The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), analyzing a recent decision of interest:
A bankruptcy court in Arizona denied enforcement of a clause limiting the liability of Amazon Services LLC in transactions arising under the Amazon Services Business Solutions Agreement (Agreement), ruling that at the time the Agreement was executed damages were not unascertainable and enforcing the clause would violate public policy. Shaffer v. Amazon Services LLC (In re Potential Dynamix LLC), 2021 Bankr. Lexis 359 (Bankr. AZ 2/15/21).
To view the opinion, click here.
Potential Dynamix LLC (the debtor) filed a voluntary chapter 11 bankruptcy on October 13, 2011. Timothy Shaffer was appointed chapter 11 trustee in January 2012. The debtor was purportedly at one time Amazon’s largest volume customer, listing up to 30,000 products for sale on Amazon’s internet-based platform. In April 2013, Amazon terminated the debtor’s ability to sell products on the platform, which instantly put it out of business. As a result of the termination, the trustee filed an adversary proceeding against Amazon, originally alleging $1.5 million in damages resulting from lost inventory and withheld sales revenue. After expert discovery, the trustee in 2019 increased the claimed damages to more than $6 million. Amazon filed a partial summary judgment motion, asserting that under the limitation on liability clause (the Clause) in the Agreement, damages were capped at $2,206,369 which was the sum of fees “the debtor paid to Amazon related to its participation in the Fulfillment by Amazon program in the six months preceding the action.”
Amazon asserted that limitation of liability clauses in such contracts are routinely enforced when they are clearly written, where damages were uncertain at the time of contracting, and when the limitation is reasonable. It pointed to Delaware law in support of its request that the court enforce the Clause. The trustee opposed, asserting among other things that the Clause was unreasonable and unconscionable. After argument, the court took the matter under submission and then issued this opinion, denying the motion.
The court first addressed Amazon’s reliance on Delaware law, which was unopposed by the trustee. It noted that the Agreement itself explicitly stated that the laws of the State of Washington govern the Agreement and it therefore analyzed the issue under Washington law. Under Washington case law, limitation of liability or exculpation clauses are enforceable unless they are inconspicuous, involve liability for acts falling below the gross negligence standard or the clause violates public policy. The court noted that although the Clause was conspicuous, written in all caps, there is nothing in the Clause which supports the 6-month look back period and the Clause is unclear as to exactly how that 6 months would be measured. Moreover, the liability cap is totally unrelated to the damages or harm the debtor might suffer due to Amazon’s breach of the Agreement. This limitation is unreasonable and violates the second and third prongs of the Washington standard describe above.
The court further observed that to determine whether an agreement is likely to be declared invalid on public policy grounds, Washington applies a 6-factor balancing test. Among the relevant factors is whether the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks the services and whether that results in a contract of adhesion. The court analyzed the Agreement and bargaining process between the debtor and Amazon. It determined that because Amazon was the dominant online platform for internet sales, the debtor really did not have the option of taking its business elsewhere. Amazon used a standardized form that bound a customer to its terms merely by using Amazon’s services, without any realistic hope that the debtor could modify the terms. Based on this analysis, the court concluded the contract was adhesive and violated public policy.
In essence, the court refused to enforce the exculpation clause for two reasons: it was violative of public policy and the damages limitation was unreasonable because (a) the measure was not related in any manner to the likely damages which might occur upon contract termination and (b) the damages were not unascertainable at the time of contracting; it just would take some detailed calculations to ascertain them.
This strikes me as Amazon seeing just how far it could go in its standard form contracts to benefit its bottom line at the expense of its customers. It first tipped its hand re its self-interest by inexplicably asserting that such clauses were generally enforceable under Delaware law, when the Agreement which it had written had a choice of Washington law. Its legal department must have decided sometime between 2013 and the time of this litigation in 2020 that Delaware law was more favorable to Amazon and determined to see if it could get away with asserting Delaware law applied despite the choice of law provision in the Agreement. The trustee did not seem to notice, but the court wisely did.
Secondly, under the Washington case law standards as analyzed by this Arizona bankruptcy judge, this clause would seem doomed from beginning. First, it was premised on damages being unascertainable, which was clearly wrong under the circumstances. The damages which might arise when the debtor had placed its inventory for sale in Amazon’s distribution centers and then Amazon terminated the contract, with no accounting for that inventory in either dollars or product, were entirely foreseeable and calculable. Reaching that conclusion was not legally complex, so Amazon’s intent to limit its exposure for contract breaches could only be achieved if the customer raised no defenses.
Finally, the unequal bargaining position of the parties to the contract, which could make it violative of public policy if it contained unreasonable terms, was evident. Amazon used a standard form contract on a “take it or leave it” basis. Its customers needed Amazon far more than Amazon needed any one customer. Unless the provisions in the Agreement were palpably fair, a court would not enforce it against the “little guy.”
These materials were written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), a member of the ad hoc group, with editorial assistance from Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and past chair of the 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.
The background facts are taken from an earlier opinion, In re Potential Dynamics LLC , 2019 Bankr. Lexis 3351 (Bankr. AZ 2019).