The Biggest Abuser of Forced Arbitration Is Amazon

Mark Lennihan/AP Photo

A warehouse worker organizes Prime Now customer orders at the Amazon warehouse in New York.

In the past several months, advocates have expressed surprising optimism that they will be able to make progress in dismantling America’s forced-arbitration system, which supersedes dozens of laws enacted by Congress to protect workers and consumers, and bars access to the constitutionally mandated right to take a complaint to court.

Using a once-benign law, the 1926 Federal Arbitration Act, which was given new corporate teeth by right-wing courts, an employer can today demand that a worker sign away a range of rights as a condition of employment. Consumers who purchase possibly defective products are put in the same position by corporate sellers. Under clauses in consumer and employment contracts, disputes must be referred to an arbitrator chosen by the company, and class action suits are prohibited.

However, galvanized by the #MeToo movement, workers have organized for and won concessions at workplaces like Google over ending forced arbitration for sexual harassment claims, which places disputes in a secret tribunal and represents an obstacle to stopping systemic misconduct. New York state prohibited mandatory arbitration of sexual harassment claims in April, and California is attempting a broader ban in employment contracts.

While national legislation to prohibit forced arbitration has a dim chance of passing as long as Republicans have a say, Lindsey Graham (R-SC) did lead a hearing on the subject in April, expressing support for reform. And Elizabeth Warren’s presidential campaign has endorsed making federal contractors that use arbitration clauses ineligible for contracts, which would cover a substantial segment of industry.

To break the arbitration debate more into the mainstream, one company should really garner more attention as a serial abuser of the arbitration process—Amazon.

 

ALL OF AMAZON'S third-party sellers, responsible for more than half of total sales on the website, must sign a contract that commits them to mandatory arbitration in the event of a dispute. “We each agree that any dispute resolution proceedings will be conducted only on an individual basis and not in a class, consolidated or representative action,” the arbitration clause reads, meaning that no seller can team up with others similarly situated to bring a complaint. Court trials are also waived.

At last count, there were 2.5 million sellers hawking products on Amazon, making it the largest single employment-related arbitration clause in America. No other company either employs as many people or forces an arbitration relationship on its suppliers or partners. “The only way you’re going to see anything that size is in the digital space,” said Jay Himes, an attorney at Labaton Sucharow.

The contract effectively enforces Amazon’s private legal space, a maze of rules and regulations placed on third-party sellers that can lead to debilitating suspensions and real hardships. “There’s a fear of retaliation, and the sellers are in competition against themselves,” said Shaoul Sussman, a law student who has gained notoriety for his theories about Amazon’s treatment of marketplace sellers. “It’s an abuse of legal loopholes but a profit margin machine.”

Amazon’s third-party sellers, including both people who stock up at discount store sales and flip the product and true entrepreneurs featuring new products, pay for the privilege of accessing potentially millions of customers. Every seller pays a monthly flat subscription rate, and referral fees for every sale of typically 15 percent, though they can range higher depending on the goods. Sellers also pay to use “Fulfillment by Amazon” (FBA), where Amazon handles customer service, storage, and shipping through its vast logistics network.

Amazon’s revenue from these fees grew to nearly $43 billion in 2018, more than one out of every four dollars in third-party sales.The company makes four times as much profit from marketplace fees as it does from its own retail sales, and that doesn’t include revenue from advertising, which many third-party sellers must invest in to get noticed.

But with so many sellers, Amazon has created a marketplace that’s simply too big to manage. “People are under attack,” said Chris McCabe, a former Amazon employee who now consults with sellers. “They get their listings sabotaged.”

Third-party sellers can get hurt in a million different ways: losing control of their listing, having their products purchased and set on fire to claim malfunctioning, seeing their inventory mislabeled as sex toys. Entire websites have formed to write phony reviews, which sellers use to flood rivals with negative reviews, or with badly written five-star raves to draw charges of fakery. Efforts to police reviews or patent infringement led to black-hat sellers filing bogus complaints in a rival’s name.

“People will look around the platform, see a product doing well,” said Cynthia Stine, a consultant for third-party sellers based in Dallas, noting another scam. “They will file a design patent on it, get a patent or trademark. And they get on the platform and kick the brand owner off. That takes some balls.”

Amazon is weirdly passive about mediating in these disputes. “If they’re proactive, they create liability,” said James Thomson, who previously worked for Amazon and now advises brands on their Amazon channels. “The lawyers told us don’t check anything, but if someone complains, then check.”

What Amazon can do is suspend accounts that violate its terms of service, typically done through curt emails (it’s nearly impossible for a seller to talk to a human at Amazon). The announcements are maddeningly nonspecific, only listing broad categories of violation. A single user review expressing mild disapproval can trigger them. If a dog destroys a toy too quickly, or an outfit doesn’t fit right, a seller can get suspended.

Jeff Schick, an Amazon seller who now counsels others as a lawyer, described his first suspension to me. Someone returned one of his products, a container of dog treats. Amazon handled Jeff’s returns, and it has a default setting where it repackages and sends them to other customers. The shipper didn’t see the open lid and sent the dog treats off. When the customer received them, they complained that the box was used. Though it was Amazon’s fault, Schick got suspended.

Under a suspension, Amazon not only deactivates a seller’s product listings, but refuses to release funds from prior sales, which could total thousands of dollars. If sellers use FBA, Amazon still holds the inventory and charges storage fees. Sellers must pay for a removal order to get their products back. With such thin margins in retail, a few weeks off the site could lead to layoffs, bankruptcies, and foreclosures. Consultants told me about sellers crying to them on the phone, trapped and desperate.

A seller who feels that Amazon wronged them could appeal to the courts for relief. But by signing the arbitration agreement, sellers are blocked from that venue. Their only real recourse is the “appeal decision” button at the bottom of the suspension announcement. An entire ecosystem of consultants that help sellers get out of Amazon jail has sprung up; Stine has a 25-person team working on cases.

Amazon often goes weeks without responding to appeals. “This Amazon court system is on par with North Korea in terms of fairness and transparency,” said Paul Rafelson, an attorney who founded the Online Merchants Guild to help sellers band together to protect their interests. I was told that the seller performance team that reads appeals has been outsourced to low-wage countries, where they are expected to read 17 appeals per hour. “So they have about three minutes,” said Stine. That often leads to what Stine calls “the punt,” where they write back a vague response like “we need more information,” even if that information is attached to the appeal.

Appeals typically succeed with a kind of forced confession and a plan of action for how the seller will improve its operations in the future. This ruins the opportunity to win an arbitration case down the road if the appeal loses. “If sellers admit to doing something wrong, the chance of success in arbitration is zero,” said consultant C.J. Rosenbaum.

If appeals fail, the final escalation is an email to Jeff Bezos, as strange as that sounds. The livelihoods of thousands of independent businesses rely on crafting an email to the richest person in the world. They’re at the mercy of an impossible process.

Amazon doesn’t carry statistics on its commercial arbitration cases, and did not respond to a request for comment for this article. We do know that Amazon has had only 16 consumer arbitration cases over the past five years, with sellers prevailing only twice, according to information from the American Association for Justice, a key advocate for arbitration reform.

The terms of service indicate that they use the American Arbitration Association (AAA) to provide arbiters and venues. Seller boards include talk of arbitration. A lawyer for Amazon sellers posted this letter where the company states, “Amazon is a frequent litigant before AAA.” Indeed, in 2016 Amazon went on the attack, hauling its own third-party sellers into arbitration over fake reviews. Amazon selectively released this information about arbitration, a closed process where the company often chooses its own arbitrator.

Julia Duncan of the American Association for Justice wasn’t completely aware of how Amazon’s marketplace worked before I explained it. “This is much worse than I thought before getting on the phone with you,” she said. Duncan pointed out that there is no good definition of what third-party sellers are—franchisees, renters of commercial space, or something else—which makes adjudicating their rights difficult. And locking them into arbitration makes it impossible. “There’s no development of the law,” Duncan said. “There are interesting questions we haven’t resolved, with forced arbitration, you’re not going to have consistent application of the law.”

Amazon may even be able to use the arbitration clause to prevent a plaintiff from bringing an antitrust action against the company, like for selling items below acquisition cost to drive out competitors (so-called “predatory pricing”). If the plaintiff is a third-party seller on Amazon, the arbitration clause may stop any antitrust cases, providing Amazon immunity.

Himes, the litigator, believes that Amazon’s power over sellers is near-total. “They’re like little governments in a sense,” he said, “setting up who can play and what the rules are and what the penalty structures are. And at the end they have the arbitration clause.”

 

ATTEMPTS TO USE state courts to get around the arbitration clause have mostly gone aground. A case in Washington state over failure to remit funds to third-party sellers failed when Amazon triggered arbitration. Amazon may have newfound liability in counterfeit cases, due to a ruling last week that said the company is responsible when phony products get to customers, even if it’s a third-party seller transaction. But that leaves all the other ways Amazon controls inventory and sales on the website, and the arbitration barrier.

California did try to ameliorate some of the problems third-party sellers face with a bill proposed in the state legislature. Initially it would have banned Amazon from refusing to disburse third-party seller funds in its possession for more than 90 days without paying 10 percent interest per day. But somehow this language got changed, and now the bill requires Amazon to only “set out the ground for decisions” to withhold funds. “Now that bill is practically nothing,” Sussman said. “Who pressured who?” Amazon wouldn’t comment on the matter.

Conservative lawmakers have supported arbitration, consistent with their fealty to big business. But here’s a case with millions of small businesses being unnecessarily put at risk. That could possibly change some minds, particularly at a time when Big Tech’s reputation on Capitol Hill is flagging. “Any other circumstance where there’s someone’s livelihood on the line, you have at least some due process,” said Julia Duncan. “Here you have no due process and no application of any rules or standards or whatever.”

The federal courts have entrenched arbitration, with multiple rulings allowing its use, including the Epic Systems case this year. Congress has dithered, and companies are taking advantage. Amazon shows how that manifests in the business world, locking in ever-increasing profits on its marketplace while forcing sellers that have few options for getting their goods noticed online into what can rapidly become a Kafka-esque nightmare.

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