Business Law

Philadelphia Indemnity Ins. Co. v Amazon.com, Inc.

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

The United States District Court in New York ruled that Amazon, as an online marketplace operator, was not liable for damages caused to an online buyer by a defective product sold by a third-party vendor based on strict liability, negligence, or breach of warranty claims. Philadelphia Indemnity Ins. Co. v Amazon.com, Inc., 2019 WL 6525624 (E.D. NY 2019).

To view the opinion, click here.

FACTS

Amazon operates an online marketplace where, in addition to the products it retails itself, more than a million third-party sellers list products for sale. In order to sell products on the marketplace, third-party sellers must assent to the Amazon Services Business Solutions Agreement (BSA) which allows a seller to avail itself of Amazon’s services. One such service is payment processing for sellers using the Amazon marketplace. The third-party vendor in this case, Glantop, also subscribed to Amazon’s Fulfillment by Amazon service (FBA) whereby Amazon warehoused Glantop blenders, picked up blenders which are ordered, shipped the blenders to an online customer, and provided customer service. Under the BSA and FBA terms, Glantop retained title to its products while Amazon stored them and Glantop agreed to provide an “accurate and complete product description.”

A & K Sushi Corp. (A & K), a sushi restaurant, was a tenant at a strip mall owned by Niat Realty. In April 2016, A & K purchased a Glantop blender via Amazon.com; the product detail page content for the blender was developed by Glantop, not Amazon. A & K paid $199.89 for the blender by credit card, $41.59 of which went to Amazon for a referral fee and for usage of its logistics service, and the balance of which went to Glantop, the third-party seller. The particular blender purchased by A & K had been warehoused at Amazon’s facility, from which it shipped, for approximately two weeks before the shipping date.

Soon after A & K received the blender, a fire occurred in the restaurant causing damages to Niat’s premises. Plaintiff Philadelphia Indemnity Insurance Company, Niat’s subrogee, filed suit against Amazon, alleging that the fire was caused by the blender and seeking recovery on theories of strict liability, negligence, and breach of warranty. Amazon filed a summary judgment motion, seeking dismissal of plaintiff’s claims as a matter of law because plaintiff could not prove that it manufactured, distributed, or sold the blender. It contended it was merely an online marketplace where third-parties such as Glantop sold products. Plaintiff countered that Amazon was within the “distribution chain” for the blender and well placed to influence manufacturers of defective products. It also asserted that Amazon was negligent because it did not secure insurance from Glantop and that it had warranted that the blender was high quality.

The District Court considered but rejected the three theories for recovery and granted summary judgment for Amazon.

REASONING

The court observed that the question of Amazon’s liability for damages allegedly caused by products bought through its online marketplace was a hot topic around the country, with decisions coming down on both sides of the issue. Here, the court was tasked to follow New York law, as it sat in diversity in the state, but noted that the New York Court of Appeals had not rendered a ruling on such matter. Instead, it relied on a factually similar case from New York’s Eastern District, Eberhart v. Amazon.com, Inc., 325 F. Supp. 3d 393 (S.D.N.Y. 2018). It recognized the settled proposition that a manufacturer of defective products may be strictly liable for damages caused by the products and that such liability extends to entities in the distribution chain, as plaintiff asserted was the case with Amazon. However, it rejected the concept that Amazon was in the distribution chain because it never took title to the products under the provisions of the BSA and FBA. In addition, from a public policy perspective, Amazon was not in a position to influence the manufacturers because it often did not even know who manufactured a product it listed, as was the case here. The court concluded Amazon was not subject to strict liability because it was not a distributor nor in the chain.

Next, the court rejected the negligence theory because Amazon did not manufacture, sell, or otherwise distribute the product and, therefore, it owed no duty to the buyer. Without such duty, there is no negligence. The breach of warranty theory also failed because Amazon did not manufacture or sell the blender at issue, an underpinning of any claim based on warranty.

AUTHOR’S COMMENTS

Amazon escaped liability in this case because its BSA and FBA established that it would never take title to the products it sold for third-party vendors and every vendor was required to enter into a BSA in order to utilize its services. Although the court here observed that cases around the country were issuing divergent decisions at the trial level, it seems likely that when the appellate courts weigh in, decisions such as this one will be affirmed. New York law is not unique on the strict liability, warranty and negligence theories decided here. These theories developed from common law torts and age-old contract cases, so even if the law is codified in some states, the legal conclusions are likely to be the same. If a party is not the manufacturer of a product or in a position to influence the manufacturer’s policies and performance, it is highly unlikely the law will impose liability based on how a product performed. The court here concluded that Amazon merely supplied services, a conclusion which appears sound.

Although this holding might seem favorable to the eight-hundred pound gorilla Amazon, a company seemingly with the wealth to respond in damages if required to do so, I think the real winners are the smaller companies which use the online marketplace to sell into homes all over the world. If Amazon becomes seriously exposed to liability for defective products it delivers, it most certainly would protect itself under the BSA’s by requiring not only indemnification from its vendors, but also insurance policies where it is a named co-insured. The cost of providing such insurance for Amazon could well be cost prohibitive for many who sell online, thereby excluding them from being able to utilize this valuable marketplace. This could put a severe damper on the profitability of many small companies.

These materials were written by Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal. Ret.), a member of the ad hoc group, with editorial contributions by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the 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.

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