September 22, 2019 Feature

Arbitration in the Age of Amazon

Gaston Kroub

©2019. Published in Landslide, Vol. 12, No. 1, September/October 2019, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

Shopping online has never been easier, or more prevalent. Fueled by the rise of high-powered smartphones that allow ordering products with a few taps or swipes, e-commerce sites of all stripes have enjoyed increased consumer attention over the years. And more buyers have brought more sellers, especially on “marketplace” websites like Amazon and eBay, which host third-party sellers from all over the world.

While these developments have been a boon for consumers, in terms of increased choice and lower prices, they have also increased the level of difficulty for intellectual property (IP) owners hoping to police infringement online. For one, there has been an increased number of foreign-based sellers (many China-based) offering their wares directly to American customers. Making matters worse, existing mechanisms for enlisting the help of the e-commerce “host” of those foreign sellers are at turns cumbersome and imprecise.

While finding a perfect solution for each e-commerce marketplace is an impossible task, there are existing procedures in place at most of them that can be tweaked to create a fairer and more reliable system for resolving IP disputes. In short, a need exists for an improved approach to handling IP disputes on e-commerce marketplaces—one that benefits IP owners, accused infringers, and the e-commerce marketplace host itself. More than ever, streamlined arbitration procedures are the tool of choice for meeting that need.

For purposes of the remainder of this article, Amazon will provide our working example, since it is at the forefront of using streamlined arbitration to resolve disputes on its platform. First, we will look at how Amazon approaches IP issues with respect to third-party sellers on its platform. Then, we will consider how Amazon currently handles IP complaints directed at those sellers by IP owners, including a look at the new arbitration system it has put in place for utility patent-based disputes. Finally, the benefits of extending Amazon’s existing seller arbitration framework will be discussed, along with a suggestion that arbitration of IP disputes could be an approach adopted by other e-commerce marketplaces.

Amazon’s IP Policy for Third-Party Sellers

Amazon is not shy about setting out expectations for third-party sellers offering goods on its platform. Sellers must abide with a comprehensive IP policy, which makes clear that Amazon does not allow listings that violate the IP rights of rights owners.1 Recognizing that not all third-party sellers are familiar with IP laws, Amazon’s policy sets out definitions and examples of the various types of IP protection (copyright, trademark, and patent) that could be applied to goods offered by those sellers. Moreover, Amazon recommends that sellers who are unfamiliar with IP laws, or who have questions about offering certain products, consult with counsel before listing products for sale.

In addition to defining the applicable types of IP for third-party sellers, Amazon’s policy also sets forth the consequences of failing to abide with Amazon’s rules as they relate to posting infringing products. Sellers are warned that Amazon could act against them even for infringing on someone’s IP without knowledge, with penalties including removal of product listings or even account suspension. In response to Amazon’s action against their account, sellers are permitted to lodge an appropriate response, with Amazon promising to conduct additional review to ascertain that the IP owner’s complaints against the seller were well-founded. Importantly, however, Amazon has the right to act against sellers before they can lodge their response. Put another way, third-party sellers on Amazon bear the risk that an IP infringement claim can at least temporarily derail their sales before they even have an opportunity to respond. But that is changing, at least for utility patent-based complaints on Amazon.

How Amazon Handles IP Complaints against Third-Party Sellers

Existing Protocols Work Well for Resolving Most Types of IP Disputes

In addition to the Amazon IP policy for third-party sellers, Amazon also publishes a policy aimed at IP rights owners.2 While Amazon here again encourages rights owners to solicit the advice of counsel before taking action on their IP rights, Amazon also reiterates that it is “dedicated to ensuring that goods do not violate or infringe a Rights Owner’s intellectual property (IP).”3 As an example, Amazon suggests that rights owners with registered trademarks seek to enroll themselves in Amazon’s Brand Registry. Similarly, Amazon has announced “a new program that empowers brands to help drive counterfeits to zero” called Project Zero, which is already being piloted with third-party sellers of note.4 Both the Brand Registry and Project Zero are tools Amazon offers to help combat the sale of counterfeit items, as well as listings that try and take advantage of another brand’s trademarks to move a third-party seller’s goods.

While initiatives such as Amazon’s Brand Registry and Project Zero are designed to aid brand owners selling on Amazon, the centerpiece of Amazon’s offerings for rights owners of all stripes is its complaint system. Depending on their relationship with Amazon, IP owners can “Report a Violation” (for companies in the Brand Registry) or use Amazon’s “Report Infringement Form” to lodge their complaint against an unauthorized third-party seller. Anyone filing an infringement report must be logged in to an Amazon account at the time of submission, and is limited to filing a “specific complaint” based on one type of IP right (patent, trademark, or copyright) at a time.

Once a complaint is filed, Amazon confirms receipt and will notify the seller that a valid complaint was received. Amazon also shares the contact information of the complainant with the seller. If Amazon agrees that an IP violation has occurred, it will remove the offending listing, while reserving the right to take additional confidential action against the seller. IP owners are notified as well when a complaint is deemed unfounded and are warned that multiple filings of frivolous complaints could result in forfeiture of their right to file additional complaints.

In this author’s experience, Amazon’s system for handling IP complaints is very effective for both trademark and design patent owners, in part because of the ease of determining whether a listing uses another’s trademark to promote the good for sale. Likewise, simple observation can often determine whether a counterfeit product, or one that infringes on a patented design, is being sold. For most IP complaints, therefore, there is no need for Amazon to offer a more involved process for resolution.

Utility Patent-Based Complaints Provide a Sterner Challenge

Utility patent-based complaints, however, are more challenging for Amazon to deal with. Such complaints require Amazon to undertake a more involved analysis in order to determine whether action against the seller is justified. Unsurprisingly, Amazon is less likely to institute immediate (or any) action against the seller in response to a utility patent-based complaint, absent some evidence of default judgment against the seller by a court. Thus, for IP owners with utility patents, a streamlined arbitration system administered by Amazon could be of great help. Amazon sellers, as well as Amazon itself, would benefit from a solution to the challenges that utility patent-based complaints against third-party sellers create. Recognizing that need, Amazon recently unveiled a pilot procedure (discussed below) directed to neutral evaluation of utility patent complaints against third-party sellers.

Amazon’s Utility Patent Neutral Evaluation Offers an Arbitration Proceeding

Amazon’s Utility Patent Neutral Evaluation (UPNE) is a pilot program developed by Amazon “for owners of United States utility patents to obtain an evaluation of their patent infringement claims against products offered by third-party sellers on amazon.com.”5 While participation at this stage is by invitation only, the UPNE allows patent owners to identify for Amazon a patent they own, as well as Amazon listings by third-party sellers (not products offered by Amazon itself) that they contend contain infringing products. Once identified, the third-party sellers have the option of joining in the UPNE or conceding the matter (with Amazon taking down the offending listings if they concede).

Assuming both sides of the dispute agree to the UPNE, Amazon requires that all parties treat the proceedings as confidential. Further, the participants must agree not to seek discovery relating to the UPNE in any later legal proceeding, while also agreeing to waive any other claim that could arise out of the UPNE proceeding against Amazon, the evaluator (the neutral decider of the UPNE proceeding), or any other participant. At the same time, Amazon requires that the participants agree not to sue Amazon itself for patent infringement relating to the offending listings or listings for “materially identical products.” But such a waiver is limited to a patent infringement case against Amazon itself, not to a potential future case against the seller or any other third party for patent infringement. Finally, Amazon requires that the participants “agree to the jurisdiction and venue of the federal and state courts located in King County, Seattle, Washington.”

General rules aside, a UPNE proceeding is in effect a streamlined arbitration mechanism for deciding patent infringement complaints lodged against a third-party Amazon seller. The evaluator is charged with making a “yes/no decision about whether the patent covers the product listings” challenged by the patent owner.6 A yes answer by the evaluator will result in removal of the offending listings from Amazon. In exchange for his or her efforts, the evaluator is paid $4,000, with Amazon not retaining any portion of the cost of the proceeding—a cost borne by the losing party. At the outset, both patent owners and third-party sellers are asked to wire $4,000 to the evaluator; failure to do so would result in dismissal of the UPNE or removal of the challenged listings depending on which side fails to pay.

Payment of the evaluator’s fee triggers the setting of a schedule for the submission of written arguments by both sides, on an expedited basis with no modifications permitted. Patent owners are allowed 20 pages in total for their opening and reply submission, with third-party sellers allowed 15 pages for their response. Claim charts and exhibits are also permitted, and do not count against the page limits. The proceeding takes place in English, with physical exhibits not permitted. While patent owners can waive their reply submission, failure to submit a required paper on time results in a loss for the offending party. If the parties settle before the reply date, the fees are refunded, except for $1,000 equally divided between the parties to pay for the evaluator’s time expended. If settlement occurs after the reply, the evaluator can keep up to $2,000, with half coming from the patent owner and the other half from any participating third-party sellers.

While the briefing requirements may seem restrictive, they are consistent with Amazon’s goal of making the UPNE proceeding “fast, efficient, and relatively low-cost.” Accordingly, patent owners can only assert “one claim from one unexpired U.S. utility patent” against third-party seller listings for products that are ideally “physically identical.” The evaluator determines whether the challenged products likely infringe the asserted claim. Defendants are limited to two defenses other than noninfringement. To win on validity, they must demonstrate to the evaluator that a court (including the U.S. International Trade Commission and Patent Trial and Appeal Board) has determined that the asserted claim is invalid. Alternatively, they can show that the accused products were on sale before the earliest effective filing date of the asserted patent. That showing must be made by “independently verifiable objective evidence.”

Importantly, there is no discovery, trial, or hearing of any sort in the UPNE. Nor can the parties independently contact the evaluator ex parte during a proceeding. They do, however, receive a determination on the merits of their arguments within 14 days of the reply date. If the patent owner wins, the decision is rendered without reasoning. If a third-party seller wins on noninfringement, the evaluator provides “a brief explanation of why the Patent Owner is unlikely to prove infringement.” The parties cannot contact the evaluator about the ruling, and the decision rendered is final. If infringement against one or more listings is found, Amazon takes down the listings in short order, usually within 10 business days of receiving the evaluator’s decision. If a listing is taken down but a seller later obtains proof that the asserted patent is not infringed or invalid from a court or other arbitration, then the listing could be restored. Likewise, if the patent owner loses the UPNE but wins in another proceeding, Amazon could still take down the challenged listings once the patent owner furnishes proof of that win.

Benefits of Arbitration for Resolving Disputes on Amazon’s Platform

Amazon’s third-party sellers already consent to arbitration of any disputes that arise out of their relationship to Amazon itself. To date, Amazon’s arbitration system for settling seller disputes has proven robust and capable of handling the increased number of sellers on the platform. More importantly, it works even though Amazon’s ability to fully vet each third-party seller in advance is limited. At a minimum, Amazon’s successful history with administering arbitration-based resolution protocols for third-party sellers bodes well for the viability of the UPNE procedure it now offers. Going forward, Amazon may well decide that the benefits of arbitration procedures should be extended to all types of IP disputes, for at least the reasons discussed below.

Benefits for Third-Party Sellers

The nature of selling on Amazon (or any other e-commerce platform) places speed at a premium. For example, Amazon cannot allow counterfeit items to remain listed on its platform one minute longer than necessary. At the same time, Amazon cannot wait too long to solicit and consider a seller’s response to a claim of IP infringement relating to a listing. This can result in a seller losing sales—even if only temporarily—as a result of an unfounded IP claim. Under the current framework, sellers face a lack of transparency and control regarding Amazon’s actions with respect to IP complaints lodged against the seller. On the flip side, because many sellers cannot afford to litigate IP claims in court, they are forced to engage with IP owners filing complaints against them on Amazon—relying on Amazon’s IP dispute team to get the decision on the complaint right.

As such, third-party sellers would benefit from the additional transparency, speed, and fairness that an optional Amazon-administered arbitration system (ideally using neutral arbitrators) based on the UPNE would offer them, especially one they could opt in to, in exchange for Amazon agreeing that sellers who opt in would no longer face sudden removal of listings without notice. The UPNE already recognizes the value of the latter point, since it allows sellers to opt in to the proceeding by agreeing to pay the evaluator, even as the cost of the proceeding helps reduce the odds of a frivolous complaint.

In addition to the benefits arbitration offers as a dispute resolution mechanism, third-party sellers would also appreciate the opportunity to distinguish themselves from the competition by opting in to the arbitration process offered by Amazon (or those of any other e-commerce website). Some already look to distinguish themselves by opting in to Amazon’s Brand Registry, conceivably to increase customer confidence that they are offering authentic goods for sale. A seller agreeing in advance to participate in an arbitration mechanism for resolving IP disputes likewise would send a message to both customers and IP owners (and Amazon for that matter) that the seller is trustworthy and responsible. Compared to the alternatives currently offered, an arbitration system for resolving all types of IP disputes consistent with the approach of Amazon’s UPNE would likely benefit third-party sellers.

Benefits for IP Owners

IP owners would also benefit from the ability to arbitrate IP complaints lodged against third-party sellers that have consented to arbitration via the e-commerce marketplace. As with those sellers, IP owners would benefit from the increased speed of arbitration, as well as the cost savings over litigation in court. As the UPNE recognizes, IP owners benefit from direct interaction with the seller, or at least from having the chance to respond to the seller’s arguments. Not only would this allow dispute resolution based on a more complete record, it would also create opportunities for settlement discussions that Amazon’s current system does not really facilitate.

In some cases, IP owners would know that sellers have opted in to the arbitration system and would only agree to pay if they thought they could win before the arbitrator, so there could be opportunities for IP owners to reach out before initiating arbitration in the first place. This could reduce the number of complaints that are filed, while giving the parties the opportunity to resolve their differences amicably. Finally, IP owners currently frustrated with the seeming randomness of Amazon’s handling of their complaints on the merits would welcome the opportunity to adjudicate their claims before a neutral arbitrator—one who would likely do a better job of communicating the reasons for his or her decision than Amazon’s current “black box” system for dealing with non-utility patent-based IP complaints. Here too, the UPNE recognizes the benefit to IP owners of understanding the reasoning behind an evaluator’s decision, particularly when the IP owner faces an adverse decision on infringement.

Benefits for E-Commerce Marketplaces

Amazon and other e-commerce marketplaces benefit when their platform attracts and hosts legitimate sellers of goods. Customers shop with increased confidence, other legitimate sellers become attracted to the platform, and IP owners learn to focus their energies on competing platforms where IP infringement is left to run rampant. At this point in time, there is a recognition that the IP claim resolution procedures offered by Amazon and others are not ideal. But that has not deterred Amazon from thinking up and piloting programs like the UPNE.

Accordingly, piloting and then tweaking an improved arbitration-based system for all types of IP disputes would be more likely than not to lead to increased participation of legitimate sellers on Amazon and similar platforms. Moreover, a greater contrast would be drawn between legitimate and less trustworthy sellers operating on online marketplaces if a voluntary arbitration-based system along the lines of the UPNE were implemented. At bottom, any system that ultimately benefits customers remains in the interest of an e-commerce marketplace to at least try, consistent with its constant innovation around improving the online shopping experience for all.

Conclusion

The challenges of developing and implementing an arbitration-based IP resolution system on e-commerce marketplaces are formidable. But that has not dissuaded Amazon from trying, if only because of the benefits that such a system could convey on sellers, IP owners, and the marketplace’s customers. Other market leaders should follow Amazon’s example and either introduce or make more robust existing streamlined arbitration procedures to help handle IP-based complaints on their platforms against third-party sellers.

Ultimately, everyone in the chain benefits from a robust and consistent resolution of IP claims online. Amazon and other e-commerce marketplaces already know that arbitration is an effective tool in other contexts arising out of their business activities. In this age of Amazon, arbitration of IP disputes may finally be taking its place as the proceeding of choice for resolving IP issues involving third-party sellers.

Endnotes

1. Intellectual Property Policy for Sellers, Amazon Seller Cent., https://sellercentral.amazon.com/gp/help/external/201361070 (last visited Aug. 8, 2019).

2. Intellectual Property for Rights Owners, Amazon Seller Cent., https://sellercentral.amazon.com/gp/help/external/U5SQCEKADDAQRLZ (last visited Aug. 8, 2019).

3. Id.

4. Dharmesh M. Mehta, Amazon Project Zero, Amazon Blog: Day One (Feb. 28, 2019), https://blog.aboutamazon.com/company-news/amazon-project-zero.

5. Amazon Utility Patent Neutral Evaluation Agreement, https://img1.wsimg.com/blobby/go/7f797a3a-f5f3-42f5-bbfa-7e82cf29ada9/downloads/Amazon%20Utility%20Patent%20Neutral%20Evaluation%20Agree.pdf (last visited Aug. 8, 2019).

6. Amazon Utility Patent Neutral Evaluation Procedure, https://img1.wsimg.com/blobby/go/7f797a3a-f5f3-42f5-bbfa-7e82cf29ada9/downloads/Amazon%20Utility%20Patent%20Neutral%20Evaluation%20Proce.pdf (last visited Aug. 8, 2019).

Entity:
Topic:

Gaston Kroub is a partner at Kroub, Silbersher & Kolmykov PLLC in New York City. A registered patent attorney, he specializes in intellectual property litigation.