The U.S. state of California has filed a lawsuit against Amazon alleging that the company “stifled competition and caused increased prices across California through anticompetitive contracting practices”. A copy of the suit was reviewed by Medianama. (You can read it here)
The suit argues that Amazon requires merchants to enter into agreements that severely penalize them if their products are offered for a lower price on other platforms in order to avoid competing on prices with other online e-commerce sites. In other words, sellers have to ensure that their products are not sold at a lower price on other sites which also includes their own websites in some cases.
The suit suggests that Amazon has cornered considerable market power through these agreements and imposes penalties such as the loss of the “Buy Box” on the website or paying compensation to Amazon if other online platforms lower their prices.
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Understanding merchant sales: The suit revealed that most sales on Amazon’s store are “third-party” sales by sellers, including brands and resellers, that sell their products. These sellers are asked to pay “referral” fees (a percentage or minimum dollar amount per unit sold), shipping and fulfillment fees, storage fees, sponsored products and other advertising fees, and other miscellaneous fees (such as stocking fees).
“Amazon coerces merchants into agreements that keep prices artificially high, knowing full well that they can’t afford to say no. With other e-commerce platforms unable to compete on price, consumers turn to Amazon as a one-stop shop for all their purchases,” California’s Attorney General Rob Bonta said in a statement.
There is a risk that a seller may lose their ability to sell on Amazon altogether if they are found to violate these agreements, according to the suit. It adds that these agreements “thwart the ability of other online retailers to compete, contributing to Amazon’s dominance in the online retail marketplace and harming merchants and consumers through inflated fees and higher prices”.
Why it matters: The lawsuit reflects the increased scrutiny that all Big Tech companies including Amazon have been facing across the world. It is likely to be followed closely by other countries who are looking to initiate action against Amazon in order to hold it accountable for its practices. Moreover, the lawsuit may be the first in a series of regulatory action against Amazon and more cases may be in tow.
What are the prayers of the suit?
The suit alleges that Amazon has violated “the policy, spirit, and letter” of California’s Unfair Competition Law and Cartwright Act. It has also demanded a jury trial which does suggest that the government may not be keen to negotiate a plea deal with Amazon.
It has called for the court to decree the following in its judgement:
Violation of California Law: Amazon engaged in contracts which violated California Business and Professions Code and ended up “injuring” the people of California. The court should find this conduct as an “unreasonable restraint of trade”.
Unfair competition: The company indulged in “unlawful practices” constituting “unfair competition” within its law and implored the court to award “damages” and the amount should be tripled. The court should also direct the company to desist from engaging in the anticompetitive conduct,
Appointing a court monitor: The suit also asked the order to include the appointment of a “Court-approved monitor” to ensure Amazon’s compliance with the orders of the Court. It should also prevent Amazon as well as its “successors, agents, representatives, employees, and all persons who act in concert with Amazon” from violating Californian laws. It added that the Court can also consider mandatory injunctions to “restore and preserve fair competition”,
Damages: The suit asked the Court to act against Amazon’s “ill-gotten gains” accrued by the company from its “anticompetitive acts”. The company should be “ordered to compensate” Californians for the “deadweight loss” to the economy caused by its practices.
- The order or judgement must also direct Amazon to “restore” money, with interest, to any person that Amazon may have acquired through violations of the law.
- The suit also urges the Court to assess a civil penalty of $2,500 against Amazon for each violation of its violation as proved in the trial. The Court has also been asked to direct Amazon to cover the costs of the suit, including fees of the attorneys.
What spurred this lawsuit?
The suit highlighted two reasons as to why it was bringing a case against Amazon. They are as follows:
Restraint of Trade in Violation of the California Cartwright Act
The suit alleges that Amazon entered into contracts with its sellers to do the following:
- Create restrictions in trade or commerce;
- Limit and reduce the production, and increase the price of commodities;
- Prevent competition in the sale of commodities;
- Fix a standard for commodities whereby their prices to consumers are controlled;
- Execute contracts and agreements through which Amazon’s “third-party sellers and wholesale suppliers bind themselves not to sell commodities below a common standard figure and fixed value”;
- Establish and settle the prices of commodities between sellers and their competitors to “preclude a free and unrestricted competition” among themselves in the sale of commodities.
The suit observed that these contracts were a “substantial factor” in causing harm to the state of California. The state was seeking monetary relief as “parens patriae” on behalf of people residing within its borders. It means that the political authority has the responsibility to protect citizens who cannot protect themselves.
The government also wants to compel Amazon to “cease its anticompetitive conduct, to restore fair competition, to deny Amazon the fruits of its illegal conduct—specifically the disgorgement of ill-gotten gains, to prevent the resumption of that conduct or conduct with the same effect—and to impose such other relief as may be just and appropriate for Amazon’s violations of the Cartwright Act.
Unfair Competition in Violation of the California Unfair Competition Law
The suit asserted that Amazon engaged, and continues to engage, in unlawful acts that constitute “unfair competition” within its law.
The suit seeks relief to stop Amazon from the following:
- Cease its anticompetitive conduct,
- Restore fair competition,
- Deny Amazon the fruits of its illegal conduct—specifically, through restitution,
- Prevent the resumption of Amazon’s conduct
What are the effects of Amazon’s conduct?
The suit contended that Amazon has reaped the following benefits through its anti-competitive policies:
- Insulated itself from competition,
- Erected barriers to entry and expansion,
- Imposed supra-competitive selling costs on third-party sellers and wholesale suppliers,
- Degraded the quality of its offering,
- Charged higher prices to consumers,
- Prevented consumers from accessing the full output and low prices across online stores that would prevail in a freely competitive market.
Prevents competitors from offering lower prices: “Amazon’s retail price parity provisions and minimum margin agreements prevent competing sites from offering lower prices, hinder new entrants and existing competitors from successfully opening or expanding competing online stores, and thereby facilitate Amazon’s maintenance of its economic power,” read the suit.
- It added that it is virtually impossible for rivals to gain any significant market share by providing customers with lower prices.
- It argued that the market would reflect lower prices at competing online stores without Amazon’s agreements.
Lack of improvement of Amazon’s own service: The suit proposed that sellers would keep their prices lower off Amazon because they do not have to pay steep seller, advertising, and other fees. “It would in turn enable online stores like eBay and Walmart.com to compete more effectively with Amazon, and would lower overall retail prices to consumers,” read the suit. It added that this competition will put pressure on Amazon to improve the seller and customer experience and lower its seller fees and Prime membership fee, and lower the prices of products on the platform.
Lower wholesale prices: The government said that wholesale suppliers would charge “lower wholesale prices” and not impose “minimum resale or advertised price requirements on other online retailers” if Amazon did not have these agreements in place. It will help them to improve their own online stores, and offer a better selection in these stores lowering prices across the spectrum.
Coughing up inflated fees: The government argued that California sellers and consumers have had to pay inflated fees and prices because of Amazon’s conditions. “There is a clear and direct path from the increasingly higher Amazon fees and the prices consumers pay for products.
Raising prices across platforms: The suit explained that merchants raise the prices for their products on Amazon because of Amazon’s high fees. These merchants are then forced to raise their prices on competing marketplaces, on their own websites, and to competing online retailers commensurately, because of their agreement with Amazon. They also have to enforce minimum advertised price or resale price maintenance policies, or withhold selection from competing retailers. This prevents companies from attracting consumers away from Amazon with lower prices, the suit reasoned.
Restraint of trade: “Amazon’s anticompetitive agreements comprise a restraint of trade that unreasonably prevents the price competition that is the hallmark of our (America) free-market economic system,” read the suit. It added that the anticompetitive effects of “Amazon’s price parity agreements outweigh any procompetitive justification or effects proffered by Amazon”. The company is able to insulate itself from the price discipline that flows from unconstrained price competition, the suit continued.
Neutralising threat from rivals on price: Amazon uses agreements to neutralise the threat of its competitors offering lower prices on their platform as it knows that rival online stores will not be able to compete with Amazon on price. It said that the agreement constituted a “blatantly anti-competitive horizontal agreement on price”. The suit alleged that Amazon recognized the potential growth of direct-to-consumer sales by Amazon’s own suppliers and sellers which was stymied with the help of these agreements.
“Given the sheer volume of Amazon sales in California,the economic damage to the State and the People by Amazon’s conduct is substantial,” the suit said in conclusion.
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