Last week, a California appeals court ruled Amazon (NASDAQ: AMZN) can be held liable for damage or harm done by defective products sold through its website, even if that product is sold by a third-party seller.
On the surface, it's not exactly earth-shattering stuff. Amazon's sheer size makes it a target for anyone looking to prevent it from running roughshod over anything or anyone standing in its way. The tech titan wins some of these battles and loses others.
However, these sorts of legal and regulatory standoffs with Amazon are happening more frequently, and they seem to be gaining more and more traction. Perhaps most alarming for shareholders is that these recent standoffs pose a threat to the company's competitive advantages because responding to them could cost time and money.
Amazon plays an important enough role
The decision made in California mirrors one already made in a U.S. district court in Texas, and similar cases are currently being argued in Ohio and Pennsylvania. The crux of each battle is the same, though: Amazon argues it's not responsible for merchandise sold by third parties, and the plaintiffs say it is. At least in the Texas and California rulings, the courts agreed Amazon plays an instrumental role in selecting and distributing those goods.
If this philosophy represents the new norm in U.S. courtrooms, it's no minor matter. Although Amazon sells from its own inventory of goods, MarketPlace Pulse estimates there are well over 2 million third-party sellers actively listing products at Amazon.com, accounting for a big piece of the roughly 10 million different products Amazon has listed at any given time. In 2019, $53.7 billion worth of Amazon's $280.5 billion in revenue came from third parties. That's a minority of sales, but it's high-margin revenue.
The big problem is that oversight of each and every product each of those third-party sellers offers could prove a significant and expensive task. It could even force Amazon to overhaul its platform in such a way that it can't approve product listings as quickly, or sell all that it offers right now. It may even mean it has to cull some of its current third-party vendors, just to more effectively vet its goods.
One of several legal issues
Were it just the product liability matter, Amazon could adapt; overall quality might even improve at the expense of quantity.
It's not just the rulings in California and Texas that the company is now contending with, however. Challenges of all types are coming from all directions.
For instance, this past week the chief of Germany's Federal Cartel Office indicated an antitrust investigation was underway to determine if Amazon was actively creating a price-fixing environment among certain third-party sellers. The legitimacy of the complaint remains uncertain, but the same antitrust regulator determined a year ago that Amazon had indeed exerted unfair influence among its third-party merchants. The German agency was able to affect meaningful change in how Amazon handles those relationships.
Similar complaints are taking shape closer to home, too, with Amazon set to defend itself against price-fixing claims in a U.S. District Court in Washington state.
Yet another legal firewall starting to crumble on Amazon is its use of contracted delivery drivers. You may have seen the vans and tractor-trailers with Amazon's smile logo painted on the side, but it wasn't likely an Amazon employee driving them. Rather, those drivers were the employees of companies contracted to provide transportation services on behalf of Amazon. Amazon claims such relationships provide the flexibility the company needs. The by-product of the arrangement, though, just happens to mean Amazon bears no responsibility for accidents those drivers may be involved in.
That legal argument is now being tested, though. In January, a driver with one of the trucking firms utilized by Amazon was involved in an accident after, according to the lawsuit, Amazon and the trucking company knowingly insisted the driver exceeded his legally allotted driving hours. Separately, an Indiana resident is suing Amazon, as well as one of its contracted delivery companies, for a non-fatal accident that occurred late last year. The plaintiff's attorney again argues Amazon itself has effective control of these drivers, negating the legal distinction normally implied by contracted work.
It's all part of a bigger paradigm shift that could force the company into employing more of its own drivers. While that can translate into greater logistics flexibility for the e-commerce behemoth, it also means Amazon must shoulder the burden of ensuring its drivers adhere to trucking laws even if its contractors are saving money by not following the same rules.
Hitting close to home
Were it just one of these stumbling blocks, it might be dismissible. But it's all of them, and more.
Flexiworld Technologies is suing Amazon for patent infringement, claiming the Amazon's Alexa devices utilize Flexiworld intellectual property. An Amazon customer is leading a class-action suit against the company for misleading customers about permanent ownership of movies purchased via Amazon Prime Video. As it turns out, those videos "may become unavailable due to potential content provider licensing restrictions or for other reasons." The e-commerce giant is also being sued for offering four movies online the plaintiff says weren't actually licensed to the company. A couple of years ago, home goods retailer Williams-Sonoma sued Amazon for copying its design of a piece of furniture and then selling it as a private-label item. Amazon finally conceded last year -- to Congress -- it does broadly look at third-party product data when planning its own goods, but the true extent of the company's use of that data remains in question. In the meantime, European antitrust regulators are preparing a case that suggests Amazon used third-party seller data to compete with them.
Oh, and don't forget the Federal Trade Commission -- along with the states of California and New York -- is still probing Amazon over its antitrust concerns. The House Judiciary Committee only recently ended its antitrust investigation of several big tech names, including Amazon. The coming weeks could produce legislative changes meant to crimp dominance of a market by any one company.
These aren't mere nuisances. These legal and regulatory battles strike at the very heart of what's made Amazon a powerhouse: inexpensive goods that consumers love and can get delivered fast. Take even just one of those away, and Amazon loses an edge. Take more than one away, and competitiveness outright suffers. Margins may well suffer for the company that already turns a scant 4% of its revenue into net income.
It may take years to play out, but it's a situational shift that shareholders can't afford to ignore.
10 stocks we like better than Amazon
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Amazon wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of August 1, 2020
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Williams-Sonoma 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.