As consumers increasingly turn to online marketplaces for their shopping needs, the extent to which those marketplaces can be held liable for products sold by third parties on their platforms could affect the e-commerce landscape. With respect to liability for intellectual property infringements by third-party sellers, there is a wealth of case and statutory law to provide guidance for the operation of online marketplaces, but products liability cases present somewhat murkier territory. Prior to 2019, courts around the country consistently held that e-commerce platforms were not liable for injuries caused by products sold on their platforms, finding them to be mere facilitators of third-party transactions. More recently, however, their potential liability is less clear. This article examines this shift in order to provide guidance as to how companies may be able to limit future potential liability.

The Prior Liability Landscape

Consumers have long been able to hold those in the supply chain, including sellers, liable for injuries incurred due to defective products. See MacPherson v. Buick Motor Co., 217 N.Y. 382, 389-90 (1916); Restatement (Second) of Torts, Section 402A. But earlier cases largely did not address whether e-commerce platforms—which host product listings by third parties—could be held liable as sellers or some other part of the supply chain. Up until early 2019, the limited jurisprudence unanimously held that online marketplaces such as Amazon and eBay, much like shopping malls renting space to retailers, likely could not be held liable for injuries caused by products sold by third-party vendors on their platforms. See, e.g., Carpenter v. Amazon.com, 17-cv-03221, 2019 WL 1259158, at *5 (N.D. Cal. March 19, 2019) (holding that Amazon’s conduct was not a “necessary factor” in bringing defective hoverboards to consumers because the market would have otherwise existed); Eberhart v. Amazon.com, 325 F. Supp. 3d 393, 398 (S.D.N.Y. 2018) (holding that Amazon was not within the coffeemaker’s chain of distribution as it did not take title to the defective product).

Recent Developments

As consumers have expanded their reliance on e-commerce platforms both for everyday and extraordinary purchases, courts have increased their focus on where the products are purchased, consumers’ reliance on the platform’s name, and the considerable profits platforms generate from these sales. In the last two years, several courts have held that e-commerce platforms could be liable under products liability theories. Recent rulings on liability for defective products sold by third parties on e-commerce platforms ranging from exploding batteries to defective thermostats provide some guidance on what those platforms can expect going forward.

In some states, including California, courts have examined whether the e-commerce platform can be considered a key part of the supply chain or whether it was integral to the sale of the defective product when imposing products liability. For example, in August 2020, a California state appellate court reversed a lower court decision that had held that Amazon was not liable for an exploding battery because Amazon was merely an “online marketplace” that “did not distribute, manufacture, or sell the product in question.” Bolger v. Amazon.com, 267 Cal. Rptr. 3d 601, 604 (Cal. Ct. App. 2020). The appellate court ruled that Amazon was “pivotal in bringing the product here to the consumer,” citing Amazon’s possession and storage of the products, registration of the products in its system, packing and shipping of the products in Amazon-branded packaging. Id. at 604-05. The court also noted that Amazon’s business model encouraged consumers to interact directly with Amazon rather than the third-party sellers: consumers place the product in an Amazon “cart,” Amazon manages the sales transaction, and Amazon processes any returns. Id. at 616. In evaluating public policy arguments, the court recognized that California law is not limited to holding “sellers” liable for product defects, and the California “doctrine of strict liability … cut[s] through such technicalities to compensate plaintiffs for injuries caused by defective products.” Id. at 619. The court expressed concern that consumers might have difficulty recovering from overseas or unknown third parties, whereas Amazon is readily identifiable and could compensate consumers for their injuries, especially since the Amazon name creates an “implied representation of safety” and Amazon can adjust its pricing to account for this liability. Id. at 617-18. Based on these facts, the court found that Amazon “was a link in the chain of product distribution” and overturned the trial court’s decision, holding that Amazon could be held liable for the exploding battery. Id. at 615, 625.

Other states, including New York, generally hold an entity liable for products liability only if that entity qualifies as a “seller” in the transaction. In December 2020, a New York Supreme Court found that Amazon exercised sufficient control over a thermostat, which allegedly caused a house fire, to be considered a “seller”—even if it did not take title—because it had the power to refuse product registration, process customer returns, and prepare products for shipment, all while taking a cut of the profits and shipping the product in Amazon-branded packaging. See State Farm Fire & Cas. Co. v. Amazon.com Servs., 137 N.Y.S.3d 884, 887-88 (N.Y. Sup. Ct. 2020). The court remarked that “Amazon seeks to have all the benefits of the traditional brick and mortar storefront without any of the responsibilities.” Id. at 889.

Similarly, the Third Circuit, applying Pennsylvania law, initially held that Amazon was a “seller” for the purpose of products liability, citing Amazon’s role as the primary contact for consumers, its ability to exert pressure on third-party vendors, its ability to stem the circulation of defective products, and its better position to allocate costs. See Oberdorf v. Amazon.com, 930 F.3d 136, 147-48 (3d Cir. 2019). Subsequently, however, sitting en banc, the Third Circuit certified this question to the Pennsylvania Supreme Court; the case settled before it was answered. See Oberdorf v. Amazon.com, 818 F. App’x. 138, 139 (3d Cir. 2020). Citing to the initial Oberdorf decision, a court applying Wisconsin law also held that Amazon bore responsibility for placing a defective product into commerce and that Amazon was well-positioned to allocate risk. See State Farm Fire & Cas. Co. v. Amazon.com, 390 F. Supp. 3d 964, 973 (W.D. Wis. 2019). And a district court applying New Jersey law also found that Amazon was a “seller” because its relationship with third-party sellers and the structure of its online marketplace supported a finding that Amazon controlled the product. See Papataros v. Amazon.com, 17-9836, 2019 WL 4011502, at *17 (D.N.J. Aug. 26, 2019), order stayed, 2:17-cv-9836, 2019 WL 4740669 (D.N.J. Sept. 3, 2019).

But not all courts have shifted to holding e-commerce platforms liable for defective products sold by third parties. For example, the Ninth Circuit (applying Arizona law) recently held that Amazon was not liable for a hoverboard sold on its platform that caught fire because it was not an “integral part of [the] enterprise,” but rather was more akin to a shipper like the U.S. Postal Service and lacked control or influence over the product. See State Farm Fire & Cas. Co. v. Amazon.com, 835 F. App’x. 213, 216 (9th Cir. 2020). A recent case applying Illinois law also held that a products liability claim could not stand where the e-commerce platform never took possession of the item; the lodestar is “exercising control over the product, not over the purchasing process.” Great N. Ins. Co. v. Amazon.com, 19-c-684, 2021 WL 872949, at *4 (N.D. Ill. March 9, 2021).

Takeaways for Online Marketplaces

Although the laws regarding products liability are fairly consistent from state to state, courts have reached different conclusions with respect to whether e-commerce platforms should be held liable for defective products sold by third parties on their sites. E-commerce platforms, which generally expect (or at least hope) to sell products from their site in every state, should assume that any litigation will be brought in the states with the least favorable jurisprudence. With that in mind, the following strategies, if implemented, could mitigate the risk of being treated as a “seller” or an integral part of the commerce chain:

• Have third-party sellers retain title to their products;
• Clarify on the package and receipt who actually sold the product;
• Clearly and prominently state the actual seller’s name on the platform;
• Have third-party sellers ship their products directly to consumers;
• Avoid having employees inspect the products or providing a warranty regarding the products’ quality;
• Have third-party sellers pay for storage space in the platform’s warehouse;
• Limit employees’ involvement in the packing and shipping of third-party products;
• Give third parties a larger role in the management of product returns;
• Only answer customer questions regarding delivery and not the products; and
• Have third parties pay a fulfillment fee that is not tied to the sale of the product.

In short, the more e-commerce platforms can demonstrate the relationships with third-party sellers on its site to be at arm’s length, the better they can reduce the chance of later being held liable for any product defects.

Reprinted with permission from the May 14, 2021 edition of the NEW YORK LAW JOURNAL © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - reprints@alm.com