Product-related Privity, Preemption, and the Internet Marketplace

• Publication year: 2021

James M. Beck^*

Abstract: The advent, rapid and broad acceptance of e-commerce has revolutionized how consumers select, purchase and receive products. Years ago, when mass marketing swept the retail world, tort law had to be retooled for a new paradigm in which consumers and sellers no longer always had a direct relationship. Will or should common law have to (or be able to) adapt again in the age of digital commerce? This article discusses what case law so far tells us about how the courts are confronting this tectonic societal shift.

One of the revolutionary aspects of "strict liability," as it was codified by Restatement (Second) of Torts § 402A (1965), was that it removed certain traditional limitations on liability due to the evolution of modern manufacturing and merchandising. Foremost among them was "privity"—the requirement that the buyer and seller of a product must have dealt directly with one another for the latter to owe any duty in tort to the former. The rationale courts commonly used to abolish privity requirements was the evolution of the economy from primarily local enterprises that dealt face-to-face into a nationwide distribution system characterized by multiple intermediate sellers. The statement, "[t]he world of merchandising is, in brief, no longer a world of direct contract; it is, rather, a world of advertising, and, when representations expressed and disseminated in the mass communications media. . . . [I]t is difficult to justify the manufacturer's denial of liability on the sole ground of absence of technical privity,"¹ is representative of this reasoning. Instead of the technicalities of contract, the common law moved to conform the then-emerging field of product liability to what were seen as the realities of the modern marketplace:

[Page 51]

Our Courts have determined that a manufacturer by marketing and advertising his product impliedly represents that it is safe for its intended use. We have decided that no current societal interest is served by permitting the manufacturer to place a defective article in the stream of commerce and then to avoid responsibility for damages caused by the defect.²

Fifty years later, a similar shift may be underway, again driven by fundamental changes in the manner in which products are marketed and sold. For over a decade the trend of product sales has unmistakably favored online "e-tailers" at the expense of traditional "brick-and-mortar" stores. COVID-19 restrictions on direct interpersonal contacts has only intensified this trend. Many of these internet marketplaces are not "sellers" in the § 402A sense of that term, in that they have structured their business model so that they never take title to the goods that people purchase on their sites. Instead, the prevailing business model is to provide—for a price—a platform for myriad third parties to offer their wares for sale, and then to charge for logistical services, from billing to shipping, that facilitate sale and delivery of these products by their third-party subscribers.

For quite some time, this e-tailing system worked as its creators intended, insulating online marketplaces set up not to own the products being sold from strict liability and providing e-tailers with a significant cost advantage over their brick-and-mortar competitors. Two reasons accounted for this success. First, under the common law as influenced by the Second and Third Restatements of Torts—which both predicated strict liability on the defendant being a "seller" as defined in the traditional brick-and-mortar sense—the traditional elements of liability were not present.³ Second, a federal statute, the Communications Decency Act,⁴ preempts state law to the extent it would hold a website operator liable for content created and uploaded by others.

How Long Will It Matter That Internet Marketplaces Are Not Traditional Product Liability "Sellers"

But the explosive growth of e-tailing created a fundamental, and very practical, legal problem. Unlike traditional physical stores, it is often difficult, if not impossible, to know who and where the thousands of product merchandisers who sell through online marketplaces actually are. Indeed, many of them are quite small, located overseas, are effectively judgment proof, or some combination of all three. Such sellers cannot be served with process, and even when they are their assets are minimal or effectively unreachable. Nonetheless, e-tailers enjoyed considerable success in convincing courts to apply existing product liability principles to what began as a novel fact pattern, but has become increasingly common, and in preempting claims that sought to challenge the content of material on internet marketplaces.

[Page 52]

Two appellate cases are representative of the traditionalist cases. The first is Erie Insurance Co. v. Amazon.com, Inc., 925 F.3d 135 (4th Cir. 2019), decided under Maryland common law, and the second is Fox v. Amazon.com, Inc., 930 F.3d 415 (6th Cir. 2019), decided under Tennessee law, which includes a product liability statute.

In Erie Insurance, the plaintiff insurance company asserted a subrogated claim that its insured purchased online an electric product with defective batteries that causes a fire.⁵ The actual seller, which apparently was not even sued, had a "fulfillment" contract with the internet market place that was sued.⁶

Under the fulfillment program, [defendant] provided logistics services for a fee. The seller could ship its inventory to [defendant's] warehouse for storage and, once an order was received online for a product, [defendant] would retrieve the product from inventory, box it, and ship it to the purchaser. . . . As part of its fulfillment services, [defendant] also collected payment and, after withdrawing its service fee, remitted the balance to [the seller]. [The seller] set the price for the headlamp and created the content of the product's description used on the [defendant's] site.⁷

On these facts, the Fourth Circuit held that the defendant internet marketplace was not subject to strict liability under Maryland common law, as either a "seller" or a "distributor."

The marketplace did not exert "so much control over the transaction that it effectively became the seller."⁸ Rather, a "basic" element of product liability required "attribution of defect to seller," which was not possible as to a marketplace that neither owned the product nor had contributed to its allegedly defective condition.⁹

[Page 53]

This requirement was fundamental to all product liability theories, not just strict liability:

[I]n each case Maryland law imposes liability on the seller. . . . Maryland courts have repeatedly noted that products liability claims sounding in negligence, breach of warranty, and strict liability in tort overlap, all focusing on the liability of a seller for a defective product. And we have no basis to conclude that Maryland's understanding of "seller" is not uniform throughout its products liability law.¹⁰

Existing case law provided "no indication" that "'seller' . . . should be understood in any manner other than its ordinary meaning."¹¹ That ordinary meaning is "one that offers [property] for sale," with "sale" defined as "the transfer of ownership of and the title to property from one person to another for a price."¹² This passing of title distinguished the "manufacturer, distributor, dealer, and retailer" that are proper product liability defendants from "shippers, warehousemen, brokers, marketers, auctioneers, and other bailees or consignees" who are outside the chain of sale and therefore not liable for product defects.¹³ Because it was undisputed that the internet marketplace through which the product was ordered had never held title to the product, dismissal of all claims was affirmed. Id. at 142 (plaintiff "presented no evidence to the contrary"). Instead, defendant "functioned much like an auctioneer, a broker, a consignee, or a bailee, none of whom actually possesses title but nonetheless is, if it is a merchant, authorized to effect a transfer to the buyer of title held by the owner—i.e., the seller." Id. at 143.

Fox was another defective battery case, although in this instance the plaintiff at least sued that actual product seller (which defaulted) as well as the internet marketplace.¹⁴ While reaching largely the same result as Erie Insurance, Fox pointed out another aspect of the product seller's agreement with the marketplace:

[That agreement] provides in part that third-party sellers are prohibited from direct communication with buyers. Rather, all communication with buyers comes from Defendant. The [agreement] also provides that Defendant retains initial control over customer payments. Generally, customers pay Defendant, and Defendant then remits those payments to third-party sellers. . . . ¹⁵

[Page 54]

In this instance, the product's problems were more widespread, causing the marketplace defendant to initiate "non-alarmist" communications with purchasers—including plaintiff.¹⁶

Unlike the common law, the Tennessee product liability statute imposed liability on product "bailors" as well as sellers. Tenn. Code Ann. § 29-28-102(4,7). Fox, citing the statute's "remedial" purpose, thus adopted a broader definition of "seller" than the defendant had urged. 430 F.3d at 424:

[W]e hold that the TPLA's definition of "seller" means any individual regularly engaged in exercising sufficient control over a product in connection with its sale, lease, or bailment, for livelihood or gain.

Id. at 425. Even applying this broader definition, the internet marketplace's activities were insufficient to impose liability.

Defendant did not choose to offer the [product] for sale, did not set the price of the [product], and did not make any representations about the safety or specifications of the [product] on its marketplace. . . . At bottom, we are not convinced, on the record before us, that Defendant exercised sufficient control over [this

...