Amazon Admits the Obvious – They Have a Counterfeit Problem

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In their annual report to the SEC Amazon noted the risk of counterfeit goods being sold by third parties on their marketplace (via CNBC).

Amazon’s Annual Report to the SEC (Form 10-K)

SEC documents are a great way to find information that companies are notifying investors about but want to do so without press releases or media briefings. Form 10-K specifically is required by publicly traded companies in the United States to provide updates about the company. In their form 10-K that was released earlier this month, Amazon Inc. (NASDAQ:AMZN) noted that counterfeit items may be a problem for them as third-party sellers aren’t subjected to the same restrictions as Amazon is. The quote from the form is below:

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We Could Be Liable for Fraudulent or Unlawful Activities of Sellers
The law relating to the liability of online service providers is currently unsettled. In addition, governmental agencies could require changes in the way this business is conducted. Under our seller programs, we may be unable to prevent sellers from collecting payments, fraudulently or otherwise, when buyers never receive the products they ordered or when the products received are materially different from the sellers’ descriptions. We also may be unable to prevent sellers in our stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods, selling goods in an unlawful or unethical manner, violating the proprietary rights of others, or otherwise violating our policies. Under our A2Z Guarantee, we reimburse buyers for payments up to certain limits in these situations, and as our third-party seller sales grow, the cost of this program will increase and could negatively affect our operating results. In addition, to the extent any of this occurs, it could harm our business or damage our reputation and we could face civil or criminal liability for unlawful activities by our sellers.

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Noting that it is the increase in the percentage of third-party sellers that are affecting the risk, Amazon offers excellent return and refund policies, and are thus holding liability for their sellers. The third party marketplace is an excellent position for Amazon to be in though, they need to do relatively little work and receive a portion of the revenue; the liability for third party sellers is the only drawback for them in this scenario.

eBay

eBay Inc. (NASDAQ:EBAY) also facilitates transactions between buyers and sellers and offers a guarantee in some regards, but is more upfront about the items being received and leaves the issue typically between the seller, buyer and, payment processor. In Ebay’s 10-K for this year, they highlighted that Amazon’s policies are a risk to Ebay’s business. "We face increased competitive pressure online and offline. In particular, the competitive norm for, and the expected level of service from, ecommerce and mobile commerce has significantly increased, due to, among other factors, improved user experience, greater ease of buying goods, lower (or no) shipping costs, faster shipping times and more favorable return policies. In addition, certain platform businesses, such as Alibaba, Amazon, Apple, Facebook, and Google, many of whom are larger than us or have greater capitalization."

It should be on the record that eBay has noted their counterfeit and intellectual property problems for years in their 10-K and are very well aware of the products moving through their marketplace but have offered very few solutions to an increasingly complex problem. Below is from their 2019 regarding intellectual property problems:

The listing or sale by our users of unlawful, counterfeit or stolen goods or unlawful services, or sale of goods or services in an unlawful manner, has resulted and may continue to result in allegations of civil or criminal liability for unlawful activities against us (including the employees and directors of our various entities) involving activities carried out by users through our services. In a number of circumstances, third parties, including government regulators and law enforcement officials, have alleged that our services aid and abet violations of certain laws, including laws regarding the sale of counterfeit items, laws restricting or prohibiting the transferability (and by extension, the resale) of digital goods (e.g., event tickets, books, music and software), the fencing of stolen goods, selective distribution channel laws, customs laws, distance selling laws, anti-scalping laws with respect to the resale of tickets, and the sale of items outside of the United States that are regulated by U.S. export controls.

In addition, allegations of infringement of intellectual property rights, including but not limited to counterfeit items, have resulted in threatened and actual litigation from time to time by rights owners, including the following luxury brand owners: Tiffany & Co. in the United States; Rolex S.A. and Coty Prestige Lancaster Group GmbH in Germany; Louis Vuitton Malletier and Christian Dior Couture in France; and L’Oréal SA, Lancôme Parfums et Beauté & Cie, and Laboratoire Garnier & Cie in several European countries. Plaintiffs in these and similar suits seek, among other remedies, injunctive relief and damages. Statutory damages for copyright or trademark violations could range up to $150,000 per copyright violation and $2,000,000 per trademark violation in the United States, and may be even higher in other jurisdictions. In the past, we have paid substantial amounts in connection with resolving certain trademark and copyright suits. These and similar suits may also force us to modify our business practices in a manner that increases costs, lowers revenue, makes our websites and mobile platforms less convenient to customers, and requires us to spend substantial resources to take additional protective measures or discontinue certain service offerings in order to combat these practices. In addition, we have received significant media attention relating to the listing or sale of illegal or counterfeit goods, which could damage our reputation, diminish the value of our brand names, and make users reluctant to use our products and services.

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It will be interesting to see how Amazon decides to handle the problem as it increases in size; due to their company policies they shoulder a lot of the risk in these transactions and may be forced to police their marketplace effectively to mitigate lawsuits in the future. The tradeoff for the extra revenue may not be worth the lawsuits if intellectual property and trademark rights become more enforced without an effective way to police their platform.

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