Recent Litigation and Proposed Legislation Reexamine Product Liability for Online Marketplaces

Arent Fox

Arent Fox

As online shopping picked up during the COVID-19 pandemic due to brick-and-mortar closures, so too have questions about liability for online marketplaces.

Traditionally, online marketplaces—e-commerce platforms that offer third-party products—have avoided product liability exposure under the theory that they are merely intermediaries connecting buyers and sellers. In recent months, however, the issue has been reexamined in federal and state litigation, while the California state legislature considered a bill that would expand strict product liability to online marketplaces.

While product liability laws vary from state to state, consumer products are generally subject to a strict liability regime. Strict product liability holds manufacturers and retailers liable for injuries caused by defective products, regardless of whether negligence occurred or a warranty exists. Traditionally, however, strict liability has not been applied to online marketplaces. State statutes impose strict liability on a limited set of actors, namely, participants in the supply chain that have possessed or exercised control over the defective product. While this will usually include manufacturers and brick-and-mortar retailers, courts have typically held that online marketplaces do not qualify as “sellers,” and therefore cannot be held strictly liable, because they do not exercise sufficient control over the third-party products they sell.

Online marketplaces have prevailed in many product liability lawsuits with this argument. That is, that they are merely intermediaries, connecting prospective buyers with third-party sellers—and that they, therefore, do not play the traditional role of a “seller” under product liability laws. In a handful of recent cases at the state and federal levels, however, courts have been more skeptical of this view. Such cases have examined, among other things, whether the “control” requirement is essential to “seller” status in today’s online-focused retail environment. While the traditional view remains the majority rule, these cases suggest that this is an evolving area of the law.

Meanwhile, the California General Assembly joined in the action, passing a bill this June that would expand strict product liability to online marketplaces by removing the requirement that a party must have title or possession of a defective product to face liability. The bill would expand California’s strict liability statute to cover any “electronic place or internet website that is engaged in the business of placing or facilitating the placement of products into the stream of commerce in [California].” In the California Senate, the bill was met with resistance by some members and failed to advance to a floor vote by the end of the legislative session on August 31. Whether the bill, or a modified version, will gain traction in the next legislative session remains to be seen.

If California or other states enact legislation imposing strict liability on online marketplaces—or if the case law moves in a less marketplace-friendly direction—this would substantially alter the product liability landscape in the U.S. Exposure to strict product liability would have a significant financial impact on online marketplaces, who may be forced to alter their financial models to account for increased liability exposure and the need for additional insurance coverage. In the meantime, online marketplaces should carefully vet their vendors and review their vendor contracts, including the legal recourse available for the marketplace if it is held liable for injuries caused by a defective product.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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