The following is a case update written by Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), analyzing a recent decision of interest:

After granting rehearing en banc for a case involving the potential strict liability of Amazon based on an interpretation of Restatement (Second) of Torts § 402A, the Third Circuit Court of Appeals certified a critical question to the Pennsylvania Supreme Court: “Under Pennsylvania law, is an e-commerce business, like Amazon, strictly liable for a defective product that was purchased on its platform from a third-party vendor, which product was neither possessed nor owned by the e-commerce business?” By way of background, the district court had ruled against liability for Amazon, then a split circuit panel reversed over a strong dissent, triggering the en banc rehearing. Oberdorf v. Amazon.Com Inc., 2020 WL 3023064 (3^rd Cir. 6/2/20).

FACTS

Heather Oberdorf purchased a dog collar on Amazon.com from a third-party vendor identified as “The Furry Gang.” Amazon did not design, manufacture, have title to, or possess the dog collar. While Oberdorf was walking her dog on a retractable leash, the D-ring on the collar broke, causing the leash to recoil, hitting her in the eye and resulting in permanent blindness. Neither Amazon nor Oberdorf could locate The Furry Gang, so Oberdorf sued Amazon, asserting strict liability under § 402A because it “facilitated and participated in the sale and distribution of the subject dog collar.”

The district court granted summary judgment in favor of Amazon. In a 2-1 decision, a panel of the Third Circuit vacated the summary judgment and ruled that Amazon was strictly liable. The majority applied the four-factor Francioni test, applied in Pennsylvania since 1977, in finding strict liability. To the contrary, the dissent argued that the § 402A analysis had two independent steps, the first of which requires the defendant to be engaged in the business of selling the kind of product at issue, which requires a transfer of either ownership or possession of the product. Only if that condition is met does the court then apply the four-factor Francioni test. The dissent then asserted that Amazon did not transfer a right of ownership in or possession of the dog collar and therefore could not be strictly liable.

Amazon petitioned for rehearing en banc, which was granted, resulting in the current certification.

REASONING

Amazon offers products for sale in one of three ways: (1) Amazon sells and ships the goods to the consumer; (2) a third-party vendor sells the merchandise on Amazon.com and Amazon “fulfills” the order by storing, packaging, and shipping the products on the vendor’s behalf; and (3) a third-party vendor sells the goods on Amazon.com but stores, packages, and ships the products itself. To sell under the third method, a third-party vendor must enter into an Amazon Services Business Solutions Agreement (BSA), under the terms of which the third party controls the products listed and the price, but Amazon processes all payments and requires all communications between the vendor and its buyer to occur through its communications platform. The second method requires both a BSA and a separate Fulfillment by Amazon Agreement (FBA) under which Amazon “fulfills” the orders by storing, packaging, and shipping the products on the vendor’s behalf. In the Oberdorf transaction, the third method was used, so Amazon did not store or ship the dog collar.

The Supreme Court of Pennsylvania adopted strict liability for defective products, specifically the Restatement (Second) of Torts § 402A, in 1966. The exact wording of the section begins with “One who sells any product … is subject to liability for physical harm … if (a) the seller is engaged in the business of selling such product….” The en banc Third Circuitpondered whether Pennsylvania cases required the two-step process favored by the panel dissent, where the first step was to determine whether the defendant is in the business of selling the kind of product at issue, here the dog collar. Only if that step is met, does the court then consider the Francioni factors: (1) is the defendant the only member of the marketing chain available to the injured party for redress; (2) does imposition of strict liability serve as an incentive to safety; (3) is the defendant in a better position than the consumer to prevent circulation of the defective product; and (4) can the defendant distribute the costs of strict liability.

Amazon asserted that to be a seller, one must transfer either ownership or some kind of legal right to possession. It pointed out that under its BSA, Amazon proclaimed it did not obtain ownership of the product sold and only if there was an FBA would it ever have any possession to transfer. The en banc court determined that the answers to these open questions had not been provided by existing case law, in particular because e-commerce was such a new prominent field. In addition, the court noted that some Pennsylvania courts often considered whether a defendant’s role in a transaction was too tangential or attenuated to impose strict liability. It found it could not predict whether the Pennsylvania Supreme Court would call Amazon a “seller” nor whether it would see Amazon’s role in handling billing and communications as too tangential for strict liability. For those reasons, it certified the question.

AUTHOR’S COMMENT

Amazon has changed the retail marketplace throughout the world.It is here to stay and its power to shape our buying present and future is not in doubt. Therefore, it is not surprising that federal and state courts are faced with unanswered questions regarding liability which might be imposed on Amazon when something does not go right either in the sales transaction itself (implicating Article 2 of the UCC) or with the product being sold (here implicating the Restatement of Torts, another law with universal impact), in either instance causing damage to the buyer. I previously reviewed one Amazon case, Philadelphia Indemnity Ins. Co. v. Amazon.com, Inc., published in CFN in February 2020, and I am certain I will review others.

In Philadelphia Indemnity,the District Court in New York found Amazon was not liable for damages caused to an online buyer by a defective product sold by a third-party vendor. At least one three-member panel in the Third Circuit initially ruled otherwise here. Further highlighting the gap between the two courts’ decisions was that in New York, where no liability was found, the vendor had both a BSA (which all vendors must have) and an FBA, under which Amazon takes on considerably more control of the product, whereas in Pennsylvania the vendor did its own shipping because there was no FBA. Yet Amazon was initially found liable by the circuit court in the Pennsylvania case, even though it never had possession of the product in its distribution center and did not ship it. These adjacent states could be headed to opposite exposure for Amazon.

If the cases concerning Amazon’s potential liability vary from state to state, even when seemingly applying universal laws like the UCC or the Restatement, I perceive marketplace schizophrenia. And the impact will not just be on Amazon’s profitability. As I remarked before, if Amazon has exposure for strict liability on product sales by third-party vendors, it most certainly will require any such vendor to indemnify it and provide insurance to assure that indemnification. Can the many tiny businesses which rely on Amazon to market their products afford the type of insurance that Amazon will require? It seems unlikely. So then what happens? The developing case law around the country must answer these legal questions and then the marketplace will adapt.

These materials were authored by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), a member of the ad hoc group, with editorial contributions by Monique D. Jewett-Brewster, an attorney with Hopkins & Carley, ALC, a member of the ad hoc group and 2018-19 Chair of the CLA Business Law Section. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.