Extension of Strict Liability to E-Retailers

1 Need to tackle the ambiguities

With the increase of access to information through the Internet over the last two decades, reasonable expectations of consumers have changed to reflect new market dynamics. According to empirical research, ‘on the supply side, retail grocery competition has intensified with the emergence of online provision and transnational retail firms, creating higher, often dispersed, purchase expectations’.^[15] In European countries or at the EU level, this change in consumers’ perception has not yet led to the expansion of strict product liability to cases involving online commerce businesses. At first sight, it seems e-retail marketplaces do not fit the technical or ordinary definition of producer.

However, the scope of that definition is indeed not precise enough to clearly assert that e-retailers are not producers. There are, at present, numerous discussions surrounding which category of persons should be held liable for damage arising out of a defective product.^[16] Even if the most obvious is the manufacturer, several legal systems also classify an entity which has created the impression of being a producer by attaching its name, trademark, or other distinctive mark to the product as producer.^[17] Taking into account the lack of confirmation as to the identity and solvency of such producers, there is a consensus among courts and legal scholars to the effect that other persons should nonetheless be held responsible.^[18] To avoid both placing the burden of bringing claims in foreign jurisdictions on the shoulders of the consumer and allowing a defendant to challenge a claim by alleging that somebody else is liable, commercial importers of said defective products must assume responsibility.

Here, the essential question is whether, under the circumstances of the specific case, an online marketplace, either presenting itself as the producer or importer of such products into the EU in its ordinary course of business, may be brought within the scope of liability. The answer should not depend on the subjective intent of e-retailers, but on an objective evaluation of the business model under an established legal framework.

There are two general business methods of fulfilling online orders: fulfilment by e-retail marketplaces (FRM) and fulfilment by merchants (FBM). The determination whether, under the given circumstances, an e-retail marketplace meets the definition of ‘producer’ requires both methods to be defined first. The convenience which accompanies FRM services includes the inventory, storage, packaging, shipping and post-sale care in the event of a return of the seller’s product, thereby allowing sellers to attain a wider consumer base. For example, businesses that participate in ‘Fulfilment by Amazon’ ‘send products to Amazon fulfillment centers and when a customer makes a purchase, [Amazon] handles receiving, packing, shipping, customer service, and returns for those orders’.^[19] Despite the hefty price-tag attached to FRM services, vendors still tend to employ said services due to not only its ease and efficiency but also due to a vendor’s retention of title in the product concerned.

Nevertheless, in the event that a third-party vendor elects FBM services, said vendor remains responsible for the inventory, storage, packaging, shipping as well as the post-sale care and thus the e-retail marketplace does not have any physical interaction with the product in question. In this last scenario, e-retail marketplaces act as a passive and technical intermediary between sellers and consumers, and cannot be classified as the producer. Despite the fact that consumers and sellers alike must register on the platform via an electronic medium, sometimes under a pseudonym, these marketplaces do not consider themselves as the manufacturers of the products offered online. Since they have neither real control over the transaction nor on the product itself, e-retail marketplaces opting for FBM can also not be defined as an importer. Consequently, product liability laws do not give a right to claim compensation against online marketplaces when the sale of the product occurred as a result of an FBM agreement.

However, there is an emerging consensus of the need to recognise the e-retail marketplace deeply involved in the transaction as a producer when it adopts the FRM business model, thus allowing the consumer no alternative save for direct interaction with the marketplace when purchasing a product, in lieu of interacting with the seller. Although, in this case, the e-retailer is not the manufacturer of the defective product, since it maintains an online marketplace; imposes its contractual terms and conditions; reserves the right to change them; is able to suspend, remove, or disable access to product listings; offers communication channels between its customers for feedback; encourages loyalty and word-of-mouth recommendations; processes orders, and invoices; ships the product in its own branded packaging, it can be qualified as a quasi-producer and held jointly and severally liable for the loss. In Germany, it was held that the mere placing of a distinctive mark onto a product would suffice in regard to the classification of quasi-producer, irrespective of whether the consumer had seen that mark.^[20]

Classifying them as quasi-producers is not the only way to extend strict liability for defective products to online retailers. To this end, another possibility is to treat e-retail marketplaces that import from outside of the EU as producers. Such a need was also recognised by the European Market Surveillance Regulation, which came into full force on 16 July 2021:^[21]

‘The challenges of the global market and increasingly complex supply chains, as well as the increase of products that are offered for sale online to end users within the Union, call for the strengthening of enforcement measures, to ensure the safety of consumers. Furthermore, practical experience of market surveillance has shown that such supply chains sometimes involve economic operators whose novel form means that they do not fit easily into the traditional supply chains according to the existing legal framework. Such is the case, in particular, with fulfilment service providers, which perform many of the same functions as importers but which might not always correspond to the traditional definition of importer in Union law. In order to ensure that market surveillance authorities can carry out their responsibilities effectively and to avoid a gap in the enforcement system, it is appropriate to include fulfilment service providers within the list of economic operators against whom it is possible for market surveillance authorities to take enforcement measures’.^[22]

By permitting consumers to file a claim against importers, art 3 (2) of the EU Product Liability Directive sought to avoid complexities of service outside the consumer’s jurisdiction and possible conflict of laws issues.^[23] This approach is in conformity with the solution set forth by the EC Regulation 44/2001 (hereafter, Brussels I),^[24] wherein art 5 (3) reads that product liability claims may be brought ‘at the place where the harmful event occurred’, in most cases where the respective injured party is domiciled.

In a Green Paper, the EU Commission suggested broadening the definition of producer and extending the strict liability regime to ‘any professional in the production supply chain when his activities have affected the safety properties in question of a product placed on the market’.^[25] The fact that some Member States still define the term ‘producer’ in a narrow way despite the Green Paper has recently incited the EU Commission to adopt another solution in order to overcome the difficulties inherent in applying the special product liability rules to the changing economies of the 21st century. The EU Commission has invited major online marketplaces to sign the ‘Product Safety Pledge’, and to adhere to its voluntary commitments.^[26] The latter aims at assisting e-retail marketplaces in identifying defective products through market surveillance that has typically fallen to producers.^[27] Some voluntary measures in the Product Safety Pledge will soon be reclassified as obligatory, since the EU Commission included them in its Proposal for a General Product Safety Regulation of 30 June 2021,^[28] which would replace the current General Product Safety Directive.^[29]

Even though they may provide solutions for reducing the number of defective products on the market, these soft law principles and regulatory measures are not apt to fill the legal gaps in product liability regimes in Europe, which were not developed to take into account the concept of online shopping. Therefore, the ambiguities regarding the liability of e-retail marketplaces for third-party defective products should still be addressed in EU consumer policy. Recent developments outside the EU are of particular interest in this regard.

2 Recent perspectives

Given the recent developments in e-retail marketplace liability in the US, it is wise to look to US case law to gain some insight into the possible solutions to the issues arising in the context of the on-going evolution and growth of e-retail in Europe. For example, in Bolger v Amazon.com LCC (‘Amazon’), the claimant was an Amazon Prime user who purchased a laptop from a third-party manufacturer and seller, Lenoge Technology (HK) Ltd.^[30] Lenoge initially shipped the product to an Amazon warehouse for storage, whereafter Amazon proceeded to ship the product to the claimant in its standard Amazon-branded packaging. After some months of use, the battery in the laptop exploded and caused injury to the claimant, who then filed a personal injury suit including strict product liability claims against Amazon, Lenoge and other defendants.^[31]

In this case, Lenoge and Amazon had put in place a ‘fulfilment by Amazon’ (FBA) agreement, pursuant to which, Amazon was responsible for the marketing, sale and shipping processes as well as all communication with the claimant.

The trial court rendered a judgment in favour of Amazon, finding that the latter was not the manufacturer, distributer, or seller of the defective laptop battery.^[32] Since Lenoge was served but did not appear, the trial court decided in the absence of the defendant (Lenoge).^[33] The Court of Appeal reversed and found Amazon to be liable for the injuries sustained by the claimant as a result of the exploding laptop battery. An important conclusion to be drawn from the Court’s holding is:

‘As a factual and legal matter, Amazon placed itself between [the seller] and Bolger in the chain of distribution of the product at issue here. Amazon accepted possession of the product from [the seller], stored it in an Amazon warehouse, attracted Bolger to the Amazon website, provided her with a product listing for [the seller’s] product, received her payment for the product, and shipped the product in Amazon packaging to her. Amazon set the terms of its relationship with [the seller], controlled the conditions of [the seller’s] offer for sale on Amazon, limited [the seller’s] access to Amazon’s customer information, forced [the seller] to communicate with customers through Amazon, and demanded indemnification as well as substantial fees on each purchase ... Whatever term use[d] to describe Amazon’s role, be it “retailer”, “distributor”, or merely “facilitator”, [Amazon] was pivotal in bringing the product here to the consumer.^[34] [Amazon was an] integral part of the overall producing and marketing enterprise that should bear the cost of injuries resulting from defective products’.^[35]

The Court of Appeal emphasised the role of general policy reasoning which drove its findings: firstly, given that Lenoge is incorporated abroad, Amazon remains the sole entity which must and can be held liable in the chain of distribution^[36]; secondly, ‘[j]ust like a conventional retailer, Amazon can use its power as a gatekeeper between an upstream supplier and the consumer to exert pressure on those upstream suppliers ... to enhance safety.’^[37] Based on the specific circumstances at stake in the Bolger case, Amazon was indeed in a position ‘to play a substantial part in ensuring that the product is safe or may be in a position to exert pressure on the manufacturer to that end; the retailer’s strict liability thus serves as an added incentive to safety’.^[38] Finally, the Court was of the opinion that Amazon is well-positioned in that it is capable of distributing losses incurred from the use of defective products to the third-party vendor who supplied such defective goods by way of shifting the cost of compensation.^[39] Indeed, third-party suppliers accept that Amazon is entitled to (1) claim reimbursement if Amazon has to pay damages to the buyer, and (2) withhold or delay payments to third-party suppliers in the case of a dispute or claim relating to the product sold or service rendered.^[40]

In the US, particularly California, Bolger v Amazon seems to open a breach in the fortress built by the doctrine of product liability around online marketplace activities.^[41] In April 2021, the California Court of Appeal handed down its judgment in Loomis v Amazon, which had very similar consequences for Amazon.^[42] In this case, Amazon was sued for injuries incurred as a result of a fire-related accident during the use of a defective hoverboard.^[43] The latter was sold by a Chinese company on Amazon.

In a response to these judgments, Amazon announced that, effective from 1 September 2021, it shall take over the costs of defective product claims going forward.^[44] The essence of such procedure is that a US-based customer may contact Amazon regarding a defective product and Amazon will then notify the third-party vendor of such defect. In the event that the supplier fails to respond or rejects the claim, Amazon will then compensate the customer up to USD 1,000 if, of course, Amazon decides that the claim is meritorious.^[45]

3 Prospects and future challenges

Although recent case law has provided conglomerates such as Amazon with an incentive to embody a more fundamental role in the compensation process, it is unclear whether said incentive goes far enough to rectify the issue seeing as the value for defective products claims may well exceed the USD 1,000 threshold. The lack of strict liability in several states in the US still creates an increased risk of defective products being sold to consumers.^[46] This is similarly the case in the EU. Online marketplaces play a significant role in the chain of distribution, where there is a need of a fair and workable adjudicatory system. Taking into account the evolution of consumers, from retail consumers to platform consumers as well as the latter’s expectations, the system should be redesigned to adjust the balance between individual liberty and social welfare.

The first step to this end would be considering such marketplaces as one of the actors in the product delivery pipeline and, therefore, as a producer under the strict product liability regime, as the EU’s legislative body put forward in the new Market Surveillance Regulation.^[47] However, in the absence of any ruling to date in European countries or at the EU level, it remains unclear whether e-retail marketplaces opting for FRM can be qualified as a quasi-producer or importer and held liable for a loss caused by a defective product.

Should this gap remain unfilled in a consumer-friendly manner, it is evident that enterprises will see to capitalise on this by investing less time and money in establishing physical footprints in locations where strict product liability frameworks would point to compensation. The wide-scale effect of this will see an immense and unjust shifting of costs and other burdens onto consumers, public health systems and insurers, which will have no recourse against the person responsible for the harm in question.

Moreover, as examined in this article, in the event that it is a foreign vendor that has caused a loss arising out of a defective product, the injured customer will have no viable recourse against any person within the distribution chain save for the online marketplace. The imposition of strict liability on an e-retail marketplace that takes on almost all the roles of a traditional and very powerful distributor business model provides for a consumer-friendly approach by offering maximum protection without unduly impacting the e-retail marketplace in question, seeing as the marketplace is capable of meeting the costs triggered by such protection.^[48]

In addition to the promotion of economic efficiency aiming at allocating losses as incentives to minimise the sum of the costs of accidents, the threat of strict liability will deter the marketing of defective products, and force e-retail marketplaces to take extra measures. Indeed, they are in a position to improve their vetting process, and exert pressure on manufacturers and sellers to ensure that their products are safe. To this effect, it is evident that strict liability imposed on online marketplaces drives them to ensure the safety of products which they put into circulation.

1 Concept of organisational defect

In a time when agricultural markets were local, businesses operated and existed almost entirely in one location, and partnerships were limited in size, the classical legal theory of vicarious liability was sufficient to meet the requirements set by law because owner-managers could directly communicate with workers. However, new justifications for vicarious liability were required when the Industrial Revolution led to the growth of businesses and the development of trading networks.^[49] Today, in several jurisdictions, an organisational defect is considered sufficient to justify vicarious liability. This new way of thinking ensures that organisational defendants, such as manufacturers, retailers, or other employers, cannot exonerate themselves from liability on the ground that the accidents caused by their profit-making activities were beyond their control.^[50]

For instance, when revising the Code of Obligations in 2011, the Turkish legislature formulated vicarious liability for organisational defects as follows: ‘An employer in an enterprise has to compensate the damage caused within the sphere of the activities of the enterprise, unless they prove that the organisation of the enterprise was appropriate to avoid the occurrence of damage of this type’ (see art 66 (3) of the Turkish Code of Obligations, TCO).^[51] This provision, which was, to a large extent, modelled on art 49a of the Swiss Draft Project on the Revision and Unification of Civil Liability (SwDP),^[52] takes into account the fact that enterprise liability focuses on activities rather than on acts. The new Turkish provision neither requires that the enterprise in question must be economic or professional in nature, nor that it has to be a commercial enterprise. In order to fall within the ambit of art 66 (3) TCO, the person relying on one or more auxiliaries in order to run an enterprise only needs to be a physical person or a legal entity. It is irrelevant whether or not they seek to make a profit.

The new provision indeed codifies judicial practice aiming to ease the establishment of liability without the need to provide proof of the real cause of the damage.^[53] Once the plaintiff has proven the damage and the causal connection, the employer is liable, and cannot escape liability by proving that the organisation of their enterprise was appropriate to avoid the occurrence of damage. Hence, liability under art 66 (3) TCO comes very close to a strict liability for damage caused by defective services and products.^[54]

As the case law on vicarious liability for organisational defects varies from country to country, the enterprise liability doctrine imposes a duty of care that is more stringent than what ‘reasonable care’ would otherwise require, because this liability is based on the argument that the circumstances causing damage could have been prevented if the principal had had sufficient control of their enterprise.^[55] Thus, each occurrence of an accident presupposes a failure by the principal to exercise all proper care to prevent the damage. Moreover, courts examine whether the enterprise is organised in such a way that an adequate safety control of services and products would be able to detect all possible defects which may occur during the running of the enterprise, although it is well-known today that some defects are not avoidable, even with utmost care.

2 Defective e-retail organisations

E-retail marketplaces can be considered as organisations in terms of vicarious liability, and as such they should not be permitted to raise the defence of lack of control over the product or of knowledge of the defect in each instance where a third-party defective product causes an accident that results in death, injury or property damage. The e-retail marketplace’s level of participation in the conclusion of the contract as well as to its performance should be taken into account in order to evaluate to what extent the organisation was involved in the retail management process. In cases where it is heavily involved in transactions whilst maintaining an online business, imposing its contractual terms and conditions; reserving the right to change them; being able to suspend, remove, or disable access to product listings; offering communication channels between its customers for feedback; encouraging loyalty and word-of-mouth recommendations; processing orders, and invoices; or shipping the product in its own branded packaging, the e-retailer should be held liable for defective products sold on its marketplace regardless of whether it engaged in conduct that breached a legally specified standard or in a business that involves a defect originating from a third party.

Although not in the context of e-retail, such an approach to vicarious liability could already be seen in a landmark ruling handed down in 1978 by the Turkish Court of Cassation that submitted employers to a very high standard of care that may be almost impossible to meet when the damage is caused by an organisational defect.^[56] Whilst lifting a 500 kg iron pole, the metal transport ring of a crawler crane broke, and the iron pole fell on a building site leaving an employee of another company injured. As a result, the plaintiff claimed damages for personal injury. The employer of the crane operator argued that, in oder to avoid any damage, the company had chosen, instructed and supervised its crane operator adequately, and showed that the cause of the accident was a defect in the metal ring purchased from a third party. However, the High Court ruled that the damage had been due to an organisational defect stemming from the entrepreneurial system, and the employer was accountable for such organisational flaws regardless of whether the defect in the metal ring was attributable to a third person.^[57] In other words, the true cause of the accident is not relevant, and the argument that a hazard would not have existed but for the defective part of which the defendant had no knowledge is not sound in the assessment of its vicarious liability. The point is that the damage occurred in connection with its activities.

A parallel with this discussion can be drawn concerning the liability of e-retail marketplaces that have several employees and collaborators whose task is coordinated and overseen through the managerial structure. E-retail marketplaces operate with a network of suppliers, each of them specialising in a particular business area. As such, e-retailers are able to allocate accident costs, spreading them maximally along the chain of manufacture and distribution. That is why the considerations of distributive justice would be a more efficient tool to deter online marketplaces from taking advantage of the booming Internet economy whilst assuming none of the risks buyers may encounter, and therefore justify the liability of e-retailers better than the theory of compensatory justice.

In sum and following the same logic as in the above-mentioned judgment, when a customer is injured by a third party’s defective product, an active e-retail marketplace should not be in a position to escape liability by arguing that the damage would not have occurred but for the defective third-party product, and/or that it was not or could not be aware of the defect. The occurrence of the damage should be seen as a consequence of its active and coordinated involvement in the marketing of the defective product.