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Court Ruling Raises Questions About Amazon & Reverb

Brian T. Majeski
Music Trades

Marketplaces like Amazon, Reverb, and eBay have provided a lifeline to the multitude of m.i. brick-and-mortar stores that were impacted by government lockdown orders during the pandemic. Collectively, these platforms accounted for close to 20% of total m.i. retail revenues for the first half of the year. That’s why a recent legal judgement that could dramatically alter the way marketplaces operate bears close watching. The case involved a San Diego woman who suffered severe burns when a replacement laptop battery purchased from Amazon exploded. She sued seeking damages, but Amazon denied responsibility, arguing that it was only an “intermediary.” Responsibility for the defective battery, it said, lay with the third-party seller, Lenoge Technology. The court saw things differently and said that since Amazon had stored the battery in its warehouses, received payment, shipped the product, set the terms of its relationship with the third-party seller, and gathered fees, it shared in the liability.

Similar cases have been tried in the past, but the California court was the first ever to rule against Amazon. If its ruling holds up under appeal, it would change the legal status of online marketplaces. Previously, they were considered neutral intermediaries much like a phone company or a classified advertising page. Just as AT&T couldn’t be held liable for criminal activity conducted on its network, the prevailing legal theory was that Amazon was merely a platform and bore no responsibility for the activities of third-party merchants using its site. Not anymore, according to the California court.

Including all third-party sellers, the Amazon site offers a mind-boggling 350 million discrete items for sale, dwarfing a Walmart Supercenter with its comparatively paltry 150,000 SKUs. To effectively monitor the quality and safety of such an enormous array of goods, Amazon would incur significant costs that could upset its entire business model. The most likely result would be higher commission fees for those using the marketplace, tighter restrictions on what could be listed, or perhaps both. A similar dynamic would hold for eBay and Reverb, although on a far smaller scale.

Music products are pretty innocuous from a safety standpoint, so it’s hard to imagine a guitar, ukulele, or clarinet getting booted from the site. The same can’t be said for products that plug into the wall or emit radio waves. Potentially buggy software products could also be a problem. However, it’s pretty easy to imagine sharp increases in commission rates that would crimp already razor thin retail margins.

Given the prevalence of counterfeit items popping up on the online marketplaces, many of the industry’s leading brands will probably cheer the California ruling. In the past, the sites have been willing to promptly take down bogus goods when notified. However, a stiff legal liability every time a counterfeit appeared would most likely make them more vigilant.

It has always taken time for laws and regulations to catch up with new technology. Mail fraud statutes came into being well after the creation of a universal postal service, and it was years after the invention of the telephone before wiretapping laws were codified. Similarly, rules and regulations have yet to fully account for online marketplaces. When marketplaces like Amazon or Reverb list products on their sites, are they providing an endorsement like the old Sears slogan, “We stand behind everything we sell?” Or, are they more like a classified ad section, simply offering a neutral platform for sellers to present their goods? We’d say the answer is somewhere in between the two extremes, but it remains for legislatures, regulatory bodies, and the courts to sort it out.

Given their popularity, even before the COVID lockdowns, the marketplaces aren’t going away. But, the terms under which they operate could be subject to major changes. The stakes are high for large companies like Amazon, eBay, and Etsy, Reverb’s new corporate parent, so expect a protracted legal fight, with all the uncertainty that entails. However, for the retailers who have come to depend on these sites as an important revenue stream, pay close attention.

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