April 10, 2020

Amazon Sellers Face Unique Legal Challenges in 2020

Patrick McKnight

In a span of only 20 years, Amazon revolutionized the global retail marketplace. The e-commerce giant is now the undisputed leader in the online sale of physical products. Yet perhaps due to its unprecedented and meteoric growth, many fundamental legal questions about the Amazon platform remain answered. For example, Amazon sometimes characterizes itself as a neutral “marketplace” in order to minimize regulatory compliance and product liability. At other times, Amazon operates as a seller and limits third-party access to customer data.

One of the most underappreciated engines behind Amazon’s remarkable growth is the entrepreneurialism of third-party sellers.

One of the most underappreciated engines behind Amazon’s remarkable growth is the entrepreneurialism of third-party sellers.

Sladic/E+ via Getty Images

One of the most underappreciated engines behind Amazon’s remarkable growth is the entrepreneurialism of third-party sellers. According to Amazon, third-party sellers are “independent sellers who offer a variety of new, used, refurbished, and collectible merchandise.” While much of the media’s attention focuses on flashy technology like drones and autonomous delivery systems, these headlines overlook a more complex legal relationship.

The Growth of Third-Party Sellers

Amazon recently achieved a $1 trillion market cap. Sales on Amazon now account for 49% of the United States e-commerce market and 5% of total retail sales. Nearly 100 million Americans are Amazon Prime members.

Amazon CEO Jeff Bezos underscored the importance of third-party sellers in his April 11, 2019 8-K letter to shareholders. Bezos describes the steady growth of third-party sellers as “strange and remarkable,” rising from just 3% in 1999 to 58% of physical gross sales in 2018. Bezos summed up the trend by saying, “Third-party sellers are kicking our first party butt. Badly.” Amazon reports 140,000 U.S. Amazon sellers are generating over $100,000 in annual sales. Amazon charges $39.99 a month for professional seller accounts and a referral fee of about 15% on every sale.

Although consumers may colloquially refer to “buying things from Amazon,” when it comes to third-party sales, it would be more accurate to speak of making purchases “on Amazon” from independent retailers. While business journalists continue to blame e-commerce for a “retail apocalypse” and the decline of local mom and pop stores, less attention has been paid to the incredible growth of independent online sellers.

Effective advertising is crucial for sellers to generate sales. Amazon Pay Per Click (“PPC”) advertising remains less sophisticated than Google Adwords, but this also makes it comparatively easier to use. Average advertising costs are rising in step with the increased competition on the platform.

 Freight by Amazon “FBA” allows third-party sellers to provide delivery to customers within two days. The program has been wildly popular and major driver of Amazon’s growth. Amazon charges sellers FBA fees based on the size, weight, and the length of time products are stored in Amazon’s warehouses.

Recently, many third-party sellers have begun to explore diversifying their business models. Constant apprehension about account suspensions and listing hijackings motivates many sellers to establish a presence off the Amazon platform. For many sellers, creating a Shopify store allows greater access to valuable customer data and more consistent cash flow.

Third-party sellers face numerous legal issues in 2020. Many of them are relatively new and specific to conducting business in cyberspace. 

Sales Tax

For years, third-party sellers were caught in the legal crossfire between Amazon and state taxing authorities. The recent trend is for Amazon to collect sales tax, a fundamental shift from only a few years ago. Previously many states aggressively pursued third-party sellers for future sales and use taxes and created “amnesty programs” which required participation in order to avoid paying back taxes.

Anti-Trust Concerns

Amazon remains the subject of congressional scrutiny for potential anti-trust violations. For sellers, some of the most important concerns include advertising, buy box eligibility, and access to consumer and manufacturer information.

Amazon sellers are essentially blocked from competing if they fail to “win the buy box.” The buy box allows consumers to purchase products with one click. Like many aspects of Amazon’s procedures, the exact requirements to become buy box eligible remain a mystery. Listings sometimes lose the buy box for seemingly inexplicable reasons. Several factors appear determinative, with FBA eligibility being particularly important. Another factor seems to be running advertising, a practice some sellers have questioned as a potential anti-trust concern inconsistent with the Amazon’s marketplace model.

Product reviews are likely the most important predictor of a product listing’s conversion rate. As a result, review manipulation has become a concern for the FTC. Responding to similar concerns, Amazon significantly changed its product review policy in October 2016. Under the new regime incentivized reviews are prohibited. Amazon also restricts the volume of unverified reviews a product may receive. Existing reviews were grandfathered in, leaving newer sellers at a relative disadvantage as they struggle to catch up.

One of Amazon’s most valuable assets is data on sales, customers, advertising research, and manufacturers. For example, a seller may invest thousands of dollars researching the best keywords to advertise a product. There appears to be nothing preventing Amazon from taking the seller’s data and competing with them directly. Amazon already uses its “Basics” brand to compete for sales with third-party sellers. Many sellers view this playing field as anything but even.

Mistrust was exacerbated last summer when a video surfaced of Amazon intercepting shoppers from a third-party seller’s paid advertisement and redirecting them to their own Amazon-branded product. Although an isolated incident, the episode and subsequent reaction highlighted the tension between Amazon and many third-party sellers.

Amazon Account Suspensions

Many of Amazon’s Terms of Service are notoriously vague. For many sellers, Amazon remains a black box. Enforcement often seems inconsistent and unpredictable. The first sign of a problem can be a suspended account. Communication with Amazon is difficult and sellers must submit a Plan of Action to be reinstated. For sellers dependent on Amazon for their revenue, this can be a massive interruption to their business.

Intellectual Property

Amazon recently launched a new “IP Accelerator” program. Amazon requires sellers to acquire trademark protection before admission into its Brand Registry program. The program unlocks many important tools for sellers including enhanced brand content, advertising options, and IP enforcement.

Listing Hijacking

This is one of the most common problems for private label sellers. Unlike sellers working within the retail arbitrage business model, private label sellers thrive by selling unique products. These “mini-brands” depend on owning their own listing and buy box.

A problem arises when Amazon doesn’t place obstacles between these sellers and unscrupulous rivals “hijacking” their listings. When this occurs, private label sellers not only lose sales but stand to lose their hard-earned ratings and reviews after rivals deliver inferior products. The only recourse available to private label sellers is filing a grievance with the Amazon Seller Performance Team.

Product Liability

Oberdorf v. Amazon could be a game-changer for Amazon’s product liability. The 2019 case out of the Third Circuit was the first time a court said Amazon could be held responsible for a defective product sold by a third-party seller. Plaintiff Heather Oberdorf was injured and blinded in one eye when her dog’s leash suddenly broke and struck her in the head. After the third-party seller couldn’t be reached, a three-judge panel concluded Amazon could be deemed the “seller” and held liable under Pennsylvania law. The court rejected arguments from Amazon that it was protected by Section 230 of the Communications Decency Act.

The long-term impact of the ruling remains unclear. Some analysts expect Amazon to institute more restrictions on new third-party sellers, such as potentially requiring insurance coverage.

Customer Data and Privacy

Amazon continues to decrease seller’s access to customer data. This has motivated many sellers to diversify to off-platform alternatives like Shopify. Amazon sellers are only permitted one message to their customer per sale. This communication must be done within the Amazon platform and content is tightly regulated. Amazon sellers do not gain access to customer’s e-mail or payment information.

Selling Amazon Businesses

As more Amazon sellers reach seven and eight digits in annual revenue, the market for buying and selling successful seller accounts has become more important. This is essentially a new world of mergers and acquisitions and deals can range from four to eight figures.

Combating “Black Hat Tactics”

Sellers consistently complain about the “Black Hat” tactics of competitors in violation of Amazon’s Terms of Service. Many of these seller accounts appear to originate from outside of the United States. Black Hat tactics include leaving fake reviews, hijacking listings, and placing fake orders to manipulate Amazon’s A9 algorithm. 

Conclusion

The future for Amazon’s third-party sellers remains bright, but also complicated and uncertain. Intense price competition exerts constant pressure on margins. Because sellers only get paid out from Amazon twice a month, sustaining positive cash flows can be an ongoing challenge. While many large legacy brands are bringing large advertising budgets onto the online platform, others have announced they are leaving Amazon altogether.

2020 presents both tremendous opportunities and new legal pitfalls for third-party sellers. After 20 years, Amazon’s legal landscape continues to evolve on an almost daily basis.

Patrick McKnight