E-commerce giant Amazon (NASDAQ: AMZN) may be hearing more and more criticism for its role in passing along counterfeit goods to online shoppers. But, at least in the European Union (EU), the courts have decided it's not quite as culpable as some investors have feared. The Court Justice of the European Union (CJEU) determined earlier this month that simply storing or facilitating the sale of a falsely represented item doesn't make the middleman liable.
The ruling was a modest relief for Amazon, which, like several other major technology giants, is facing a wave of multi-faceted regulatory pushback. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Amazon, Apple (NASDAQ: AAPL), and Facebook (NASDAQ: FB) are all being scrutinized by the U.S. Department of Justice or the Federal Trade Commission for antitrust and/or consumer privacy-related matters, and each has faced some sort of backlash from consumers who fear it has become too big and too powerful to be trusted. The EU's ruling is a much-needed victory indicating that consumers, advertisers, and these companies' partners bear some degree of responsibility for the consequences of their relationships.
Not Amazon's problem ... in Europe, anyway
The statistics are stunning. The Organization for Economic Co-operation and Development estimates counterfeiters sell on the order of $500 billion worth of fake goods every year, making up more than 3% of the world's total trade.
Image source: Getty Images.
And if you think it's a problem that only applies outside of the United States, think again. Digital brand protection company Incopro believes roughly one-fourth of Americans have unknowingly purchased a counterfeit item within the past year. Even Amazon, which developed Project Zero as a means of identifying and removing all counterfeit goods listed at Amazon.com, still lets some items slip through. That's because it's a huge job, with the mere effort to control it costing Amazon around $400 million in 2018 alone.
It's enough, however, at least according to the Court Justice of the European Union. The explanation of its decision regarding a counterfeit lawsuit levied against Amazon by beauty brand Coty (NYSE: COTY) in 2014 reads:
...a person who, on behalf of a third party, stores goods which infringe trade mark rights, without being aware of that infringement, must be regarded as not stocking those goods in order to offer them or put them on the market for the purposes of those provisions, if that person does not itself pursue those aims.
Translation: The third-party seller is responsible for any liabilities linked to selling counterfeit goods. The middleman -- Amazon -- isn't.
Lingering uncertainty in the U.S.
That's the prevailing legal opinion in Europe's courts anyway. It's subject to change over time, of course. But for a continent that's been quick and heavy-handed when it comes to keeping big technology companies in check, the decision is a step toward a common sense-based middle ground all parties can live with.
That may or may not be the case in North America, though, where regulators and courts are still grappling with the complicated realities of online shopping that weren't foreseen just a few years ago.
To date, Amazon has won most of the lawsuits filed against it that argued it was profiting at the expense of the legally authorized manufacturers of a particular item for the same underlying reason: it's just the seller. Bedding product company Milo & Gabby sued Amazon in 2014, for instance, claiming it was knowingly selling knockoffs of its kids' bed pillows. Amazon won that jury trial and then went on to win the 2017 appeal of that ruling.
Public and regulatory sentiment is shifting, though. Even back in 2015, U.S. District Court Judge Ricardo Martinez -- who presided over the first trial of Milo & Gabby's legal complaint -- conceded in his response: "The Court is troubled by its conclusion and the impact it may have on the many small retail sellers in circumstances similar to the Plaintiffs." The Department of Homeland Security's view aligned with Martinez's opinion in the meantime. That's largely why Amazon eventually began to add "we could face civil or criminal liability for unlawful activities by our sellers" to its SEC filings beginning in 2018.
And sure enough, the company is indeed facing these liabilities. Maglula Ltd., which makes firearm accessories, filed a suit against Amazon late last year claiming that despite several attempts to remove counterfeit goods that violated Maglula patents, the e-commerce platform was still knowingly selling these goods.
Amazon's past legal victories are certainly no guarantee of similar victories in the future. In short, the United States' legal system's general stance on the matter remains in question.
Clarity ahead, eventually
While the future of the matter may be murky, the fact that the EU is starting to offer better clarity as to where the lines of responsibility are drawn is encouraging. The United States' courts have been meandering in that direction, but not seemingly in a hurry to do so. Europe's step forward may well indicate a readiness to supply similar clarity here.
To that end, don't be surprised if Washington's lawmakers finally establish some framework on the counterfeit matter. Judge Martinez also explained in 2015 that it's a standoff "which must be addressed to Congress and not the courts." Also don't be surprised if the United States' standards are notably tougher, as fellow Motley Fool writer Daniel Kline explains regarding a bipartisan bill being entertained right now. Given how many times representatives from major tech companies have already appeared at Congressional hearings, it's a topic likely to be somewhere on the agenda.
Find out why Amazon is one of the 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
Tom and David just revealed their ten top stock picks for investors to buy right now. Amazon is on the list -- but there are nine others you may be overlooking.
*Stock Advisor returns as of March 18, 2020
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. James Brumley owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Facebook and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.