Henry Moreno —On July 3, 2019, The United States Court of Appeals for the Third Circuit dealt a massive blow to Amazon’s liability armor. In Oberdorf v. Amazon, The Third Circuit reversed summary judgment and held Amazon was susceptible to products liability claims arising from injuries sustained by third-party vendor products. Postured under diversity jurisdiction, Oberdorf’s biggest challenge was convincing the Third Circuit that Amazon was a “seller” under Pennsylvania law (following the Restatement (Second) of Torts § 402A). Along the way, the court closely scrutinized the standard agreement between Amazon and its third-party vendors. Amazon’s own agreement turned out to be fatal to its position and the court’s discussion signals a potential shift in liability for the digital marketplace.
Oberdorf’s unfortunate rise to fame amongst products liability practitioners began in January 2015, when a dog leash she purchased on Amazon, through a third-party vendor — “The Fuzzy Gang” — snapped while she was walking her dog. The leash flung back, struck her glasses, and ultimately caused her to lose all sight in her left eye. By May 2016, “The Fuzzy Gang” had gone underground and disappeared from the Amazon marketplace.
The Oberdorf decision signaled a significant departure from the longstanding view that Amazon is not a “seller” and therefore not susceptible to product liability claims. In fact, earlier last year, the U.S. District Court for the Northern District of Illinois dismissed such a claim over a faulty hoverboard battery in Garber v. Amazon. The Garber court accepted Amazon’s argument that as an online marketplace, with a million third-party vendors, it could not be held liable under a products liability theory. This was largely because Amazon never advertised a direct sale between itself and the customer. Rather, the sale was between the third-party vendor and the customer.
Amazon launched the same defense in Oberdorf; however, the Oberdorf court took a different position. The court first acknowledged Amazon to be the most valuable retail company in the world – foreshadowing the court’s belief that Amazon is in a superior position to ensure the safety of the products in its marketplace. Then the court turned to a thorough discussion of the agreement between Amazon and its third-party vendors. Of significance, the court noted that under the Amazon agreement, third-party vendors were restricted from: (1) charging higher prices than in any other platform they market their products; (2) offering inferior customer service; (3) providing lower quality information about their products than in any other platform; and (4) communicating with customers in any way except through the Amazon platform. The agreement further classified Amazon as an agent of the third-party vendor for processing payments and retaining due sales proceeds. It contained an indemnity and hold harmless agreement and allowed Amazon, in its sole discretion and without notice, to suspend, prohibit, or remove any item on its marketplace.
Restatement (Second) of Torts §402A Factors
After summarizing Amazon’s third-party vendor agreement, the court turned to an analysis of the four factors utilized by the Second Restatement of Torts to determine whether Amazon was a “seller.”
The first factor – whether Amazon was the only actor in the marketing chain available for redress – was quickly found as against Amazon’s position. First, the court noted that the Amazon agreement required third-party vendors to solely communicate with customers through Amazon’s platform, providing third parties with an additional blanket of anonymity. Further, the court noted several other cases were many third-party vendors disappeared from the reach of the plaintiff subsequent the threat of litigation.
Next, the court analyzed whether the application of strict liability on Amazon would serve as an incentive for safety. Again, the court looked at the Amazon third-party agreement and found significant the fact that Amazon – in its sole discretion– could remove, suspend, or prohibit, any item on its marketplace. The court found the provision gave Amazon “substantial control over third party vendors.” Imposing strict liability, the court noted, would impose a strong incentive on Amazon to remove unsafe products from its marketplace.
In addressing the third factor – whether Amazon was in a better position than the consumer to prevent the circulation of defective products – the court compared the relationship between Amazon and third-party vendors against the relationship between third-party vendors and the ultimate consumer. Again, pointing to the agreement, the court found that Amazon’s prohibition against direct contact between third-party vendors and the customer placed Amazon in a superior position to that of the customer in preventing circulation of harmful products. This was especially so given the customer’s only avenue to communicate product issues was through Amazon’s customer rating and review function (or directly to Amazon).
The court then addressed the final factor – whether Amazon could distribute the cost of compensation for injuries from defective products. The court briefly discussed the traditional method of distributing costs through indemnification clauses, which Amazon had done in its third-party agreements. However, the court found the indemnification clause insufficient because it disincentivized Amazon to keep track of third-party vendors like “The Fuzzy Gang.” The court also noted Amazon could distribute the cost of strict liability by adjusting commission fees against vendors that are deemed to be higher risk.
The Oberdorf court continued its analysis by examining additional Pennsylvania case law allowing for liability against vendors that do not take into possession or title the defective product. The court found the Second Restatement factors militated against Amazon and held it could be liable under a products liability theory.
On August 23, 2019, the Third Circuit vacated its decision, granting Amazon’s motion for a rehearing. Nevertheless, the analysis engaged in by the court is illustrative of how a corporation can create such robust contract provisions intended to insulate liability and nevertheless find itself facing strict liability based on those very provisions. Corporations should take note of the Oberdorf decision, even if reversed, and closely scrutinize their agreements with third-party vendors. A common thread in Oberdorf was the court’s discomfort with Amazon placing itself between vendors and customers. Corporations should heed this as a lesson and ensure open lines of communication exist directly between a tangible vendor and customer or else be exposed to similar liability.