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California legal rulings may have big impact on Amazon’s liability for third-party products it sells

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(BigStock Photo)

In November 2015, Kisha Loomis signed on to Amazon and ordered her son a hoverboard, a two-wheeled vehicle popular with kids and balanced with gyroscopic gears.

Just more than four weeks later, on New Year’s Eve, its lithium ion battery exploded and the hoverboard burst into flames, setting Loomis’ bed on fire.

Loomis, who lives near Sacramento, suffered burns fighting the blaze and sued, accusing Amazon of selling her a faulty and dangerous product. Amazon countered that the hoverboard was sold on its platform by a third-party company based in China and the Seattle retail giant therefore shouldn’t be held liable for a product it didn’t manufacture, sell or ship.

Last month, California’s Second Appellate District Court disagreed, saying Amazon was an integral part of the hoverboard’s supply chain and can be held liable for Loomis’ injuries and other damages.

The ruling is among a pair of cases that could have a big impact on Amazon’s operations and the broader e-commerce landscape.

Last year, in a case known as Bolger v. Amazon.com LLC, a California appeals court held that Amazon was liable for an exploding laptop battery, partly because it had been shipped through Amazon’s Fulfilled by Amazon service, which stores and ships merchandise for third-party retailers.

The decision involving Loomis’ exploding hoverboard takes that ruling a step further, holding Amazon liable even though it never stored nor shipped the hoverboard.

Both cases represent the first time consumers have been meaningfully successful in holding Amazon liable for dangerous third-party products sold on its platform, said Jeremy Robinson, a partner with the San Diego law firm CaseyGerry who argued the Bolger case and assisted with the Loomis suit.

Jeremy Robinson. (CaseyGerry Photo)

“Although they claim that they’re just sort of a hands-off platform that’s not really how they operate,” Robinson said of Amazon.

In many cases, he added, “they don’t even allow you to communicate with the actual third-party vendor or manufacturer. It’s all through Amazon.”

The rulings could potentially impact a huge chunk of Amazon’s business model. The company has millions of third-party sellers on its platform, and third-party sales make up about 55% of sales on Amazon, according to the market research site Statista. Revenue from third-party seller services hit $23.7 billion in the first quarter of this year, up 60% year-over-year.

Meanwhile, overall e-commerce has boomed during the COVID-19 pandemic, and Amazon has been the biggest beneficiary of that shift in consumer behavior. The company’s net sales increased 44% to 108.5 billion in this year’s first quarter compared to the same period last year.

Amazon faces a monumental task in policing all of those sellers to ensure they’re providing authentic and safe products, and the California rulings may bring new urgency to that effort.

E-commerce companies such as eBay and Etsy also will likely now find themselves exposed to additional liability.

Last month’s ruling (read in full below) also underscores a problem across the U.S.: Many consumer protection laws, which vary from state to state, were written long before e-commerce existed and are out of date. The Loomis and Bolger rulings are an example of courts grappling with and setting new precedent for rules to protect online shoppers.

“As Amazon’s (court) losses pile up, it becomes harder for Amazon to maintain it should be exempt from strict liability for defective products,” John Bair, a settlement consultant who has represented the families of airline crash victims and 9/11 victims, wrote earlier this month in a blog post. “Courts are coming to terms with Amazon’s role in product distribution and its responsibility for protecting consumers.”

Lawmakers are also trying to catch up. Last year, the California Legislature considered a bill that would hold e-commerce companies to the same standard as the Loomis ruling. Surprisingly, Amazon supported the legislation, which eventually died in the state Senate, while other e-commerce companies such as Google, Facebook, Etsy and eBay opposed it.

Why did Amazon support the legislation while simultaneously mounting vigorous defenses in the Loomis and Bolger cases? Two reasons, Robinson said: Amazon realizes courts and lawmakers are increasingly likely to hold it liable for third-party products, and the company, the world’s biggest online retailer, has enough cash to withstand liability claims while its competitors may not.

“I think Amazon sees this as a potential competitive advantage,” he said, “because they may actually have the infrastructure and the money to be able to deal with this type of liability where some of the other marketplaces don’t.”

In addition, much in the way Amazon fought paying state sales taxes for years then relented when it became clear it wasn’t going to prevail, Amazon now understands it won’t overcome consumer protection laws either, Robinson said.

“For one reason or another the states are going to catch up with them. So I think their position now is that they lean into that — they’re all for it … with the proviso that everyone gets held to the same standard,” Robinson said.

In what would amount to a sort of “hail mary” play, Robinson suggested, Amazon may take the Loomis case to the California Supreme Court.

“They don’t really have anything to lose at this point, so they may try it, just to see what happens,” he said. “But ultimately, I think they kind of understand that this is where things are headed. And they’re going to try to get out ahead of the curve and deal with it.”

Robinson said he wouldn’t be surprised if Amazon tightened its vetting process for third-party sellers, requiring additional proof that electronics meet consumer protection standards and taking extra measures to ensure those products are being sold by a legitimate business.

“Amazon is going to have to make a decision, because it’s probably true that they can’t vet every single seller and every single product on their website,” he said. “They may start vetting vendors a little more carefully.”

Amazon declined to comment specifically on the Loomis case, but a spokeswoman said the company “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.”

In contrast to its support for the now-dead California consumer protection legislation, Amazon has put up a tough fight in court when it comes to the matter. In the Loomis case, Amazon argued that it couldn’t be held liable because the faulty hoverboard was sold on its e-commerce platform by a third-party seller.

Amazon said it functioned much like a shopping mall, simply offering space for other retailers to sell their wares.

But in last month’s decision, the appellate court disagreed, saying Amazon was far more integral to the sale of the hoverboard than a typical neighborhood mall would have been. Amazon can be held liable, the court said, even though it never physically possessed or shipped the product.

“Amazon provides payment processing for all third-party sales,” reads the April 26 ruling. “It remits the purchase price of the third party seller on a set schedule minus any service fees it may charge. Amazon collects a ‘referral fee,’ a percentage of the sale price per item sold by the third-party seller, depending on the nature of the item sold.”

That, experts say, could impact e-commerce vendors far beyond the scope of Amazon alone, particularly those who make products available for sale on their platforms but never physically ship or handle the merchandise.

“This holding will have sweeping implications for other online marketplaces,” Bair wrote. “Most marketplaces do not offer a program similar to (Fulfilled by Amazon) and so could have argued Bolger was inapplicable to them because they never had possession of the product. It may or may not have worked, but Loomis eliminates that option entirely.”

Robinson said that means companies including eBay and Etsy could face new liability exposure based on the Loomis decision.

“These cases do have ramifications across the industry,” he said.

Here’s the most recent ruling on the Loomis case:

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