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October 28, 2019 | Publication| How Amazon disrupted product liability

Michael Wolfer

This article is originally a publication of Property Casualty 360 on October 28, 2019. Legal opinions may vary when based on subtle factual differences. All rights reserved.

Amazon is the quintessential example of a modern-day “disrupter.” From books to electronics to groceries and media, the trillion-dollar behemoth has significantly impacted almost every sector of the economy. Perhaps less noteworthy to the general public, but significant to insurance professionals, is the impact Amazon has had on product liability law. The innovations that propelled Amazon past Walmart as the largest retailer in the world have called into question traditional understanding of what it means to be a “seller,” and specifically whether Amazon should be subject to seller liability for the products that third-party sellers list on Amazon.com.

Product liability law is generally within the purview of the United States. Most have adopted the principles set forth in the Restatement of Torts, the leading treatise on tort law in the U.S. The Restatement provides that “one who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm.” The Restatement does not distinguish retailers from manufacturers; it applies to all sellers within the supply chain. For example, Walmart could be found liable for selling a defective laptop battery even if the battery was designed and assembled by a Chinese corporation. Walmart could seek contribution from the Chinese corporation but the burden would be on Walmart, not the injured consumer.

Determining liability

Imposing liability on the entire supply chain serves chiefly to promote product safety and to ensure customers are compensated for injuries caused by defects. From a safety perspective, product liability encourages retailers to vet their suppliers and to ensure the quality of their products. Product liability also enables individual customers to sue retailers directly, which is crucial in today’s economy where manufacturers and suppliers are not always known, solvent or otherwise amenable to the jurisdiction of the U.S.

As aptly summarized by Judge Motz of the Fourth Circuit Court of Appeals, “[i]n a traditional supply chain, manufacturers transfer new goods to consumers through multiple links, with each link in the chain — from manufacturer to distributor to retailer — taking title to, and possession of, the product. Because seller liability extends to manufacturers, distributors and retailers alike, the consumer at the end of this supply chain almost always has some legal recourse in the event of an injury, for some entity in this linear supply chain is clearly a ‘seller’ and available for service of process within the United States.”

The most apparent distinction between Amazon and traditional retailers is Amazon’s large-scale utilization of third-party sellers on its marketplace. Third-party sellers list their products on Amazon to sell to Amazon customers but they are independent of Amazon. Unlike Walmart and other large retailers, Amazon does not purchase products from third-party sellers for resale, which has clouded our preconception of a “seller” for purposes of product liability. Although some products are sold directly by Amazon, most products listed on their website are sold by third-party sellers.

In his 2018 annual letter to shareholders, Jeff Bezos revealed the share of physical gross merchandise sales sold on Amazon by third-party sellers had grown from 3% in 1999 to 58% in 2018, totaling an estimated $160 billion in revenue. “To put it bluntly,” wrote Bezos, “Third-party sellers are kicking our first-party butt. Badly.”

Bezos explained that the reason for the significant increase is that Amazon provides third-party sellers with the very best selling tools that help sellers manage inventory, process payments, track shipments, create reports, and sell across borders. Amazon’s “Fulfillment Program,” for example, allows third-party sellers to ship their inventories to Amazon warehouses to be stored and shipped to customers upon purchase. Amazon collects monthly fees in exchange for these tools. It also collects a commission on each third-party sale. In addition to paying Amazon, third-party sellers must assent to Amazon’s Services Business Solutions Agreement which cedes significant operational control to Amazon. For instance, third-party sellers are prohibited from directly communicating with the customer and from charging more for a product on Amazon than they charge in other marketplaces.

Defective third-party products liability

The sheer volume of third-party sales on Amazon has naturally given rise to the issue of whether Amazon should be liable for harm caused by defective third-party products. In 2016, for example, the residence of Megan and Charles Fox was destroyed in a fire caused by a hoverboard that Fox had purchased from a Chinese manufacturer on Amazon. The Foxes obtained a default judgment against the Chinese manufacturer and filed a separate lawsuit against Amazon seeking damages under the Tennessee Product Liability Act for selling a defective product. Amazon took the position that it was not a “seller” under the Act and therefore not liable for the ensuing damages.

This position is not unusual for Amazon. The company has consistently argued that it does not sell third-party products and therefore not subject to product liability. Several courts have agreed with Amazon including the Sixth Circuit of Appeals when considering the claims brought by Megan and Charles Fox.

The Court found Amazon did not exercise sufficient control over the sale of the hoverboard to be considered a seller. The District Court of New Jersey similarly held that Amazon was not a “product seller” under the New Jersey Product Liability Act. The Fourth Circuit of Appeals also held Amazon was not subject to seller liability.

The Court based its decision on the fact that Amazon did not take title of the third-party product; however, in her concurring opinion, Judge Motz identified the critical issue, “Amazon’s business model cuts out the middlemen between manufacturers and consumers, reducing the friction that might keep foreign (or otherwise judgment proof) manufacturers from putting dangerous products on the market.” Judge Motz further indicated that change may be coming, stating that “nothing in today’s holding prevents Maryland’s own courts or legislators from taking up and resolving these difficult, fast-changing and cutting-edge issues differently.”

Less than two months after the Fourth Circuit’s decision, Judge Motz’s prophesy came to fruition. On July 3, 2019, the Third Circuit of Appeals held for the first time that Amazon is subject to product liability as a seller in the context of third-party products. The case decided under Pennsylvania law, involved a retractable leash that partially blinded Heather Oberdorf. Oberdorf purchased the leash on Amazon from a third-party seller located in Nevada. Following the accident, the third-party seller closed its Amazon account and disappeared, leaving Amazon as Oberdorf’s only source of recourse.

Oberdorf filed a lawsuit against Amazon in the Eastern District of Pennsylvania. Similar to the courts before it, the Eastern District granted summary judgment in favor of Amazon. Oberdorf appealed the decision to the Third Circuit where she was able to convince the Court that Amazon is indeed a “seller” under Pennsylvania law. Rather than focusing on control or title, the Court diverged from prior judicial reasoning and made a public policy argument — essentially asking whether subjecting Amazon to product liability served the public’s interest. A majority of the three-judge panel found that it did, explaining that Amazon is best positioned to prevent the circulation of defective products, and in some cases, possibly the only member of the marketing chain available to the injured customer.

Subrogating defective product claims

The Third Circuit’s ruling was a significant development. Defining Amazon as a seller allows subrogating insurers to assert product liability claims directly against Amazon for products sold by insolvent or foreign companies. It was all too common for defective product claims involving Amazon products to be closed due to a lack of recovery potential.

Moreover, even before Amazon’s rise, subrogation investigations often hit dead-ends because the insured could not remember which large retailer originally sold the product and the manufacturer’s markings could not be identified. Because Amazon is an online platform with electronically stored information, subrogation professionals can easily establish if a product was purchased on Amazon, saving the resources spent tracking down unknown, insolvent or foreign third-party sellers.

On August 23, 2019, the Third Circuit granted Amazon’s petition to re-hear the case. It is possible the en banc court finds in favor of Amazon but it may be too late to turn back the clock as the Western District Court similarly found against Amazon shortly after the Third Circuit opinion. The Western District’s reasoning also focused on public policy considerations stating that “sellers and distributors are liable, not because of a particular activity on their part, but because they are proxies for the absent manufacturer.”

It appears the momentum has shifted against Amazon as courts begin to recognize the inequities resulting from Amazon’s disruption of the traditional supply chain and take action to protect consumers.

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A profile photo of Michael WolferMichael Wolfer | SENIOR ASSOCIATE

Casualty Defense Litigation, First-Party Coverage and Subrogation & Recovery

(215) 405-9191 | PHILADELPHIA

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