This is another of my overly long fearful contributions to the death of Section 230. Today's fear revolves around the liability regime for online marketplace transactions, the inevitable demise of online marketplaces, and how we all get poorer in this case.
The Bolger Decision
The impetus for this blog post comes from last month's judgment in the Bolger v.Amazon appeals court in California. In this case, it is an exploding battery that is being sold by a non-suing vendor on the Amazon Marketplace. In the lower court, Amazon won on grounds of § 230. In the appeal proceedings, the court declares that Amazon is strictly liable for sales on the marketplace. The court offers this overview:
Amazon has placed itself in the sales chain of the product in question between Lenoge and Bolger. Amazon accepted ownership of the Lenoge product, stored it in an Amazon warehouse, pulled Bolger to the Amazon website, provided her with a product list for Lenoge's product, received payment for the product, and shipped the product in Amazon packaging she. Amazon set the terms of its relationship with Lenoge, controlled the terms of Lenoge's offer to sell on Amazon, restricted Lenoge from accessing Amazon's customer information, forced Lenoge to communicate with customers through Amazon, and demanded compensation and substantial fees for every purchase. Whichever term we use to describe the role of Amazon, be it "retailer", "distributor" or just "intermediary", it was crucial in getting the product here to the consumer …
Amazon is the only member of the company adequately available to an injured consumer in some instances. It makes a significant contribution to ensuring that the products listed on its website are safe and can and puts pressure on upstream distributors (such as Lenoge) to increase security and it has the ability to adjust liability costs between itself and its third party suppliers. Under the established principles of strict liability, Amazon should be held liable if a product sold through its website is found to be defective.
It is fair to say that the opinion author, Judge Patricia Guerrero, was not interested in what Amazon said. Every argument from Amazon was quickly put down. The opinion is razor-sharp and 100% hostile to Amazon's business model.
The court gives more detailed information about how Amazon's behavior triggered strict liability:
Amazon created the environment (its website) that enables Lenoge to offer the replacement battery for sale. Amazon attracted customers through its own activities, including its direct sales offerings and its Amazon Prime membership program, which includes benefits for some third-party products (including the Lenoge replacement battery at issue here). Amazon set the terms for Lenoge's participation and requested fees in exchange for Lenoge's participation. Amazon asked Lenoge to provide compensation and, assuming Lenoge reached the sales threshold, to take out general liability insurance with Amazon listed as an additional named insured. Because Lenoge participated in the FBA program, Amazon accepted ownership of Lenoge's products, registered them in its inventory system, and stored them in an Amazon warehouse waiting to be sold. Amazon created the format for Lenoge's offer to sell and allowed Lenoge to use a fictional name in its product list. The listing itself complies with the requirements set by Amazon. Even if the use of a fictional name is not taken into account, the listing does not conspicuously inform the consumer about the identity of the third party seller or the nature of Amazon's relationship with the sale.
To buy the product, the consumer adds it to their Amazon cart, not their Lenoge or E-Life cart. The consumer pays Amazon for the product, not Lenoge or E-Life. As part of the FBA program, Amazon employees pick up the product from its place in an Amazon warehouse and ship it to the consumer in Amazon packaging. If necessary, Amazon ships the product together with products that are sold by other third-party providers or by Amazon itself.
Lenoge is not involved in the sales transaction. The sale will not be approved until it is completed. It may not even know a sale has taken place until it receives a report from Amazon. It is not paid until Amazon has transferred the proceeds. The use of customer or transaction information, if received at all by Amazon, is strictly limited. However, it takes on the burden of significant fees for Amazon's participation, around 40 percent here.
When a customer wants to return the product, they send it back to Amazon under the FBA program. Amazon employees check the product, determine whether it can be resold and, if necessary, return it to the inventory of the Amazon warehouse. Third-party providers such as Lenoge are prohibited from communicating with Amazon customers, except via the Amazon website, on which such interactions are anonymized.
The court articulates the political considerations that support strict liability:
- "Amazon, like traditional retailers, may be the only member of the distribution chain adequately available to an injured plaintiff purchasing a product on its website."
- "Amazon, like traditional retailers, can play an essential role in ensuring the safety of the product or be able to put pressure on the manufacturer to do so. The retailer's strict liability thus serves as an additional incentive to ensure safety." "
- The court set the example of how Amazon is now demanding UL certification for replacement batteries.
- Amazon offers an implicit representation of security. The statement quoted a deposed Amazon employee who said, "Amazon is doing everything in its power and goes above and beyond to ensure we deliver the best customer experience, including safe products." And I want that for all of our customers and for myself when I buy from Amazon. I hope people believe that. ”Such things hurt my head because the court seems to be implying that Amazon could avoid liability by taking fewer steps to protect consumer safety.
- "Amazon, like traditional retailers, has the ability to adjust the cost of injured claimants' compensation between itself and the third-party sellers over the course of their ongoing relationship."
Amazon cited dictionary definitions of "seller". The court was at a loss: "The California strict liability doctrine was supposed to eliminate such technical problems and compensate plaintiffs for injuries caused by defective products." The court acknowledges the extensive precedent in this area, but says much of it is factually or legally distinct. In particular, the court says that cases that do not involve FBA (Fulfilled by Amazon) can be objectively differentiated.
Amazon argued that it didn't choose to put the battery up for sale. This argument goes bad too:
Amazon has decided to offer the Lenoge replacement battery for sale. Amazon is not just a bystander of the vast digital and physical devices that it develops and controls. Aside from Amazon's own decisions, Lenoge had to put its product up for sale, store Lenoge's product in its warehouse, accept Bolger's order, or ship the product to her. It made these decisions for its own commercial purposes. It should share in the consequences.
A variation on the maxim “You make your bed, you lie in it”, I think.
Amazon argued it was like an auctioneer, but the court says this would only help with selling used goods, and auctioneers are less involved in product sales than Amazon.
The court has some discussion about who will pay the liability costs. The court says Amazon may vary its fees to merchants to allocate costs or "limit the sale of products that pose an economically unreasonable risk of injury".
The court says section 230 does not apply to no-fault liability claims. (Quoted from Erie, State Farm). The court declares:
Bolger's claims do not require a court to treat Amazon as the spokesperson or editor of content provided by Lenoge. The content of the product list is not determinative and does not have to be assigned to Amazon to support strict liability. Instead, Amazon's own involvement in the distribution of an allegedly defective product supports strict liability for the reasons already discussed. The fact that some content provided by Lenoge has been published on the Amazon website does not automatically immunize Amazon for its own decisions and activities regardless of that content.
How will Amazon react?
I expect Amazon will appeal the ruling to the California Supreme Court.
The trillion dollar question is what changes, if any, Amazon could make to change the outcome of the court case. For example, the court repeatedly pounded on the Fulfilled by Amazon (FBA) feature, saying that non-FBA jurisdiction was factually distinguishable. If Amazon eliminated the FBA, would a court get a different outcome? It's hard to tell as the opinion was hostile to so many other aspects of Amazon's business.
Is that really a good result? FBA has great benefits for consumers, including reduced shipping costs and speed. If Amazon turns off FBA and this avoids strict liability, Amazon will return liability to the status quo, but Amazon will make less money and consumers will get poorer service. (It's not clear to me whether or not providers benefit from this under these circumstances.) Yay?
Alternatively, Amazon could continue to offer FBA because it knows it has strict liability for those sales, but the FBA only limits it to trusted vendors who can get adequate liability insurance (or sell items where there is little risk of no-fault liability). In this scenario, Amazon would force all other retailers out of the FBA or possibly out of the market. This policy choice would reward large established businesses and harm startups and small businesses, and it would continue to decrease consumer choice and increase consumer prices. Yay?
Exiting the FBA may not be enough to remove no-fault liability. Amazon may need to conduct more radical operations across its entire market, with effect unknown. I suspect Amazon is wargaming scenarios as we speak. If opinion does more than just rule the FBA, then it is almost certain to be picking up other competitors in the Amazon market, including the competitive offering from Walmart. It is likely that this opinion will have an impact on the entire online marketplace industry.
Bolger's statement reads: "Amazon initially claims that the legislature, and not this court, is the appropriate forum for examining whether these guidelines are being applied in new contexts." This was no idle speculation; At that moment, the California legislature was working on the issue.
That year, the California Assembly and Justice Committee of the California Senate passed AB 3262, which would have largely codified the Bolger ruling. The main billing stipulation read:
An electronic retail marketplace is strictly liable for all damage caused by defective product that is placed in the flow of trade to the same extent that a retailer of that defective product is liable and is considered a retailer for the purposes of the California strict liability law
The exclusions included prominently labeled second-hand goods, small-volume hand-made goods, situations where the market did not receive any financial advantage (direct or indirect) (this sounds like a contradiction, no, how could a market not make money and still function?) And auctioned Were – unless in one of those cases the introduction of strict liability would advance strict liability policy goals (in other words, plaintiffs would be asked to sue the political merits of the exclusions each time).
An electronic retail market was defined as “an electronic place or Internet website that, in this state, operates the placement or facilitation of the placement of products in the flow of trade in that state, regardless of whether the vendor, product or marketplace has one physical presence in the state or whether … the electronic retail market ever physically takes possession of the product. “(The" supporting "language was added late). That of course seduces every online retailer, but what does it mean to "facilitate" the sale of products? Presumably this would cover Amazon's marketplace, but it seems like this would cover all other marketplaces like eBay and Etsy as well. While not intended, I wonder if "moderation language" would reach other advertising locations – say, Craigslist? Or frankly a website that accepts ads for goods? The bill said that advertising was not a direct benefit, but that language was hit. As a result, the undefined term "relief" was the linchpin of the bill, but I have no idea what that meant.
The word "relief" also raised questions about Section 230, including an interesting and annoying question of whether a state legislature can revise Section 230 by simply creating a tort with strict liability. (This also raises questions about the first change, especially as they hit ad locations). On the other hand, the HomeAway 9th Circuit ruling essentially opened the door for lawmakers to do what they wanted without having to worry about Section 230, as long as they regulated completed transactions. This means that state legislative floodgates are open to proposals like AB3262 that can proceed without inhibition because of Section 230, and the inevitable tide is guaranteed to flood the industry.
Here's the twist: Amazon was initially against the bill, but it turned when the bill expanded to cover their competitors. Of course it did. Amazon assumed that (1) the Bolger case already put him in an undesirable position, and (2) he could accept the financial consequences, but only if his competitors were bearing the same costs, even if they had less money. Hey lawmakers, if an incumbent supports your bill, but only if the law applies to their competitors, there's a pretty good chance you're pushing a law that hinders competition. They are being played.
Despite the early positive votes, AB3262 died when the sponsor failed to advance the bill (I was told this was due to the lack of supportive votes) before the legislature ended. However, I expect it will be reintroduced next year. and if Bolger continues to be good law, Amazon will re-adopt the proposal for the same reasons it was flipped this year.
The future of online marketplaces
The (temporary) demise of AB 3262 does not change the forecast for online marketplaces. The courts will continue to impose strict liability, saying that section 230 does not apply. State legislators will take up this issue again. Congress is interested in the subject, including the introduction of market regulation bills such as the INFORM Consumers Act and the SHOP SAFE Act. Even if Congress does not pass market reforms this year, the topic will reappear in Congress in 2021.
Most of these judicial and legislative reform efforts have been successful without changes to Section 230. In other words, Section 230 is not a barrier to liability even today. Because of this, I am at a loss over any proposals to amend Section 230 to eliminate market activity. We're already there, and changing Section 230 to this end would take zero pressure from other Section 230 reforms.
I'm afraid we won't like the ramifications of moving to an internet with strict liability for market transactions (and an outstanding section 230). First, in my WSJ editorial earlier this year, I explained why strict liability for online marketplace transactions hurts everyone. Ironically, it's likely that strict liability will help Amazon consolidate even more market control through its direct retail function, although that will certainly reduce Amazon's revenue and market cap. Is this really the result that consumer advocates want?
Second, online marketplaces are one of the most amazing achievements of the internet – there is literally no offline equivalent that complete strangers are so comfortable with that they can blindly do business without doing mutual research. This prerequisite has unlocked hundreds of billions of dollars of wealth in our society (both producer and consumer surplus). These days we just expect that we can find just about any product we could ever want with minimal search costs, and that there are likely multiple vendors competing with each other to bring that price down. In a pandemic era where access to goods from physical space has become more difficult, not easier, and online marketplaces have been a major channel in bridging that void, this is what lawmakers are currently trying to burn down ???
Case quote: Bolger v. Amazon.com, Inc., 2020 WL 4692387 (Cal. App. Ct. August 13, 2020)