The Subrogation Strategist

New York has joined a growing number of jurisdictions ruling that Amazon can be liable for defective products sold by third-party sellers on its website. The rationale for New York’s recent ruling is based upon Amazon’s level of control over the sale of the product. There are three ways which products are sold on Amazon: (1) Amazon sells, processes and ships the product; (2) a third-party sells, processes and ships the product (i.e., Amazon does not take possession of the product); and (3) a third-party sells the product and Amazon “fulfills” the order by storing, processing and shipping the product through its “Fulfillment by Amazon” (FBA) logistical program. The FBA program has been the lynchpin in many of the recent decisions decided against Amazon, including a recent New York case. Under the FBA, the sellers store their inventory at Amazon’s warehouse until the product is purchased, at which time Amazon retrieves the product from its warehouse shelf, packages it, and ships it to the consumer. Accordingly, Amazon has significant control over products “fulfilled” through the FBA.

In State Farm Fire & Cas. Co. v. Amazon.com Servs., Inc., 2020 N.Y. Misc. LEXIS 10352, 2020 NY Slip Op 20326 (Sup. Ct.), a subrogating carrier filed a product liability lawsuit against Amazon.com Services, Inc. (Amazon) for property damages resulting from a fire caused by a defective thermostat ordered through Amazon, which was fulfilled through the FBA. Amazon filed a motion to dismiss the lawsuit, arguing that it could not be liable for subrogation damages because Amazon never took title of the thermostat, but rather merely provided “temporary storage” for the product in its warehouse. The Supreme Court of Onondaga County, New York disagreed.

In New York, anyone in the distribution chain of a defective product may be held liable, including retailers and distributors. The court in State Farm Fire & Cas. Co. ruled that Amazon exercised “sufficient control” over the product through the FBA program and could face liability as a retailer or distributor. As noted by the court, Amazon physically stored the product on the shelf in its warehouse, Amazon maintained possession of the product, and Amazon packaged and shipped it to the consumer. Additionally, Amazon’s contract with the seller includes an indemnification clause, whereby Amazon can seek indemnification from the seller for claims arising from defective products sold on the website.

The tide has begun to shift against Amazon in the product liability landscape. However, it is significant to note that the State Farm Fire & Cas. Co. decision has limited value as controlling precedent in New York because a New York trial court, rather than an appellate court, issued the decision. In addition, it is important to note that there are currently two contrary federal decisions in New York in favor of Amazon, both of which Amazon relied upon in support of its motion for summary judgment. See Eberhart v. Amazon.com, Inc. 325 F.Supp.3d 393 (S.D.N.Y. 2018) (holding that Amazon was outside the chain of distribution because it never took title of the product and, therefore, could not be subject to product liability); Phila. Indem. Ins. Co. v. Amazon.com, Inc., 425 F.2d Supp.3d 158 (E.D.N.Y. 2019) (relying upon Eberhart and holding that Amazon was not a seller because it never took title to the product and, thus, was outside the chain of distribution). As Amazon continues to argue that it is not a “seller” based upon the fine print in its third-party contracts, the courts are recognizing that Amazon has sufficient control over third-party products to hold them accountable for defects. As the court noted in State Farm Fire & Cas. Co.: “Amazon seeks to have all of the benefits of the traditional brick and mortar storefront without any of the responsibilities.”

The pandemic has caused Amazon’s sales to skyrocket and it is anticipated that e-commerce sales will continue to rise into the foreseeable future. The string of decisions against Amazon have all been decided within the past two years. Even though the tide has begun to shift against Amazon, it is anticipated that Amazon will continue to spar with insurance companies over defective product claims involving third-party sellers. Accordingly, subrogation professionals must strive to understand the recent favorable decisions regarding Amazon and the rationales for potential liability for third-party products, especially when they are “fulfilled” through the FBA.