commerce marketplaces

A court in California just held Amazon liable for a defective product sold by a third-party seller — and it may portend many more product liability cases to come for online marketplaces in the state.

In Loomis v. Amazon, which was decided last week, a customer sued after buying a defective hoverboard from an Amazon seller in 2015. That hoverboard set her house partially on fire after her son plugged it in. The case centered on a complex question: was Amazon merely a neutral third party to the sale, or could it be classified as that product’s “seller,” meaning it could be liable for damages? The court concluded with the latter point — because Amazon was in the “vertical chain of distribution” for the product, meaning that Amazon interacted with customers, processed the order and received a percentage of sale, it said Amazon could be characterized as the seller of the product.

That is the second court case in California in the past year to conclude that Amazon can be liable for certain third-party products — a worrying trend for the company in the state. It also goes further than the previous suit, finding that Amazon was in the “chain of distribution” even though it didn’t handle fulfillment, as it did in the previous case. While these two legal precedents are not binding in other states, in California it could mean a whole new raft of product liability lawsuits are on the way for both Amazon and other e-commerce sellers.

Amazon, in a statement to Modern Retail, said, “Amazon invests heavily in the safety and authenticity of all products offered in our store including proactively vetting sellers and products before being listed, and continuously monitoring our store for signals of a concern.”

Why Loomis is unique

One key component of the Loomis case is that it expands on a previous California court decision made last year, Bolger v. Amazon. In Bolger, a separate California court found that Amazon was liable for a third-party product in part because that product was shipped through Amazon’s fulfillment program, Fulfillment by Amazon. The court concluded that Amazon had acted as a seller because of “Amazon’s own involvement in the distribution of an allegedly defective product” — the fact that Amazon processed payment, warehoused the battery and shipped it to the customer.

The Loomis case is important because it goes even further — it classified Amazon as the seller of the third-party product, even when Amazon wasn’t involved in fulfillment for the product. In this case, the defective hoverboard was fulfilled by the merchant; Amazon was classified as the liable seller merely because of its front-facing role with customers, suggesting that Amazon — and other third-party marketplaces — could face more similar lawsuits down the line.

At this stage, it’s difficult to say exactly how consequential the Loomis decision will prove to be. One complicating factor is that California’s liability law is relatively unique. In California, courts have a lot of leeway in deciding who counts as a liable seller, whereas other states have stricter statutes that more clearly spell out who can be counted as a seller. Many of those statutes are more friendly to e-commerce companies.

Yet the Loomis case, if nothing else, solidifies that Amazon has a real liability risk in that state. “It’s going to carry a lot of weight in California,” said Derek Rajavuori, a lawyer focused on products litigation at the Butler Snow Law Firm. “Now we have two different California courts of appeal holding that Amazon can be held liable.” California is a massive state, and Amazon now runs a real risk that any of California’s 40 million residents could buy a dangerous product and then demand Amazon pay up.

Eric Goldman, a professor at the Santa Clara University School of Law, wrote recently that “this puts Amazon in a legally dicey spot, and its countermoves will likely shake up the industry.” He speculated, for instance, that Amazon might try to cut down on third-party sellers — noting that he imagined the company “will increasingly nix marketplace items and retail” to avoid liability — though Amazon has given no indication that’s the case.

Will other states follow California?

Rajavuori said that attorneys in other states who are arguing for holding e-commerce marketplaces liable might cite the Loomis and Bolger decisions in their cases, but courts in other states are under no obligation to follow that precedent. “Loomis’s impact in other states will be a lot less predictable,” he said.

He pointed to the example of states that have “sealed container” laws, where e-commerce companies that sell third-party products in a sealed container, as long as they don’t open it, cannot generally be liable for a defective product (there are sometimes exceptions, depending on the state). “In some states, this is the end of the analysis,” he said. “Amazon couldn’t be held liable unless it played a role in the design, manufacture, or labeling of the product.” Colorado, Delaware, Kansas, Kentucky, Maryland and Minnesota are among the states with such laws.  

The Loomis decision is also important because it has implications for more than just Amazon: other third-party marketplaces in California are likely to face the same liability question, especially if they are involved in offering seller services (as many now are). The difference is that Amazon can probably afford a series of liability lawsuits; smaller e-commerce companies cannot.

Indeed, in a potential sign of how the tide in California is shifting toward liability, Amazon endorsed a California bill last year that would have held e-commerce companies liable for a large share of third-party products — so long, Amazon said, as that law applied to all e-commerce companies, not just Amazon.

Critics charged that Amazon was simply taking advantage of its greater resources, knowing that if a liability law did pass, Amazon has the funds to deal with it — whereas paying for defective products sold by third-party sellers might cripple other online marketplaces.

That bill was scrapped at the end of last year’s session, and has yet to be introduced. But, paired with the Loomis decision, it does suggest that product liability will increasingly become a patchwork across the U.S. It’s possible that, depending on the state, e-commerce companies may increasingly become tied up in liability litigation, especially as their third-party marketplaces balloon in importance.

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