Can Amazon be Strictly Liable for Defects in the Products Sold Through its Website? A U.S. Appeals Court Says “Yes”

| 9 minutes

Introduction

In a decision with potentially seismic implications for Amazon.com (“Amazon”) and other online marketplaces, in July 2019 a three-judge panel of the Third Circuit Court of Appeals in the United States held that Amazon can be strictly liable for defective products sold by third parties through its online marketplace, even though Amazon does not design, manufacture, or warrant the products, and does not take ownership of the product as it passes from the third-party vendor to the purchaser.[1] The Third Circuit’s decision sent shockwaves through the technology and e-commerce industry. Amazon immediately filed a petition to have the case re-heard en banc by the entire Third Circuit of Appeal, arguing that the majority’s decision “effected a sweeping change in Pennsylvania tort law that will alter vast swaths of commerce within the Commonwealth.”[2] The petition was granted, the decision was vacated, and on February 20, 2020 the case was re-heard by all fourteen judges of the Third Circuit. Depending on what the full Third Circuit decides, this case could very well make its way up to the Supreme Court of the United States.

Why This Case Matters

The case is notable for two reasons:

  1. This appears to be the first time that a U.S. appellate court has held that Amazon can be strictly liable under a state’s strict products liability regime for defective products sold by third parties. The decision is contrary to numerous previous decisions from other U.S. courts, which have held that Amazon cannot be strictly liable for such defects; and
  2. If upheld, this decision could significantly increase Amazon’s exposure to product liability claims, and change how Amazon and other online marketplaces (such as eBay, Wayfair, Newegg, and others) deal with third party vendors.

The Background

Amazon’s Services Business Solutions Agreement

Amazon is the world’s largest retail company. It provides an online marketplace where it sells its own products, as well as products from more than one million third party vendors, to customers around the world. These third party vendors select which products to sell on Amazon, the product price, and the means of shipping. Amazon lists the products on its website, collects order information from customers, and processes payment. Unlike traditional retailers, in most cases Amazon does not take ownership or possession of the product from third party vendors at any point in the sales process. Instead, once the payment is processed, the vendor ships the product directly to the customer.

Amazon’s relationship with third party vendors is governed by Amazon’s Services Business Solutions Agreement (the “Agreement”). Once the vendor signs the Agreement, it can choose to list products for sale on Amazon’s website. With few exceptions (such as illegal, obscene, or defamatory material), Amazon permits any vendor to sell any product that it wants to sell on Amazon. Amazon does not vet the products sold on its website by third party vendors to ensure that they are safe. It receives commission based fees for any sales made by third party vendors through its website.

The Claim

On December 2, 2014, Heather Oberdorf purchased a retractable dog leash through Amazon’s website. The leash was sold by a third party vendor based in Nevada called The Furry Gang. On January 12, 2015, Ms. Oberdorf came home from work, put the leash on her dog, and took the dog for a walk. During the walk, the dog lunged, breaking the collar and causing the leash to retract into Ms. Oberdorf’s face, permanently blinding her in her left eye.

Unable to locate The Furry Gang, Ms. Oberdorf sued Amazon for negligence as well as under Pennsylvania’s strict product liability regime. Under this regime, a “seller” can be liable for damages if it sells a defective product and/or fails to adequately warn consumers of the risks of a product. Amazon brought a summary judgment motion asking the District Court to find that: (i) Amazon cannot be sued under Pennsylvania’s strict product liability law because it is not a “seller” within the meaning of that law; and (ii) the failure to warn claim is barred by the Communications Decency Act (“CDA”), a U.S. statute which prevents websites from being sued for publishing content provided by third-parties.

The District Court agreed with Amazon and granted the motion. The Court held that The Furry Gang, and not Amazon, listed the leash for sale on Amazon’s website and shipped the leash directly to Ms. Oberdorf. Amazon never took possession of the leash. Amazon was therefore not a “seller” under Pennsylvania law and not subject to the state’s strict liability regime. The Court also agreed that Ms. Oberdorf’s failure to warn claim against Amazon was barred by the CDA.

The Third Circuit’s Decision

Ms. Oberdorf appealed to the Third Circuit Court of Appeals, and in July 2019 a three-judge panel reversed the District Court’s decision. The court split two to one, with the majority concluding that Amazon was indeed a “seller” and therefore subject to the state’s strict liability regime.

In reaching this conclusion, the majority considered the four factors identified by the Pennsylvania Supreme Court in Musser v. Vilsmeier Auction Co, Inc, 562 A.2d 279 (Pa. 1989). The majority found that all four factors supported a finding that Amazon was indeed a “seller” and subject to the strict products liability regime:

  1. First, the Court held that Amazon is “the only member of the marketing chain available to the injured plaintiff for redress”. Even though Ms. Oberdorf could ostensibly sue The Furry Gang, neither she nor Amazon was able to locate the company. The majority noted that under the Agreement, third party vendors can communicate only with customers only through Amazon. This allows third party vendors to “conceal themselves” from their customers, “leaving customers injured by defective products with no direct recourse to the third-party vendor.” The Court held that Amazon “takes no precautions” to ensure that third party vendors are in good standing under the laws of the country in which they are registered and has “no vetting process” to ensure that third party vendors are can be identified and served with a lawsuit.
  2. Second, the Court held that the imposition of strict liability on Amazon would serve as an incentive to safety. Amazon argued that since it does not design or manufacture the products sold by third parties, imposing strict liability on Amazon would not serve as an incentive to safety. But the majority held that Amazon “exerts substantial control over third party vendors”, and is “fully capable in its sole discretion, of removing unsafe products from its website.”
  3. Third, the Court held that Amazon is in a better position than the consumer to prevent the circulation of defective products. Amazon receives customer feedback on its website and is therefore “uniquely positioned” to receive reports of defective products, which can in turn lead it to remove such products from its site. By comparison, the Court held, third party vendors are “ill-equipped” to perform this role, since under its contract with vendors Amazon only permits third party vendors to communicate with customers through “tools and methods that we [e., Amazon] designate.”
  4. Fourth, the Court held that Amazon can distribute the cost of compensating customers for injuries they suffer from defective products. In this case, Amazon had a clause in its Agreement with The Furry Gang which indemnified Amazon from any injuries caused by the vendor’s products. The Court also held that Amazon can also adjust the commission-based fees that it charges third party vendors based on the risks posed by each vendor.

The majority’s decision appears to have been driven by its view that Amazon does not do enough to protect consumers from the products sold by third party vendors. For instance, the majority noted that “Amazon’s customers are particularly vulnerable in situations like the present case” – they purchase products through Amazon from vendors that Amazon does not vet or identify. The majority also held that “had there been an incentive for Amazon to keep track of its third party vendors, it might have done so”, and that Pennsylvania law does not “shield a company from strict liability simply because it adheres to a business model that fails to prioritize consumer safety.” Finally, the majority held that Amazon’s arguments, if accepted, “would give an incentive to companies to design business models, like that of Amazon, that do nothing to protect consumers from defective products.”

The majority did, however, find that the failure to warn claim was barred by the CDA. Thus only the claim for defective product was subject to Pennsylvania’s strict liability products law.

Dissent

Judge Scirica dissented. He held that “well-settled Pennsylvania products liability law precludes treating Amazon as a ‘seller’ strictly liable for any injuries caused by the defective Furry Gang collar.” He noted that several other U.S. courts, including the Fourth Circuit Court of Appeals, the Sixth Circuit Court of Appeals, the Southern District of New York, and Northern District of Illinois had all held that Amazon was not subject to strict product liability laws. The majority, however, dismissed these decisions as “non-controlling case law from other jurisdictions”, each of which have “their own statutory schemes and policy considerations.” 

Fall-Out From the Decision

If upheld by the full Third Circuit, the decision will have significant implications for Amazon and other online marketplaces. Specifically, it will mean that:

  • Amazon and potentially other online marketplaces can be strictly liable under Pennsylvania law for injuries caused by defects in the products sold by third parties through its website, even though Amazon does not design, manufacture, or warrant any of those products;
  • Amazon will likely have to take steps to vet the identity and legitimacy of the third party vendors who sell products on its site. This will likely increase Amazon’s cost of business, require changes in its agreements with vendors, and reduce the number of vendors who can sell products on Amazon; and
  • Amazon will face increased exposure to product liability claims, including class action lawsuits. Customers who purchase a defective product on Amazon will be able to sue both Amazon and the third party vendor and collect damages from the deeper pocket (which will invariably be Amazon). Amazon can seek to protect itself through the indemnity provisions in its agreements (as it did in this case), but this would still require increased litigation costs and the risk of not being able to recover from smaller vendors.

Implications for Canadian Law

As a purely legal matter, the Oberdorf decision has limited application in Canada. Canada does not have a strict products liability regime like the one in Pennsylvania or other U.S. states. Here, products liability law is governed by the usual principles of negligence and contract law. However, if U.S. courts start permitting strict product liability claims against Amazon and other online marketplaces, this will no doubt have an effect in Canada, particularly given the seamlessness of e-commerce across the border and the tendency for Canadian courts to craft commercial law that is harmonious with that of Canada’s major trading partners. 

In addition to the potential legal impact of this decision in Canada, this decision will also have a business impact on Amazon and other online marketplaces. If full Third Circuit upholds the majority’s finding, then Amazon and other online marketplaces will likely have to revise their agreements with third party vendors and take greater steps to identify and vet those vendors. This will inevitably reduce the number of vendors that can sell through online marketplaces, which could in turn lessen competition and the choices available to consumers.

We will provide a follow-up post after the full Third Circuit reaches its decision.

[1]Oberdorf v. Amazon.com, Inc., 930 F.3d 136, 141 (3d Cir.)

[2] Petition for Rehearing En Banc, Oberdorf v. Amazon.com, Inc., 930 F.3d 136 (3d. Cir. July 17, 2019) (No. 18-1041).

Third Circuit Court of Appeals Amazon Third Circuit Court of Appeals products liability e-commerce

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