May 23, 2021

Supporting Liability for Online Marketplaces that Allow Third-Party Sellers to Offer Defective and or Counterfeit Products

With many consumers turning to more shopping online, what liability do online marketplaces face when a product is sold to a consumer by a third-party seller that is defective or counterfeit? Often, none.

Online marketplaces may escape liability for harmful or counterfeit products sold by third-party sellers if marketplaces are not considered the sellers of these products, but instead are the platform third-party sellers use to execute their sales. Online marketplaces’ liability hinges on status as a seller of a specific product because under § 402A of the Second Restatement of Torts marketplaces must be a “seller” of products to be held strictly liable. Failing to classify online marketplaces as sellers and allowing an avoidance of liability is crushing the ability for consumers to have effective means of recourse when they have purchased harmful products online, a fundamental component of consumer protection. It can be very challenging or even impossible for consumers to hold third-party sellers liable when bad-faith third-party sellers employ strategies to avoid detection. Counterfeiters operate several seller accounts so that if one account is identified and/or removed they simply create a new account. Third-party sellers are also often shielded from legal accountability because they are located outside of the United States and its jurisdiction. If unable to hold both the online marketplace or third-party seller accountable, a harmed consumer has no recourse available. This is a complete breakdown of consumer protection measures that are supposed to be ensured to consumers.

However, momentum is gaining to impose liability on online marketplaces for the defective or counterfeit goods sold by third-party sellers on their platforms. Decisions in state court actions as well as pending legislation may hold online marketplaces liable for defective and counterfeit products sold by third parties on their platforms.

State and federal courts nationwide are addressing the issue of whether online marketplaces can be held liable for defective or counterfeit products listed by third-party sellers. In Bolger v. Amazon.com, LLC (2020) 53 Cal.App.5th 431 a consumer in California brought suit against Amazon for severe burns suffered from a laptop battery that caught fire which had been purchased from a third-party seller on the Amazon platform.[1] The lower court granted Amazon’s motion for summary judgment on the basis that Amazon did not manufacture or sell the battery.[2] However, the California Court of Appeals reversed the decision and stated “whatever term we use to describe Amazon’s role, be it retailer, distributor, or merely facilitator, it was pivotal in bringing the product here to the consumer.”[3] Amazon’s appeal to the California Supreme Court was refused, creating a pathway for other state and federal decisions holding Amazon and other online marketplaces liable for defective products sold by third-party sellers on its platforms.[4]

The decision follows the logic that online marketplaces should not be shielded from liability if they are playing more than passive roles in the sales made by third-party sellers on their platforms. The Sixth Circuit considered similarly in Ohio State Univ. v. Redbubble, Inc., 989 F.3d 435 (6th Cir. 2021) “what level of involvement and control must a defendant exercise over the creation, manufacture, or sale of offending goods to be considered akin to a ‘seller’ or ‘manufacturer’ to whom Lanham Act liability applies?”[5] The court reasoned that Redbubble is more than a passive facilitator of sales that would normally avoid trademark liability under the Lanham Act because “although  Redbubble  utilizes  a  third-party  to  manufacture  goods  sold  on  its  site,  the degree  of  control  and  involvement  exercised  by  Redbubble  over  the  manufacturing,  quality control,  and  delivery  of  goods  to  consumers  is  relevant  to  an  assessment  of  whether  the offending  goods  can  fairly  be  tied  to  Redbubble  for  the  purpose  of  liability.”[6] The decision indicates that online retailers may be liable for trademark infringement even when they do not design or manufacture the products. On a spectrum, the more an online marketplace manages the marketplace, the greater the chance it may be found liable as a direct infringer.

Despite Amazon’s loss in California, Amazon has argued similarly in states across the country that it is merely a facilitator of sales for third-party sellers and not a seller itself. In Oberdorf v. Amazon.com Inc., 818 F. App’x 138, 143 (3d Cir.), certified question accepted, 237 A.3d 394 (Pa. 2020), the Pennsylvania Supreme Court agreed to consider whether Amazon could be held liable after the lower courts went back and forth on Amazon’s status as a seller regarding products on its platform listed by third-parties.[7] However, the case settled before the Pennsylvania Supreme Court had the chance to issue what could have been further precedent regarding the seller status of online marketplaces and the products of third-party sellers.[8] The Texas Supreme Court will have its chance to answer the question in McMillan v. Amazon.com, Inc., No. 20-20108, 2020 WL 7417454, (5th Cir. Dec. 18, 2020), certified question accepted (Jan. 8, 2021), resolving whether “Under Texas products-liability law, is Amazon a ‘seller’ of third-party products sold on Amazon’s website when Amazon does not hold title to the product but controls the process of the transaction and delivery through Amazon’s Fulfillment by Amazon program?”[9]

Court decisions cannot fully address the inadequate recourse consumers have when harmed by products bought on online marketplaces from third-party sellers. Outdated state product liability laws may limit the ability to hold online marketplaces liable. In Stiner v. Amazon, an 18-year-old died after ingesting a lethal dose of caffeine powder purchased from a third-party seller on Amazon.[10] The Ohio Supreme Court ruled that under Ohio’s Products Liability Act, Amazon could not be held liable because it did not meet the required definition of a “supplier” of the caffeine powder, leaving the victim’s family with no available recourse against Amazon[11] and little chance of recourse against the third-party seller considering the notorious difficulty in holding third-party sellers liable.

Ohio’s product liability laws were enacted in 1988, a pre-Internet age, when brick-and-mortar retail was the norm and e-commerce had yet to be invented,[12] and yet they dictate in Ohio whether e-commerce giants like Amazon can be liable for products sold on their platforms. States cannot protect consumers with product liability laws that were written without consideration of e-commerce.

State legislation is needed to update product liability frameworks that match consumer needs in an online world. California’s proposed Assembly Bill No. 1182, introduced on February 18, 2021, would impose strict liability on online retailers “to the same extent as a retailer would be liable for selling the defective product in the retailer’s physical store, regardless of whether the electronic place ever takes physical possession of, or title to, the defective product.”[13] Heighted scrutiny of state product liability laws will likely force states to follow California’s lead in introducing legislation that modernizes product liability laws to address inequitable liability between major e-commerce platforms and traditional brick-and-mortar retailers.

Threats to consumer safety from the sale of defective products likewise exist with the sale of counterfeit products. Like the defective laptop battery that caused severe burns in Bolger versus Amazon.com, counterfeit products including pharmaceuticals or cosmetics can impose serious harm to the health and safety of consumers. Many of these products do not go through proper safety testing leading to dangers like counterfeit prescription opioids being laced with fentanyl and counterfeit cosmetics containing arsenic, mercury, aluminum or lead.[14] The liability gap and ineffective available recourse regarding defective products exists also with the sale of counterfeits. Counterfeiters can employ the same tactics to avoid detection as sellers of defective products, and online marketplaces can escape liability for counterfeits sold by third-party sellers.[15] Courts and states should apply similar standards for defective and counterfeit products regarding how and when online marketplaces face liability for products sold on their platforms by third-party sellers since both kinds of products are producing similar harms.

Federal legislation is pending to address the liability gap for counterfeits sold on online marketplaces. The Stopping Harmful Offers on Platforms by Screening Against Fakes in E-Commerce Act, or the Shop Safe Act 2020, introduced on March 2, 2020, proposes to amend the Trademark Act of 1946 and establish contributory trademark liability for online marketplaces based on the sale of counterfeit products by third-party sellers that pose a risk to consumer health and safety.[16] To avoid liability, the bill would require marketplaces to demonstrate that they take measures including but not limited to: verifying the identity, principal place of business, and contact information of the seller; requiring the seller to verify and attest to the authenticity of goods; requiring the seller to agree not to use a counterfeit mark on the platform, and to consent to the jurisdiction of United States courts with respect to claims related to the platform; and implementing proactive technological measures for screening goods before displaying them to the public to prevent uses of counterfeit marks.[17] The Shop Safe Act of 2020 has bilateral support and hopefully will be reintroduced in Congress in 2021.

Additionally, the Integrity, Notification, and Fairness in Online Retail Marketplaces Consumers Act (INFORM Act) was reintroduced on March 23, 2021, in a bipartisan effort led by Senators Dick Durbin (D-IL) and Bill Cassidy (R-LA)[18] to provide consumers more transparency regarding third-party sellers on online marketplaces. Online marketplaces would be required to verify high-volume third-party sellers by acquiring the seller’s government ID, tax ID, bank account information, and contact information. The third-party sellers would also have to disclose to consumers basic information including the seller’s name, business address, email address, phone number. Authenticating third-party sellers with confirmed and traceable information should cut back the amount of counterfeit goods sold on online marketplaces. It also would provide stronger consumer protection measures because harmed consumers will be able to identify and track down third-party sellers using the required confirmed seller information, as opposed to current conditions where third-party sellers can delete their profiles and disappear.

Major online marketplaces are pushing back. Ebay, Estsy, Mercari, OfferUp, and Poshmark formed the Coalition to Protect America’s Small Sellers, or PASS Coalition, to in part advocate specifically against the INFORM Act.[19] The coalition claims that “requiring the disclosure of personally identifiable information of individual sellers could have potentially unintended and dangerous consequences for sellers, especially minority- and women-owned businesses.”[20] A one size fits all disclosure requirement favors big-box retailers who have a local store or an established e-commerce presence, and harms the small sellers who have thrived developing their online business.”[21] However, the INFORM Act does not have a one size fits all disclosure requirement. Clear exceptions are made when sellers do not have business addresses or phone numbers. Sellers are not required to disclose their personal addresses or phone numbers in those cases.[22]

Additionally, the PASS Coalition claims that “targeting third-party online micro businesses and small sellers needlessly discriminates against legitimate activities and favors big box retailers.” It erroneously claims that the INFORM Act would stifle online sales because of a blanket requirement that sellers listing individual items must provide extensive personal information to a platform before listing these items for sale. However, sellers will not be deterred from listing their items because the PASS Coalition’s interpretation of the INFORM Act’s requirements is misguided. The INFORM Act’s proposals calls for the disclosure of verified information specifically from high-volume third-party sellers, not micro businesses or small sellers.

Public support to impose liability on giant online marketplaces for harmful products sold by third-party sellers on their platforms continues to grow despite public campaigns like the PASS Coalition’s attempts to mischaracterize legislation like the INFORM Act. Between evolving caselaw and state and federal legislation, consumers and intellectual property owners may gain the ability to hold online marketplaces liable for sales of defective or counterfeit products by third-party sellers on their platforms.

[1] Bolger v. Amazon.com, LLC (2020) 53 Cal.App.5th 431, 437.

[2] Id.

[3] Bolger v. Amazon.com, LLC 431, 438.

[4] Review denied (Nov. 18, 2020).

[5] Ohio State Univ. v. Redbubble, Inc., 989 F.3d 435, 447 (6th Cir. 2021).

[6] Ohio State Univ. v. Redbubble, Inc., 989 F.3d 435, 448.

[7] See Oberdorf v. Amazon.com Inc., 818 F. App’x 138, 143 (3d Cir.), certified question accepted, 237 A.3d 394 (Pa. 2020).

[8] Oberdorf v. Amazon.com Inc., 818 F. App’x 138, 143 (3d Cir.) dismissed per stipulation. Available at https://static.reuters.com/resources/media/editorial/20200924/oberdorfvamazon–settlement.pdf.

[9] McMillan v. Amazon.com, Inc., No. 20-20108, 2020 WL 7417454, (5th Cir. Dec. 18, 2020), certified question accepted (Jan. 8, 2021).

[10] Stiner v. Amazon.com, Inc., Slip Opinion No. 2020-Ohio-4632 ¶ 2.

[11] Stiner v. Amazon.com, Inc., ¶ 30.

[12] Stiner v. Amazon.com, Inc., ¶ 33-34.

[13] A.B. 1182 2021-2022 Reg. Sess. (Cal. 2021). Text available at https://leginfo.legislature.ca.gov/faces/billVersionsCompareClient.xhtml?bill_id=202120220AB1182.

[14] See U.S. Dept. of Homeland Security, Combating Trafficking in Counterfeit and Pirated Goods (Jan. 24, 2020), available at https://www.dhs.gov/sites/default/files/publications/20_0124_plcy_counterfeit-pirated-goods-report_01.pdf.

[15] Holding a platform liable for contributory trademark infringement is a possibility, but a harmed consumer has the difficult bar of showing that the platform had both knowledge about particular infringing items on its site and subsequently refused to act on that knowledge. See Tiffany Inc. v. eBay Inc., 600 F.3d 93, 107 (2d Cir. 2010)

[16] Press Release, U.S. House Committee on the Judiciary, Nadler, Collins, Johnson & Roby Introduce Bipartisan SHOP SAFE Act to Protect Consumers and Businesses from the Sale of Dangerous Counterfeit Products Online (Mar. 2, 2020), https://judiciary.house.gov/news/documentsingle.aspx?DocumentID=2838

[17] A complete list of requirements can be found in the full bill text here.

[18] Durbin, Cassidy, Grassley, Hirono, Coons, Tillis Introduce Bill to Ensure Greater Transparency for Third-Party Sellers of Consumer Products Online, Mar. 23, 2021.

https://www.judiciary.senate.gov/press/dem/releases/durbin-cassidy-grassley-hirono-coons-tillis-introduce-bill-to-ensure-greater-transparency-for-third-party-sellers-of-consumer-products-online.

[19] Inform Act, Protect Small Sellers, protectsmallsellers.org, http://www.protectsmallsellers.org/inform-act.html (last visited Apr. 30, 2021).

[20] Id.

[21] About, Protect Small Sellers, protectsmallsellers.org, http://www.protectsmallsellers.org/ (last visited Apr. 30, 2021).

[22] Durbin, Cassidy, Grassley, Hirono, Coons, Tillis Introduce Bill to Ensure Greater Transparency for Third-Party Sellers of Consumer Products Online, Senate Judiciary.


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