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Amazon’s New Distributor Status Means Safety ‘Headache’ Ahead

Feb. 15, 2022, 11:00 AM

Amazon.com Inc. is a “distributor” of many products sold on its web marketplace, responsible for reporting safety hazards and recalling dangerous products, a federal agency judge recently ruled—a determination that may forecast major financial and logistical obligations for it and other e-commerce companies.

The distributor label “could be a pretty big headache” for Amazon, said attorney Jeremy Robinson, who has litigated against the company on behalf of injured product users. Reporting, recalls, vetting suppliers, scanning for banned products, and inspecting products require money and staffing, he said.

The designation under federal law may have a leveling effect with traditional distributors and retailers—but because expensive changes favor established, well-funded players, it may also provide Amazon with a market advantage over smaller online marketplace operators, attorneys say.

And it may benefit safety at a crucial time. “The pandemic has only increased families’ reliance on Amazon and other online marketplaces for everything from groceries to baby clothes, toys and furniture,” said Nancy Cowles, executive director of Kids in Danger, a consumer safety organization based in Chicago.

The group “hopes this ruling will move the needle in favor of consumers when a product is recalled—or needs to be recalled,” Cowles said in an email.

Fulfilled and Distributed

Executive branch judge James E. Grimes issued the ruling in January in a case where the Consumer Product Safety Commission is trying to force Amazon to formally recall certain pajamas, carbon monoxide detectors, and hair dryers.

“Amazon meets the statutory definition of the term distributor” with respect to products in its fulfillment program, in which it stores and ships products and provides other services to sellers, he said. And it doesn’t fit an exception for logistics providers, Grimes, an administrative law judge, said.

The judge has yet to decide whether the sleepwear and appliances sold in the “Fulfillment by Amazon” program present the level of hazard requiring a recall. Nor has he decided whether Amazon must take additional remedial steps if they do present that hazard—beyond the steps it has already taken, including providing refunds.

Amazon could appeal the determination to the CPSC’s commissioners, and eventually to a district court.

‘Scary’ Information Mountain

Amazon already participates in a reporting program in which it provides data to the CPSC, according to Boaz Green of Neal Cohen Law LLC in Takoma Park, Md. If the “distributor” categorization sticks, Amazon would have to make monthly reports to the CPSC and negotiate recalls, he said. And the company would announce recalls in its own name, he said.

But “more scary for Amazon” is its duty to report hazards from “all this information that sits there” in product reviews, customer return forms, and warranty documents, Green said.

A failure to report can result in civil monetary penalties, and—if willful—potential criminal penalties, he said. That’s “a whole different level of potential exposure,” he said.

There’s also a prohibition on selling products already subject to a CPSC-announced recall, whether voluntary or mandatory, Green said.

“We are aware of the judge’s latest ruling in this case,” Amazon said in an emailed statement. And “while we continue to disagree with the notion that we are a distributor, we share CPSC’s commitment to customer and product safety and will continue working toward that goal,” it said.

CPSC spokesman Jason Levine said that the commission doesn’t comment on pending administrative cases. But “the CPSC expects all sellers, including e-commerce companies, to fully meet their legal obligations to protect consumers from product hazards,” he said in an emailed statement.

Fulfillment Program’s Growth

The FBA program is a large and growing segment of Amazon’s business, according to Stacy Mitchell of the Institute for Local Self-Reliance in Portland, Me., which advocates against corporate economic and policy control. Among the ranks of the top 10,000 third-party sellers, 56% used FBA in 2016, while 84% do now, Mitchell said. FBA accounts for about half of Amazon’s third-party seller fees of $121 billion in 2021, she said, citing a recent report she authored.

Amazon’s sheer size creates challenges, said Robinson, the plaintiffs’ attorney, who’s with Casey Gerry Schenk Francavilla Blatt & Penfield LLP in San Diego, Calif. The effort to monitor products “could be problematic for them” because there’s “too much inventory,” he said.

Amazon will have to make “more effort to vet suppliers” and keep a close eye on CPSC information about banned and prohibited products, Robinson said. And it may need to inspect some products, especially in high-risk categories, he said.

But the main concern for Amazon is that the judge has categorized it as an “entity in the chain of distribution,” Robinson said. That’s a “fundamental blow” to what the company has argued about itself, he said.

Other e-commerce companies will want to pay attention to the case. Still, “Amazon does stand apart,” said Green, who represents companies in their dealings with the CPSC.

“Pure marketplaces” that don’t facilitate transactions won’t be affected, he said. “Some are hybrid,” and if they have a warehouse, package, and ship, “that physical interaction with the product” could expose them to being considered a distributor, he said.

The distributor designation could add more expense and legal exposure, but “if anyone’s in a position to live with it, it’s Amazon,” Green said. “It has the resources and tools compared to more fledgling marketplaces.”

It sometimes supports laws that add complexity and give it a market advantage, he said. A monopolizing effect “could be an outcome” as Amazon comes face-to-face with federal safety requirements, he said.

To contact the reporter on this story: Martina Barash in Washington at mbarash@bloomberglaw.com

To contact the editors responsible for this story: Carmen Castro-Pagán at ccastro-pagan@bloomberglaw.com; Steven Patrick at spatrick@bloomberglaw.com