October 01, 2019

Recent Court Opinions Signal Potential Expansion of Online Marketplace Liability

An opinion from the District of Arizona on Friday, September 27, 2019, highlights the divide created by a pair of recent opinions from the 3rd and 6th Circuit Courts of Appeals. The two opinions, issued days apart, suggest that e-commerce intermediaries like Amazon and eBay may now be held liable for defective products sold through their websites. On Friday, however, the District of Arizona reiterated the prior interpretation of the term “seller,” holding Amazon was not subject to strict liability under Arizona law.

Traditionally, a company must exercise a degree of control over a product to be labeled a “seller” of that product and potentially liable under a product liability theory. As a result, Amazon and companies like it have not been held liable for third parties’ allegedly defective products sold through their website because they do not exercise sufficient control over third parties’ products to be deemed “sellers;” they merely provide a marketplace on which other companies can sell their goods and services.

In Oberdorf v. Amazon.com Inc., however, the 3rd Circuit effectively removed “control” as a requisite to status as a “seller,” holding that Amazon is categorically a “seller” under Pennsylvania law. There, the plaintiff sued Amazon under Pennsylvania law based on strict products liability (failure to warn and design defect), negligence based on a variety of theories, breach of warranty, misrepresentation and loss of consortium. The Middle District of Pennsylvania held that Amazon was entitled to summary judgment because it was not a “seller” and that the plaintiff’s claims were barred by the Communications Decency Act. The 3rd Circuit reversed, holding Amazon is categorically a “seller” within the meaning of Pennsylvania law. In doing so, the court rejected the rationale of numerous cases holding that Amazon did not exert control over the products at issue and, as a result, is not a “seller” that is subject to strict liability for defective products sold on its site. Last month, the 3rd Circuit agreed to an en banc rehearing of this decision.

In Fox v. Amazon.com, Inc., the 6th Circuit left intact some established limits – i.e. control – on whether online marketplaces may be considered “sellers,” but found a different way to impose liability on such companies. There, the plaintiffs sued Amazon under Tennessee law for damages from a defective hoverboard which exploded and caught on fire, sold by vendors through Amazon’s online marketplace. The suit was based on the Tennessee Product Liability Act, breach of duty to warn plaintiff (based on Tennessee common law) and the Tennessee Consumer Protection Act. The Middle District of Tennessee held that Amazon was entitled to summary judgment on all claims. The 6th Circuit affirmed summary judgment as to the strict liability claims, finding that Amazon was not a “seller,” but reversed as to the plaintiffs’ negligent failure to warn claim, finding that Amazon assumed a duty to warn when it sent an email regarding safety issues to customers who had purchased hoverboards through its website. The implication from this decision is that if Amazon had merely stayed silent and not provided any warning to customers, the plaintiffs’ negligent failure to warn claim would not be viable.

On Friday, in State Farm Fire and Casualty Co. v. Amazon.com Inc., the District of Arizona granted summary judgment in favor of Amazon, holding it was not a “seller” of the product. State Farm, like Fox, involved the sale of a third party’s hoverboards. While one of the hoverboards charged, it “burst into flame,” and set fire in a home. The court noted that “even entities in the chain of distribution who are better situated to bear the risks and costs of defective products are not strictly liable unless they participate significantly in the stream of commerce.” The court analyzed seven factors to determine whether Amazon participated significantly in the stream of commerce, several of which focus on the level of control a potential “seller” has. In this case, the court found that Amazon did not exert the requisite amount of control over the product to be a “seller.” Interestingly, to reach this conclusion, the court cited Fox.

Fox and Oberdorf, while inconsistent, both represent a departure from existing jurisprudence and an expansion of potential liability for online marketplaces. The considerations businesses need to be aware of in light of the uncertainty these opinions create are highlighted by Friday’s State Farm opinion. As a result of these cases, online marketplaces should:

  1. (1) Consider reviewing the “control” they exert over the product of third parties;
  2. (2) Continue to be vigilant in screening their communications with customers about perceived safety issues with products sold through their marketplaces; and, most importantly;
  3. (3) Continue to monitor the law as it develops.

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