On July 3, the Third Circuit Court of Appeals reversed a lower district court decision and held that Amazon can be liable as a “seller” for defective products sold by third parties on its online marketplace. This holding, if applied broadly, exposes companies that maintain third-party vendor platforms to strict liability lawsuits for defective products – a decided change to the legal supply chain landscape.

In Oberdorf v. Amazon.com Inc., No. 18-1041, 2019 U.S. App. LEXIS 19982 (3d Cir. July 3, 2019), a purchaser of a defective dog leash sued Amazon under strict product liability and negligence theories. The retractable dog leash – purchased from a third-party vendor on Amazon’s online marketplace – allegedly permanently blinded the plaintiff when it broke and recoiled. The Middle District of Pennsylvania found that Amazon was not a “seller” under Pennsylvania law, and therefore was not liable. On appeal, however, the Third Circuit vacated and remanded the district court decision. The Third Circuit found that Amazon was a “seller” of the product, despite Amazon’s argument that “it merely provides an online marketplace for products sold by third-party vendors.”

The Court weighed four factors articulated in a previous Pennsylvania decision, Musser v. Vilsmeier Auction Co, Inc., 562 A.2d 279 (Pa. 1989). First, the Court concluded that Amazon was the “only member of the marketing chain available to the injured plaintiff for redress.” The plaintiff was unable to locate the vendor. However, the Court also noted that Amazon enters into agreements with its vendors that restrict them from communicating with customers on any other platform. The Court determined that “this enables third-party vendors to conceal themselves from the customer.” Second, the Court held that imposition of strict liability upon Amazon would incentivize safety because Amazon “is fully capable, in its sole discretion, of removing unsafe products from its website” by virtue of its vendor agreements. Next, the Court determined Amazon was “in a better position than the consumer to prevent the circulation of defective products” because Amazon receives customer feedback regarding defective products while contractually limiting vendors’ direct channels of communication with customers. Finally, the Third Circuit found that Amazon already distributes the cost of compensating for injuries through indemnification provisions in its vendor agreements.

Although Oberdorf v. Amazon.com Inc. was decided under Pennsylvania’s strict product liability laws, its holding is likely broader – Pennsylvania adheres to the Second Restatement of Torts, as do other states. The Court’s decision was largely influenced by terms in Amazon’s vendor agreements. In light of this, other online marketplaces should evaluate their own vendor agreements and consider the restrictions they place on direct communication between vendors and customers. Moreover, online marketplaces should develop vetting processes to determine if third-party vendors are in good standing and amenable to the legal process. The Court’s decision, however, has unavoidable implications for online marketplaces. Other online third-party vendor platforms similarly operate under Amazon’s model and exert substantial control over vendors, or have vendor agreements with similar provisions. As the Court pointed out, online marketplaces may have to increase the commissions they charge vendors to accommodate increased product liability exposure, or may have to change their insurance coverage. Thus, the Court’s decision changes supply chain risk allocation in this important area.