Selling Products Through Online Marketplaces Will Get Tougher

Less than two weeks ago, in Suing Chinese Companies for Product Liability, I wrote about the difficulties in holding Chinese companies responsible for defective products in U.S. courts and elsewhere. The problems include asserting personal jurisdiction over a Chinese company and the lack of enforcement of U.S. judgments in China. Because so much of the global supply chain relies on China’s ability to manufacture products cheaply, persons injured by defective products have to be creative.

On August 13, in Bolger v. Amazon.com, LLC, Case No. D075738 (Aug. 13, 2020) an California appellate court ruled that Amazon may be liable for defective goods sold by third-parties. This is a huge deal, folks. For years, Amazon and various other online retailers have successfully fended off lawsuits that sought damages for faulty products sold through their websites. Though the legal impact of the Bolger case is limited to California and though Amazon will almost certainly appeal this decision to the California Supreme Court, we should expect to see a flood of lawsuits against against online retailers for damages caused by defective products.

The facts of the Bolger lawsuit are commonplace for a defective product claim. The plaintiff, Bolger, purchased a replacement laptop battery on Amazon, who listed the seller as “E-Life,” a fictitious name used on Amazon by Lenoge Technology (HK) Ltd. (“Lenoge”). Amazon charged Bolger for the purchase, retrieved the battery from an Amazon warehouse, prepared the battery for shipment in Amazon-branded packaging, and then sent it to Bolger.

Bolger claimed the battery exploded several months later, causing her severe burns. Bolger sued Amazon, Lenoge, and others for strict products liability, negligent products liability, breach of warranty and negligent undertaking. Lenoge was served with the complaint but did not appear in the case and the trial court entered a default judgment against it. This happens all the time as I pointed out in my previous post.

Amazon moved for judgement in its favor, arguing it could not be held liable under strict products liability and similar tort theories because it did not distribute, manufacture, or sell the battery. Amazon contended its website was merely an “online marketplace” and Lenoge was the product seller. The trial court agreed and entered judgment in Amazon’s favor. Bolger appealed, likely concluding that trying to enforce the judgment against Lenoge would be a waste of time, though it is considerably easier to get U.S. judgments enforced in Hong Kong as opposed to in the PRC — for now, anyway.

Bolger argued that Amazon should be found strictly liable for defective products offered on its website by third-party sellers like Lenoge. The California appellate court agreed, based on the pivotal role it viewed Amazon as having played in the transaction:

As a factual and legal matter, Amazon placed itself between Lenoge and Bolger in the chain of distribution of the product at issue here. Amazon accepted possession of the product from Lenoge, stored it in an Amazon warehouse, attracted Bolger to the Amazon website, provided her with a product listing for Lenoge’s product, received her payment for the product, and shipped the product in Amazon packaging to her. Amazon set the terms of its relationship with Lenoge, controlled the conditions of Lenoge’s offer for sale on Amazon, limited Lenoge’s access to Amazon’s customer information, forced Lenoge to communicate with customers through Amazon, and demanded indemnification as well as substantial fees on each purchase. Whatever term we use to describe Amazon’s role, be it “retailer,” “distributor,” or merely “facilitator,” it was pivotal in bringing the product here to the consumer.

The court held that strict products liability applied because (1) Amazon was a direct link in the chain of distribution because it acted as a powerful intermediary between the third-party seller and the consumer; (2) Amazon is the only member of the enterprise reasonably available to an injured consumer in some cases; (3) Amazon plays a substantial part in ensuring the products listed on its website are safe; (4) Amazon “can and does exert pressure on upstream distributors” (like Lenoge) to enhance safety; and (5) Amazon “has the ability to adjust the cost of liability between itself and its third-party sellers.”

If this decision stands and its holding is adopted by other states, Amazon and other online retailers “marketplace” for third-party sellers will likely face a deluge of lawsuits.

We see the Bolger decision (and those that could follow it) impacting the marketplace for online products as follows:

1. Online marketplaces will become far stricter in terms of who they allow to sell on their site. We would expect pop-up fly by night Chinese and other foreign companies to disappear from U.S. online marketplaces as they start weeding out companies without assets or that are otherwise suspect.
2. Online marketplaces will likely charge companies more to list on their sites, so as to cover the greater product liability risks these online marketplaces will be facing. Perhaps online marketplaces will require their sellers pay a monthly fee to cover the more thorough due diligence investigations they will need to undertake. Perhaps these extra fees will depend on both the product being sold and the seller. For instance, a chain saw seller will need to pay higher fees than a sock seller. And a start-up China-based chain saw seller will need to pay more than the largest American chain saw company.
3. Selling on American online marketplaces will become more difficult for foreign companies. Already, and just since the Bolger decision, my law firm’s U.S.-based foreign direct investment lawyers have gotten three requests from Chinese companies to form U.S. companies that will enable them to become an American company in the eyes of various online marketplaces.
4. Online marketplaces may require some of their online sellers show proof of product liability insurance or pay extra for not having such insurance.

Will this impact your business?

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.