Fundamentals of Ecommerce Product Liability

Strict product liability was created to protect consumers hurt by defective products. At the time of its creation in the 1960s, the only remedy available to a consumer hurt by a defective product was to try to sue the manufacturer of the product under warranty law. But warranty law was (and is) ill-suited for this. It is a body of law designed around contracts and is intended to address economic loss and damage to the product itself, not personal injuries or death. Manufacturers of defective products also found it easy to disclaim the warranties or otherwise manipulate economic arrangements to avoid responsibility, leaving injured consumers with nothing.

That all changed with Greenman v. Yuba Power Products and other landmark product liability cases, as well as the creation of Restatement Section 402A. And the law has continued to evolve.

Presently, under California product liability law, any company in the vertical chain of distribution from manufacture to sale is strictly liable for harm caused by a defective product. The vertical chain of distribution typically looks something like this:

While the principal defendant in a product liability case remains the product’s manufacturer, a person harmed by a product can, if he or she chooses,go after anyone in the vertical chain. In practical terms, what that means is if you buy a product at a normal brick and mortar retailer like Walmart or Home Depot or Target, and that product turns out to be defective and hurts you, you can pursue the manufacturer of the product, the distributor or wholesaler (assuming there is one), and the store that sold you the product. Of course, no matter how many companies the consumer goes after, there is only one recovery.

The main reason for imposing liability on retailers and distributors to aid the injured consumer. Many times it may be difficult or impossible for a consumer to locate and collect a judgment from the manufacturer, particularly now, when so many of our products are made overseas. Allowing the consumer to seek recourse against others in the distribution chain gives the consumer a much better chance of success.

Also, companies in the chain can protect themselves by seeking indemnity or contribution from the other parties. So, for example, Target may agree to carry a particular company’s line of products only if that company agrees to pay any successful claim made against Target for defects in that company’s products. And the companies in the vertical chain can also spread the risk, meaning to the extent there is an increased cost, that cost can be spread across all platforms and products so it is not disproportionately born by the consumer or one particular tier in the distribution chain.

The conceptual problem with online marketplaces

Online marketplaces—websites where the marketplace operator lists products ostensibly sold by a different entity—have created a new problem in the evolution of strict liability. Traditionally, there was not much argument about who was the “manufacturer,” who was the “distributor,” and who was the “retailer” of a given product.These terms had established definitions and were fairly easy to apply to standard retail transactions.

But online marketplaces have purposefully upended the traditional retail model. Instead of the traditional vertical chain arrangement, online marketplaces typically involve the marketplace taking on some aspects of being a distributor and retailer—and even occasionally a manufacturer—without neatly fitting into the definition of any of them.

There are an infinite variety of online marketplace models, from Shopify to the Facebook Marketplace to Google Shopping. But the classic setup is the one used by the most successful online marketplace: Amazon. Even Amazon itself has a variety of different configurations for its marketplace, but generally they look something like this:

In this model, a third party lists a product on Amazon’s marketplace while agreeing to fairly onerous terms imposed by Amazon. The key terms, for our purposes, give Amazon complete control overnearly all aspects of the transaction: Amazon posts the listing in the format required by Amazon, Amazon takes the payment and processes it, and Amazon either ships the product after an order (in the case of Fulfillment by Amazon) or directs the third party to ship the product to the buyer. In either case, the consumer and the third-party supplier have little to no contact with each other. Indeed, Amazon largely prohibits direct communication between the buyer and the third party. But Amazon never takes title to the product being sold, even in cases where Amazon takes possession of it under the Fulfillment program. The third party gets paid by Amazon after Amazon deducts its commission and fees.

This business model has provided Amazon a vehicle to argue it is not strict liable under product liability law because, in Amazon’s view, it is neither truly a retailer nor a distributor. Instead, Amazon has compared itself to a classified ad service or virtual shopping mall. These comparisons are inapt for a number of reasons, but it is nonetheless true that Amazon has, at some level, changed what it means to be a retailer or distributor.

Fortunately, despite severalcases finding Amazon could not be liable for injuries caused by products on its website, the tide seems to be turning. In our case of Bolger v. Amazon.com, LLC (2020) 53 Cal.App.5th 431, a California appellate court found that Amazon could be strictly liable for terrible burns caused by a defective laptop battery sold on Amazon’s marketplace. This was the first ruling of its kind in the nation by a state appellate court, and hopefully other courts will follow suit.

Product liability laws vary from state to state, though, and Amazon may continue to avoid liability in states that have a narrow definition of “retailer” or that require a transfer of title for liability to attach. But product liability is a flexible body of law and those states can help it evolve to meet the needs of consumers in an ecommerce economy.

And, Amazon is just the beginning. New online marketplaces appear all the time, and determining the boundaries of their liability for defective products will require a careful analysis of their business operations and a thorough understanding of the applicable product liability law, including its historical origins.

There has also been sone interest at both the federal and state level in passing legislation that will change some aspects of online marketplaces (the larger ones have a huge problem with counterfeit goods being sold) and potentially hold them liable for product injuries provided certain criteria are met. But so far, nothing has been enacted.