On July 3, the Third Circuit Court of Appeals reversed a lower district court decision and held that Amazon can be liable as a “seller” for defective products sold by third parties on its online marketplace. This holding, if applied broadly, exposes companies that maintain third-party vendor platforms to strict liability lawsuits for defective products – a decided change to the legal supply chain landscape.
In Oberdorf v. Amazon.com Inc., No. 18-1041, 2019 U.S. App. LEXIS 19982 (3d Cir. July 3, 2019), a purchaser of a defective dog leash sued Amazon under strict product liability and negligence theories. The retractable dog leash – purchased from a third party vendor on Amazon’s online marketplace – allegedly permanently blinded the plaintiff when it broke and recoiled. The Middle District of Pennsylvania found that Amazon was not a “seller” under Pennsylvania law, and therefore was not liable. On appeal, however, the Third Circuit vacated and remanded the district court decision. The Third Circuit found that Amazon was a “seller” of the product, despite Amazon’s argument that “it merely provides an online marketplace for products sold by third-party vendors.”
The Court weighed four factors articulated in a previous Pennsylvania decision, Musser v. Vilsmeier Auction Co, Inc., 562 A.2d 279 (Pa. 1989). First, the Court concluded that Amazon was the “only member of the marketing chain available to the injured plaintiff for redress.” The plaintiff was unable to locate the vendor. However, the Court also noted that Amazon enters into agreements with its vendors that restrict them from communicating with customers on any other platform. The Court determined that “this enables third-party vendors to conceal themselves from the customer.” Second, the Court held that imposition of strict liability upon Amazon would incentivize safety because Amazon “is fully capable, in its sole discretion, of removing unsafe products from its website” by virtue of its vendor agreements. Next, the Court determined Amazon was “in a better position than the consumer to prevent the circulation of defective products” because Amazon receives customer feedback regarding defective products while contractually limiting vendors’ direct channels of communication with customers. Finally, the Third Circuit found that Amazon already distributes the cost of compensating for injuries through indemnification provisions in its vendor agreements.
Although Oberdorf v. Amazon.com Inc. was decided under Pennsylvania’s strict product liability laws, its holding is likely broader – Pennsylvania adheres to the Second Restatement of Torts, as do other states. The Court’s decision was largely influenced by terms in Amazon’s vendor agreements. In light of this, other online marketplaces should evaluate their own vendor agreements and consider the restrictions they place on direct communication between vendors and customers. Moreover, online marketplaces should develop vetting processes to determine if third-party vendors are in good standing and amenable to the legal process. The Court’s decision, however, has unavoidable implications for online marketplaces. Other online third-party vendor platforms similarly operate under Amazon’s model and exert substantial control over vendors, or have vendor agreements with similar provisions. As the Court pointed out, online marketplaces may have to increase the commissions they charge vendors to accommodate increased product liability exposure, or may have to change their insurance coverage. Thus, the Court’s decision changes supply chain risk allocation in this important area.
foreign minerals and develop a national electric vehicle supply chain policy. The American Minerals Security Act (S. 1317), which embraces part of a 2017 executive order by President Trump, would “facilitate the availability, development, and environmentally responsible production of domestic resources to meet national material or critical mineral needs[.]” The Act would require identification of critical minerals that are essential to the economic and national security of the U.S. and vulnerable to supply chain disruptions. Further, the Act would require a nationwide assessment of the reserves of these critical mineral reserves. Perhaps most importantly, the Act would also create a more efficient process to obtain a permit for mining of critical minerals used in electric vehicle production.
Voluntary recalls are a key tool that the Food and Drug Administration (“FDA”), and FDA-regulated companies, use to protect public health. Voluntary recalls are also a corporate nightmare, and can be extremely taxing on supply chain relationships. For industries and products where recalls are common – such as food and drugs – supply chain partners should negotiate responsibility for recalls at the start of their relationship and be prepared to act quickly if a recall is initiated.