A new lawsuit could change how Amazon does business with 3rd-party sellers forever

amazon delivery boxes
  • Texas mom Morgan McMillan wants to sue Amazon over a defective Chinese product.
  • But courts across the US have issued mixed rulings about whether Amazon is a “seller.”
  • The highest court in Texas could set a precedential ruling in a state of 29 million people.
  • Are you an Amazon third-party seller with a story to share? Email acain@businessinsider.com.
  • See more stories on Insider’s business page.

Amazon’s e-commerce empire relies on third-party sellers, but the company has long held that it is not responsible when products from these independent merchants turn up counterfeit, defective, or even dangerous. But a brewing lawsuit may change all that, and alter how Amazon and other e-commerce players do business forever.

In Amazon’s most recent Prime Day – postponed to October 2020 due to the coronavirus – the significance of third-party sales shone through. Third-party sales for the event topped $3.5 billion, eclipsing the company’s own retail business.

Meanwhile, third-party Amazon sellers are becoming a big business outside of the Seattle-based online giant, with private equity firms and other investors looking to buy up successful merchants for millions of dollars.

But an ongoing lawsuit could upend all that, and the ruling, in this case, could echo out to affect more companies than just Amazon. Walmart and other major players making a foray into third-party platforms could also be affected.

Plaintiff and Texas resident Morgan McMillan’s nineteenth-month-old daughter swallowed a battery to a remote control purchased on Amazon, from a seller called “USA Shopping 7693.” The baby was severely injured, but the Chinese-based seller or company couldn’t be found.

McMillan sued Amazon in Texas, even though the company has argued that it isn’t technically the merchant for the remote. Insider spoke with attorney and former Texas appellate justice John Browning, who has litigated product liability cases. He said that in the past, Amazon has tended to settle many cases before they get too far. Amazon declined to comment on the case.

“If I were a betting man, I’d probably give the edge to Amazon, but it’s a very real possibility, given our case law, that the ruling could go the other way,” Browning said. “There are huge implications.”

Texas isn’t the only state where Amazon has been sued over allegedly defective products sold on its website. In California, an appellate court ruled last August that a woman who was burned by a defective Chinese laptop battery sold through the “Fulfilled by Amazon” program could hold Amazon liable.

The case is currently set for trial in October, court records show. Jeremy Robinson of the law firm CaseyGerry, who represents plaintiff Angela Bolger in that case, said Amazon appears to have stopped allowing third-party sellers to do business under fake names after the decision came down, but he said it wasn’t clear whether it was prompted by the lawsuit.

“There’s basically a zero-percent chance of actually getting anything” from any defendants other than Amazon, said Robinson, who is also representing consumer advocacy groups in the Texas case. It could be very difficult to seize a shipment from a Chinese seller or to sue in Chinese courts, he added.

Legislators in California have proposed a new bill, AB 1182, that would clarify when electronic retailers can be held liable for defective products, although debate on the measure in its early stages. Amazon endorsed a similar proposal that passed the California senate in 2020, but other online retailers opposed it and that bill never became law.

Craig Crosby, who founded consumer advocacy group Counterfeit Report, told Insider that Amazon and other e-commerce players have long ignored the issue of counterfeit, pirated, and defective goods “through legal loopholes.”

“Let’s bring it down to just common sense. Do you really say, ‘Anyone can sell anything on my website and I am not responsible for it’? Whereas a brick and mortar store is?” he said. “When you walk into a Walmart store and buy food, you have an expectation that that food is pure and healthy. When you buy it online – anything goes.”

Are you an Amazon third-party seller with a story to share? Email acain@businessinsider.com.

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How JFK customs searches 1 million packages a day for illegal items

Following is a transcription of the video.

Narrator: About 1 million packages arrive at John F. Kennedy International Airport every day. And just like travelers have to go through customs, so do international packages. The US Customs and Border Protection, or CBP, is tasked with screening all of them. They’re looking for anything that isn’t legally allowed in the US; certain foods, animals, drugs, and counterfeit goods.

JFK is one of nine international mail facilities in the US. It’s essentially the country’s biggest mail room, dealing with roughly 60% of all international packages entering the country.

First, the packages are taken off arriving passenger or cargo planes and transported to the US Postal Service’s mail room on site. They’re sorted and then taken to the CBP mail facility next door for inspection. CBP uses a three-tiered strategy to efficiently search each of these packages; intelligence gathering, nonintrusive inspection, and hand inspection. We followed two units searching for drugs and counterfeit items.

Before a package ever lands in the US, CBP gathers intelligence on the sender, the container, and the aircraft. They’ll check with law-enforcement partners like Homeland Security, the DEA, and the FBI to see if there’s anything of interest. This is how CBP narrows down a million packages to ones that will get flagged for further inspection.

Once a suspicious package is pulled, it goes to the CBP inspection area. This is where human CBP officers get a little help. Here, a four-legged officer, like Alex, will search hundreds of packages in 20-minute runs. These dogs are trained to sniff out seven different drugs.

Michael Lake: The drugs that they are trained for are hash, marijuana, cocaine, heroin, methamphetamine, ecstasy, as well as fentanyl.

Narrator: If Alex finds something, he’ll notify his handler by sitting or lying down. If he’s right, he gets his chew toy.

Lake: This is the game that they work for. All right, it’s good play. Here’s a good boy, good boy.

Narrator: And if Alex or one of his furry friends comes in contact with a drug, officers have the antidote Narcan on hand. Nearby, CBP officers are using another nonintrusive search tool: X-rays.

Nathanial Needham: When I first started this, I would literally open up everything ’cause I couldn’t tell what the image was. But eventually, after you do thousands of parcels, opening them up and comparing them to image, now you start getting good. You can identify, oh, that’s this, oh, that’s this. We can let that go because of this.

Narrator: If they see something on an X-ray monitor that looks suspicious, officers will isolate the package.

Needham: Can we pull that one, actually?

Narrator: Isolated packages go through an intrusive search. Officers will cut them open to hand-search for drugs or counterfeit goods.

Needham: I always got taught, basically, expect a package to be something that’s going to your mom, so that if it is good, it’s coming back to your mom the same way that it’s supposed to be.

This is common. It’s, like, from back home. It’s pills, certain kind of vitamins, and they get them from their little pharmacy. I’m pretty sure that this right here is actually a steroid.

Producer: Is that allowed?

Needham: No. The worst part is you don’t know what’s in these capsules.

Narrator: If the officer finds drugs, the package is sent to Murielle.

Murielle Lodvil: That’s 4,000-plus pills here.

Narrator: But if he finds a counterfeit good, it’s sent to Steve. We’ll start with Murielle.

Lodvil: The strangest areas that we find drugs concealed are radio speakers or even car bumpers. For some reason, they love to place cocaine in car bumpers. It’s crazy, where we even find drugs in Play-Dohs. Also books, children books. In between the lining of the pages, you’ll find drugs there.

Narrator: Murielle tests the drugs with a spectrometer called a Gemini. Using lasers, the machine can pierce through packaging and tell what drug is inside.

Lodvil: Right now, I’m gonna test this particular package. It’s telling me that it’s ketamine. It’s used for horse tranquilizer and also painkillers.

Narrator: Murielle will label the drugs based on where they fall among the DEA’s drug schedules, Schedule V being a drug with the lowest potential for abuse or dependence, like Robitussin, and Schedule I being a drug with the highest potential for abuse, like ecstasy.

Lodvil: We have the GBL coming from the Netherlands, and someone in New York is receiving it. Steroid, a Schedule III, coming from Hong Kong. Then we have the carisoprodol coming from India. And then we have the tramadol coming from Singapore.

Narrator: Any scheduled drugs will be seized.

Lodvil: There is no day that we come to work that we don’t find anything. Every day is a sense of importance because of the fact that we taking out those particular drugs from the street.

Narrator: The narcotics unit had over 7,600 seizures in 2018, including 246 pounds of cocaine and over 360 pounds of ecstasy.

Now, back to Steve. He’s the one that gets all the counterfeit goods. That’s anything that infringes on a company’s intellectual property rights, or IPR. Think fake Air Jordans, Gucci purses, or Rolex watches. Companies like Louis Vuitton and Gucci train Steve on the telltale signs for spotting a fake. While most of the tips are kept top secret to protect the brand, there are a few things that Steve could share with us.

Steve Nethersole: The first, when it comes in, is the country of origin. These high-end manufacturers here, Louis Vuitton, Gucci, they’re coming from France, Italy, Spain. The watch is coming from Switzerland. When it’s coming from China, bing, that’s your No. 1 red flag. Then you look at the dilapidated boxes, so that’s two red flags there. A third thing is commingling. The high-end manufacturers never commingle their products, like, in other words, a Gucci inside a Fendi or a Louis Vuitton. These people will stuff watches, a wallet, inside a handbag. And so, they’ll never commingle their products. They are so precise.

Some of the things I could say, like, some of the manufacturers, they don’t put any of this in it, the filler, inside it. They would never do that. We’ll look at the smell. Sometimes it smells like petroleum. It’s not real leather. We look at the stitching. We look at the symmetry of the logos by the manufacturer, the zippers. This one here is a Coach bag with a Michael Kors zipper. This coat has “Burbelly” on the buttons instead of Burberry, so these are the comical things that we find when you look at it up close, and you could pick it right out.

Narrator: Counterfeit goods make up an estimated trillion-dollar industry that’s even been linked to terrorist groups around the world. In 2018, CBP had over 1,800 IPR seizures. And if all those counterfeit goods had gone on to sell at their suggested retail price, they’d total an estimated $54 million. So, where do all these seized goods end up anyway?

Well, most of the narcotics and counterfeit goods will be sent to a top-secret incinerator to be destroyed. Some of the drugs will go under further testing, while some of the counterfeit goods may be donated if the offended company allows it. But, in some cases, if the illegal goods are part of a greater investigation, CBP officers will actually put that package back in the mail. Then, they’ll track it all the way to the person it was sent to. This is known as a “controlled shipment.”

Lodvil: I’m the one who opened that package, and now I’m involved in this controlled delivery. Now I get to finish the story. All right, now we go out. We knocked on your door, you open. Hello, we noticed that you’ve ordered, you know, this particular package. It’s MDMA. What’s the story behind it? So then, we listen.

Narrator: But whether they’re up against fake Guccis or dangerous amounts of fentanyl, CBP stands guard at the country’s busiest mail facility.

Lake: This is where it comes. You don’t see it all the time coming across the border in trucks and big bundles, like the TV will have you see. This is where it’s all coming from, and it hits the street and it destroys lives. So, in our way, if we can stop it here, it’s one less tragic story, probably, that we’re gonna have to hear about.

EDITOR’S NOTE: This video was originally published in September 2019.

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