Why States Should Not Make Online Marketplaces Liable for Defective Products

Sujai Shivakumar April 1, 2021
April 1, 2021

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State product liability laws hold manufacturers, distributors, and sellers strictly liable for defective products they bring to market. Injured parties can hold suppliers responsible for harms their products cause without needing to prove negligence or wrongful intent. No seller in the United States is immune, regardless of whether it is a brick-and-mortar retailer or an e-commerce site: If they sell defective products, then they are liable.

But newly proposed legislation in California would twist that principle by making online marketplaces such as those run by Amazon, eBay, and Etsy liable when consumers are harmed by defective products that third parties sell using their platforms. This is unfair and nonsensical. Extending liability beyond sellers to include the digital platforms they use to reach consumers would undercut the viability of many online marketplaces while doing very little to improve product safety. It would only leave consumers worse off in the long run.

The legislation in question, AB 1182, was introduced in the California Assembly in February 2021. It would impose strict product liability on online marketplaces—platforms that aggregate products from multiple third-party sellers. Specifically, the legislation deems platforms liable “for all damages proximately caused by a defective product that is purchased or sold through the electronic place to the same extent as a retailer would be liable for selling the defective product in the retailer’s physical store, regardless of whether the electronic place ever takes physical possession of, or title to, the defective product.” This legislation follows a similar bill, AB 3262, that was introduced in 2020 but failed after significant opposition from companies like Etsy, Shopify, and eBay.

AB 1182 comes on the heels of a decision by the California Court of Appeal court, Bolger vs. Amazon (2020), which found that Amazon’s online marketplace was an “integral part of the overall producing and marketing enterprise that should bear the cost of injuries resulting from defective products.” The ruling noted that as Amazon was “the only member of the enterprise reasonably available to the injured consumer in some cases, it played a substantial role in ensuring the products listed on its website are safe, it can and does exert pressure on upstream distributors to enhance safety, and it has the ability to adjust the cost of liability between itself and its third-party sellers.” AB 1182 would partially codify the Bolger decision and impose strict liability on online marketplaces to the same extent as a retailer would be liable for selling a defective product in its physical store. It would also expand Bolger to impose strict liability even if the online marketplace never has physical possession of the product.

Online marketplaces are platforms that connect sellers with buyers—they are not the sellers themselves. Many of these marketplaces offer additional services such as order fulfilment and thus make it easier for businesses to sell directly to consumers. It is unusual to hold those who allow commerce to take place on their platforms liable for the transactions they facilitate. After all, state laws do not impose strict liability for defective products on the banks retailers use to process payments for purchases, nor on the delivery services they hire to ship packages, nor on shopping malls where their stores may be located. By the same token, it is excessive to impose strict liability on online marketplaces which provide similar services to online sellers. It is true that some sites, like Amazon and Walmart, are both online retailers and online marketplaces—in other words, they both sell their own products to consumers, and provide a platform for third parties to sell to consumers. These sites are already liable for defective products they sell themselves. California’s proposed law would also make them liable for defective products sold by other vendors on their platforms.

Imposing liability on online marketplaces misses one of the primary aims of product liability law—to punish, and in this way, discourage companies from putting dangerous products on the market. Online marketplaces are often not in a position to determine if a third-party seller is offering a defective product. Liability should therefore remain with the actual vendor selling the product, not the platform on which the transaction takes place.

Making online marketplaces liable for defective products sold by others will do little to decrease the number of defective products on the market. It could even have the opposite effect because online marketplaces help provide transparency in the market, such as by compiling consumer reviews for products and sellers. If the proposed liability changes result in a decline in online marketplaces, unsuspecting shoppers might find themselves on e-commerce sites run by unscrupulous sellers who hide or limit negative reviews, putting consumers at greater risk.

Extending liability to online marketplaces will limit market competition given that many smaller platforms may not be able to absorb liability costs. It will also limit the ability of many sellers to list their products in online marketplaces, as many of these platforms may adopt risk avoidance strategies that make it more difficult to become a seller. The net impact will be fewer choices, less competition, and higher barriers for small, independent vendors to sell their products. This imposes costs on both consumers and sellers.

Finally, focusing on liability distracts from more reasonable solutions to a major problem, which is the risk to consumers from foreign sellers operating out of the jurisdiction of U.S. product liability laws. However, there are better solutions to this problem than rewriting state product liability laws. For example, policymakers could work with online marketplaces to inform consumers if they are buying from a seller in a foreign country where making a civil claim would be difficult. They could also work with consumer protection agencies to educate consumers about the potential risks involved in buying from certain overseas sellers. Such initiatives would put pressure on foreign sellers to address these consumer concerns, such as by insuring themselves to pay out any claims.

Online retail is rapidly evolving, and online marketplaces are likely going to remain a key driver of growth and innovation in the coming years. It would behoove policymakers to think more carefully about the unintended consequences of unfairly imposing product liability on these platforms.