The Amazon Effect   /   November 5, 2020

How Amazon’s vast logistics network may become a liability trap

Jeff Bezos didn’t take a seat at last week’s Senate hearings, but he was likely paying close attention.

The hearings focused on a subset of the Communications Decency Act called Section 230. For Google, Facebook and Twitter, whose CEOs testified, Section 230 is a core part of business. The law states that a platform is not liable for the speech it hosts. If, say, someone makes a libelous claim on their Facebook page, Facebook the company can’t be sued.

For Amazon, Section 230 is much less important. At most, the law insulates Amazon from blame against inaccurate descriptions by third-party sellers or customer reviews posted to its site. But Amazon and other e-commerce platforms have more quietly used the law to protect themselves when a third-party product proves to be faulty. Because of Section 230, they’ve claimed, they can’t be accountable when a product description fails to warn customers. It’s a tried and true argument that eBay has been using since 2003. Yet a small number of court cases are revealing an awkward contradiction for the company: One of Amazon’s greatest strengths as an e-commerce platform — its vast logistics network — might also be making it look a lot like the true seller of a third-party item, opening it up to new types liabilities.

While marketplaces like eBay are able to claim that their third-party sellers make the rules of pricing and shipping and are therefore the true “sellers” of a given product, for Amazon things are more difficult. That stems from the prized Fulfillment by Amazon program, or FBA, which lets third-party sellers store their products in Amazon warehouses. With FBA, Amazon handles the packaging, shipping, returns and customer service in exchange for a larger cut of commission. In some cases, if third-party sellers also sign up for a related program — called Sold by Amazon — Amazon goes as far as to set prices of third-party goods using an algorithm. Now, some court cases have claimed that makes the e-commerce giant look more like a retailer and less like a neutral platform.

“Amazon does a lot more to broker the arrangements between buyers and sellers than eBay has ever done,” said Eric Goldman, a professor at the Santa Clara University School of Law. “Things like taking possession of the goods puts Amazon in a qualitatively different place than eBay has ever been.”

Historically, most judges have taken Amazon’s side, ruling that Amazon is a mere facilitator, not a seller, of items that come from third-party vendors. But an important break came in August, when a California judge rejected Amazon’s claims of neutrality and opened the door for it to end up responsible for all sorts of faulty items shipped through its FBA program. (Amazon is appealing the decision.) That case, Bolger v. Amazon, hinged on a customer that bought a laptop battery from a third-party seller on Amazon. The laptop proved faulty and burned her — and because the third-party seller was pseudonymous, the customer decided to sue Amazon instead.

Because the description was written by the third-party seller, not by Amazon, Amazon tried to invoke Section 230, as other e-commerce platforms have before. The court dismissed the case, pointing to FBA as the key difference: “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 — “supports strict liability,” it concluded.  

Building a network of efficiency — and control
First launched in September 2006, Amazon lauded FBA as a way for its third-party sellers to offer “a great deal on shipping and to receive their orders quickly.” To get sellers on board, the company started offering a series of bonuses to sellers who opted to rely on Amazon FBA instead of shipping products themselves.

One method was by giving FBA products favorable store tags. Amazon would list them with Prime eligibility or descriptors like “quality guarantee” and 2-day shipping guarantees. FBA would also protect sellers from negative reviews in case of shipment delays or mistakes. Plus, FBA items would be more likely to appear in Amazon’s coveted Buy Box — which usually translates into a big sales boost. The result is that Amazon FBA has, in just over a decade, become the shipping service of choice for the company’s millions of third-party sellers. 66% of Amazon third-party sellers now rely entirely on FBA, according to the research firm Jungle Scout. In many cases, these sellers don’t even touch their own products.

Many sellers see using FBA as a requirement for steady sales. One big draw for FBA, according to Michael Scheschuk, the chief marketing officer for Jungle Scout and an Amazon seller himself, is its convenience. “It became a lot easier, even as a seller, because getting merchandise to Amazon warehouses is pretty seamless,” he said.

But there’s one real reason why FBA has become so crucial to the seller ecosystem. “Prime is the big thing,” Scheschuk said. “Everyone wants to have Prime eligible.” And that’s because of customers: “A lot of people won’t even buy something if it’s not on Prime these days,” he said.

A question of liability
Yet the Bolger case hints that full-service logistics, while big moneymakers for Amazon, might come with downsides. According to Goldman, “any marketplace providing fulfillment would likely be covered by the Bolger ruling.” That could be bad news for platforms like Shopify, which has been steadily investing in its own fulfillment network.

But the lawsuit is part of a bigger backlash to the idea of platform neutrality. The California legislature, for instance, considered a bill this year that would hold e-commerce platforms liable for the products they host, even when those products come from third-party sellers. (Amazon initially opposed the bill, then decided to support it when the law was re-written to include Amazon’s competitors.)

Google, Facebook and Twitter are in the business of hosting content, which means a Section 230 revision — as some in the Senate are threatening — would strike at the heart of how they operate. Amazon and other e-commerce companies, by contrast, focus on selling products, not on publishing content. Rory Van Loo, a professor of law at Boston University, put it like this: “You could get rid of Section 230, and Amazon would be fine,” he said. “A lot of other more content-focused companies would have a lot harder time.”

Amazon, meanwhile, has also taken steps to avoid winding up in the same situation as the Bolger case — where, because the third-party seller was impossible to locate, Amazon had to go to court in their stead. One way to avoid a repeat is just to force sellers to be more visible: In April, Amazon started testing video-chats with third-party sellers in order to validate their identities. And starting last month, Amazon sellers have to publicize their names and business addresses, which means they can no longer be anonymous.

For now, it’s up the courts — as well as individual state laws. “The courts are just split,” Goldman said. “There have been other decisions on Amazon’s eligibility for Section 230 throughout the nation, and they’re split as well.”

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