From A to P: Amazon’s Third-Party Problem

With Christmas ‘only’ two months away, many of us will soon be turning to Amazon for our holiday shopping. But recently, the company has received heavy criticism regarding counterfeited items and expired food sold by third-party vendors. Speaking at the Wall Street Journal Tech Live Conference this week, one of the company’s top managers explained the company is prepared to spend billions to combat the problem.

Some of us (myself included!) will remember that Amazon began as an online bookseller 25 years ago in Seattle, Washington at the height of the dot.com boom. Two years later, America’s largest bookseller Barnes & Noble sued the company, alleging that Amazon’s claim to be “the world’s largest bookstore” was false, because it “isn’t a bookstore at all. It’s a book broker.” Although the case was eventually settled out of court, it is worth mentioning as it underscores a key aspect of Amazon’s business model, and the complexity it faces in controlling the quality of items sold on its website.

Although Amazon does manufacture and sell a range of its own-brand products, more than half  of its sales come from marketplace listings, rather than from Amazon itself as a direct retailer. Whereas pure e-commerce websites allow retailers to sell directly to the consumer, marketplaces like eBay and Amazon require sellers — known as “third party retailers” — to register and then sell products using the marketplace’s platform. Consumers then search for and select what they want to purchase, and the transaction is processed by the marketplace operator. The merchants then give Amazon a commission off of sales made on its platform.

In June, The New York Times reported that although Amazon “sells substantially more than half of the books in the United States,” the company “takes a hands-off approach to what goes on in its bookstore, never checking the authenticity, much less the quality, of what it sells. It does not oversee the sellers who have flocked to its site in any organized way.” While Amazon’s Anti-Counterfeiting Policy prohibits the sale of counterfeit products, it also states that “it is each seller’s and supplier’s responsibility to source, sell and fulfil only authentic products.”

Of course, Amazon’s third party seller problem goes far beyond counterfeited books. Alarmingly, a report by CNBC shows that even expired food, including baby formula, is regularly sold. Regarding Amazon’s 100 best-selling food items, the report “found that at least 40% of sellers had more than five customer complaints about expired goods.” This is substantial, not least because since its purchase of Whole Foods for $13.4 billion in 2017, Amazon has risen to near the top of the $700 billion grocery industry (and that’s only taking the United States into consideration).

Terms & Conditions, lawsuits and regulations… how best to protect consumers?

Generally speaking, when you purchase something online, your relationship with the seller — and any intermediary such as Amazon — will be governed by the website’s terms & conditions.  Under English law (which, in this respect, will be fairly similar to laws in Europe, as well as in the United States) the T&Cs provide certain of the required information to the consumer. They can also provide the consumer with answers to questions they may have, and can modify the commercial relationship to the limited extent permitted by law.

In the United States, the Uniform Commercial Code (“UCC”) will apply to contracts for the sale of goods, as will many other state and national laws regarding consumer safety, manufacturing, labelling, returns, and so on. In the United Kingdom, the most relevant laws are the Sale of Goods Act 1979, the Consumer Rights Act 2015, and various pieces of intellectual property legislation, together with European Union regulations. Regardless of jurisdiction, a counterfeiter can expect to face criminal fines and imprisonment, as well as civil penalties and lawsuits if they are caught.

In addition to complying with applicable laws, Amazon also requires that sellers comply with the 44 (yes, 44!) policies listed on its website. As mentioned above, Amazon’s T&Cs and various policies do expressly prohibit users from selling counterfeit, faulty, or unsafe goods on its website. But experts and insiders claim the problem lies with “loopholes in Amazon’s technology and logistics system”, that allow for expired items to make their way to customers with virtually no accountability. The question therefore remains: despite consumer protection laws and robustly written T&Cs and policies, if a seller breaks the rules, how can Amazon enforce them?! 

For context, there are more than 2.5 million businesses using Amazon for distribution. Many of the sellers hide behind the shield of online anonymity, and many are located in jurisdictions notorious for intellectual property rights infringement, such as China. (On this, see also my article, Chinese IPRs and Trade Wars).

Even the company’s most recent annual report for the U.S. Securities and Exchange Commission admits, for the first time, that they “could be liable for fraudulent or unlawful activities of sellers”. In particular, they may be unable to prevent sellers “from selling unlawful, counterfeit, pirated, or stolen goods, selling goods in an unlawful or unethical manner, violating the proprietary rights of others, or otherwise violating our policies.”

Could Amazon’s anti-counterfeiting technology help?

Speaking at the WSJ Tech Live conference in California on 22 October, Amazon’s CEO of Global Consumer Jeff Wilke explained that the company is prepared to spend billions to prevent counterfeit goods, expired food and dangerous products from being sold on its platforms. “We have to be vigilant and willing to spend hundreds of millions and eventually billions of dollars to protect our customers,” he said.

At the conference, Wilke also extolled Amazon’s reputation as one of the top-trusted brands in the world. He noted that the company welcomes scrutiny, adding further that Amazon has “more than 5,000 people working on [the problem]: to protect the interests of our customers, and consequently our reputation.”

According to its blog post addressing the NYT article mentioned above, Amazon stated that in 2018, it “invested over $400 million in personnel and tools built on machine learning and data science to protect our customers from fraud and abuse in our stores.” The company asserts that it has proprietary technology which “begins screening and analysing during the account set-up process”, and that more than 3 billion suspected bad listings have been blocked since screening began.

Technology provided by Amazon to combat counterfeiting include its Brand Registry service and Transparency, which traces and verifies items using a unique code. Project Zero is another, newer tool which combines “Amazon’s advanced technology, machine learning, and innovation with the sophisticated knowledge that brands have of their own intellectual property and how best to detect counterfeits of their products.”

While tools such as Brand Registry may assist with curtailing the proliferation of counterfeited goods, it is unlikely to stop expired food products from reaching consumers. Besides, a detailed search of every parcel would be a logistical nightmare for Amazon, and practically impossible. So although the technology is encouraging, it remains to be seen just how successful these measures will be. 

Featured photo of Amazon’s warehouse in Dunfermline, Scotland © The Press and Journal