For all of Amazon’s technological innovations, the tech giant has also excelled at exploiting loopholes during its history. In its early years, that meant taking advantage of tax laws that allowed online retailers to avoid collecting, and thus charging, sales tax, which created a pricing advantage over traditional retail shops.
As a publicly traded company, Amazon convinced investors from early on to let it play by a unique set of rules: Reward us for revenue growth now and we promise the profits will follow at some point in the future.
But a significant one related to product liability may have just evaporated.
Much of Amazon’s retail success has been predicated on a structure where it acts as both a retailer that purchases and resells goods itself, as well as a marketplace that allows independent merchants to list items to be sold to Amazon customers. The marketplace model has been crucial to Amazon’s success, creating massive selection and price competition that now accounts for some 60% of all goods sold through the shopping site. Amazon also generated $140 billion in revenue in the form of fees from its marketplace sellers in 2023 alone.
That massive selection, however, has historically come with downsides that may include not as much vetting of a product as a traditional retailer might do. Case in point: The U.S. Consumer Product Safety Commission (CPSC) found a few years back that more than 400,000 items sold through Amazon’s third-party marketplace posed a significant product hazard, including faulty carbon monoxide detectors, hair dryers that lacked electrocution protection, and kids’ pajamas that did not meet federal flammability standards.
These items were offered by merchants through an Amazon program known as Fulfillment by Amazon, or FBA, whereby Amazon handles the storage, packing, shipping, and customer service for an order.
In the wake of that finding, Amazon did credit customer accounts and inform them that a product they bought “may” cause harm but, at the same time, the tech giant fought the commission’s claim that it was legally responsible for the recall of the items as a “distributor” of the goods. Instead, Amazon said it was acting solely as a logistics provider.
Today, however, the CPSC announced a unanimous ruling dismissing that argument, making Amazon legally responsible for product safety recalls as a “distributor” due to the holistic role it plays in the sale of goods through its FBA program.
The agency also ruled that Amazon downplayed the severity of the risks of these products in its communication to customers and should have to incentivize buyers to either return or dispose of the faulty products to avoid them being used.
In the short term, the ruling means that Amazon must now submit a proposal to the commission on how it will notify customers and the public about the product hazards, and to provide refunds or replacements for these products. The commission will then consider the plans and rule on them.
In the long term, however, such a ruling of Amazon as a “distributor” through its marketplace business could have a profound impact on how the tech giant expands and monitors the business.
Jason Del Rey
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