It’s October 2017. Just before 3am on a Monday, firefighters are called to an accidental blaze at a townhouse in Manchester, Pennsylvania. Thankfully, no one is injured, but the house itself is destroyed, displacing 13 residents and causing $500,000 in damage.
What was the cause of this disastrous fire which became a three-alarm and involved over 100 firefighters? The findings suggest that a malfunctioning hoverboard that was plugged in to charge was more than likely at fault.
In fact, consumers have been encouraged by firefighters to get rid of their hoverboards, with the assertion that all of them pose a fire risk. If you are a seller of hoverboards, perhaps having tried to cash in on the trend, you would now be in the position of either having to recall all of your products or face a very real liability risk.
What does this hoverboard story have to do with you as an Amazon seller? It highlights that selling products isn’t as simple as listing them, then seeing them on their way to customers. Sometimes the products you sell can prove to be a liability risk.
Following a few high-profile issues with hoverboards, Amazon pulled all listings pending safety reviews of the products. Only those who were selling products that had been tested and certified were able to relist. Why would Amazon do this? Besides the impact on their reputation as a company should they allow people to sell defective products, they have to look out for their own liability too.
What should Amazon sellers be aware of when it comes to risk and liability? Let’s take a look:
First of all, it’s helpful to understand what exactly product liability is and what it might mean for sellers. Under US law, product liability refers to the manufacturer or seller of a product being held responsible for placing a defective product in the hands of a consumer. If you take the hoverboards as an example, there is a clear case where liability can be established, due to a known defect with the batteries.
As a general rule, the product must meet the ordinary expectations of a consumer, without presenting any unexpected danger or defect. This also means that generally, a seller can’t be held responsible for negligent behavior on the part of the consumer. If you sell knives which act as knives are expected to, then a buyer cuts themselves through careless use of the knife, it’s unlikely that you can be found liable unless there was something “unexpected” about it. (Still, strange things have happened in the world of product liability! Don’t take that as an excuse to go unprotected – we’ll get into that later).
Here’s some further information from FindLaw:
“There is no federal product liability law. Typically, product liability claims are based on state laws, and brought under the theories of negligence, strict liability, or breach of warranty. In addition, a set of commercial statutes in each state, modeled on the Uniform Commercial Code, will contain warranty rules affecting product liability.”
The liability for the product can fall with anyone in the distribution chain of the product, but if you’re an FBA seller importing products from China or elsewhere, there’s a high chance that liability will fall on you. Many of these offshore manufacturers have no presence in the USA, making it difficult to enforce any sort of liability on them. As the seller, this leaves you on the hook, even though one of the most common reasons for product liability issues is manufacturing faults.
Types of product liability
There are typically three main types of product defects where you can be found liable as a seller:
- Manufacturing defects – These occur in the assembly or manufacturing of the product. For example, if the wrong batteries were installed in the hoverboards, this could be considered a manufacturing defect.
- Design defects – This is when a fault was present in the product prior to manufacturing, because it was designed that way. For example, the batteries used in the faulty hoverboards can be considered a design fault because they have been built and operated as they were designed.
- Marketing defects – These might include improper labeling, misleading product information, poorly worded or insufficient instructions, or inadequate safety warnings. You know those takeout coffee cups that say “caution, contents may be hot”? This is labeling to cover themselves for the safety warning requirement.For Amazon and other ecommerce sellers, here is your reminder to ensure that all product descriptions and labels are both accurate and adequate. If you sell a product that can be considered “unavoidably unsafe” (such as those sharp knives), then you must give proper warnings to the consumer of the risks such a product can present.
Product liability law
Product liability law has been designed to give consumers recourse where there is an unexpected defect or danger, or when the product does not meet “ordinary expectations.” Sometimes, the burden of proof for liability is put directly on the defendant. This happens when a doctrine known as “res ipsa loquitur” (Latin for “the thing speaks for itself”) is invoked, which can happen when it is shown that the defect wouldn’t exist if someone hadn’t been negligent.
Another doctrine which can be used is that of “strict liability.” In these cases, the plaintiff doesn’t have to prove the manufacturer or seller was negligent, only that the product is defective. This opens the door for “no fault” liability, which is another way plaintiffs can seek recourse.
Warranties are another way that consumers can look for recourse in liability cases. There may be express warranties when a seller has directly made representations about the product, or implied, where it is assumed that a product is fit for its purpose and that the seller’s instructions for use of the product will be accurate.
Lastly, two of the most common theories for recourse tend to be negligence or misrepresentation. If a seller, manufacturer or anyone else in the product chain is found liable, they may face potentially hefty monetary liability, where the plaintiff is awarded damages. You can also face fines from the Consumer Product Safety Commission.
If you think of an example like the house fire caused by the hoverboard, there is more potential liability than the cost of the house – others who were impacted by being displaced may have incurred costs as a result and could be awarded damages. For most ordinary Amazon sellers, a claim like this could bankrupt them fast.
You might not sell a product that runs on electricity or batteries, but are there other potential concerns? What if a seemingly benign piece of cookware turned out to contain a substance that is unsafe around food? There have been examples of class action lawsuits against companies for the surface coating on pans, for example.
First of all, we are not lawyers here, so any reader who wants to ensure that they are getting the right advice and are protected against possible liability cases should talk to a qualified attorney. What we can tell you are a few general tips for protecting yourself and your business.
The bottom line is, anyone selling products online should ensure that they are protected by insurance. Most sellers begin with a Commercial General Liability insurance, as a cost-effective way of protecting themselves against liability claims. These policies usually have relatively low premiums and will serve you up to a point.
What is that point? Most advice on liability protection tends to suggest that, once your business is selling $300k – $400k or more of product each year, it’s time to kick the insurance up a notch to a product liability insurance policy. The downside of these is that they are much more expensive, but a plus is that you’re covered for more. Product liability insurance covers you if your product injures or has the potential to injure a customer.
Again, it’s best to speak with an expert as to what sort of insurance you should have, as you’ll want to take into account factors such as affordability of the policy and how potentially risky your products are.
The way you set up your business structure is another thing that you really should seek professional advice on. Under certain business entities, you can at least limit your personal liability, meaning that you can (usually) keep personal assets, such as property, safe from claims. Of course, there are implications for taxes and other requirements depending on your setup too, which is why we recommend getting good advice.
An LLC (Limited Liability Company) acts as its own entity. If your LLC is the importer of record for the goods you bring in, then it will usually be established as responsible under any liability claim. This keeps your personal assets out of it and, in a worst-case scenario, would bankrupt the LLC rather than you personally. (Again, this is a description of what usually happens. There can be exceptions). Of course, if your LLC is insured, hopefully, all claims are paid out using insurance.
Some people follow more complicated structures, such as a “double LLC.” They designate one LLC as the importer of record and higher risk entity, then transfer lower risk items to the second LLC. This is a strategy used in the hopes of preserving a business, even if one LLC is made bankrupt. This is definitely something to talk to a professional about first!
The thought of liability and the implications of what might happen should something go wrong are often far from the minds of sellers when they set up on Amazon. There are so many other things to think about, including how you’re going to become a successful seller!
Part of bolstering your success is ensuring that you are appropriately protected, just in case you ever face a liability claim. Seek professional advice and figure out what the best combination of insurance and business structure is going to be for you.
We hope you never face such a claim, but better to be safe than sorry!