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One businessman says Amazon kept his merchandise—and his money

During last year's holiday season, hoverboards were all the rage.

The electronic self-balancing scooter was the hottest-selling item on Black Friday and clips from "Back to the Future Part II" were all over the internet. Amazon.com, which sold plenty of hoverboards in addition to everything else on earth, was having a blockbuster Christmas.

The same could not be said for JC Berg, a New York–based seller who was early in spotting the hoverboard trend.

Amazon had been so eager to snap up inventory that it agreed to buy $1.5 million worth of scooters from Berg, equal to about 4,000 hoverboards.

Berg held up his side of the deal, delivering the first 3,000 boards in a hurry. But he never received a penny.

According to a $1.5 million fraud and breach of contract lawsuit Berg filed against Amazon in October, the e-tailer tried to change the terms of the deal and force Berg to accept "improper price concessions" when cheaper hoverboards began showing up on its marketplace.

Berg, who started his business on Amazon in 2014 and was generating several millions of dollars a year on the site, is now cut off altogether. Even the electronics and office products that he'd delivered in the past are no longer welcome.

"We've been blackballed," said Berg, who grew up in a family of retailers in New York's Diamond District. "They ceased purchase orders across the board as the situation became more contentious."

Amazon is enjoying a banner 2016 heading into Christmas, with analysts forecasting annual revenue growth of 28 percent, the fastest expansion since 2011, according to FactSet. The Echo voice assistant is beloved by techies, and Prime subscribers are signing up by the millions with the promise of faster shipping on a wider array of goods and an expanding roster of original TV shows.

But the contentiousness that Berg describes is being felt across the universe of sellers and vendors, where Amazon continues to flex its muscles in dealing with marketplace participants. The Seattle-based company's behavior is raising the ire of frustrated merchants, creating a litigious holiday season for Amazon that goes way beyond hoverboards.

The primary complaint is that Amazon has failed to stop the spread of counterfeits, primarily from Chinese manufacturers, who are getting unfettered access to the market and selling knockoffs at prices that undercut the real thing.

Earlier this month, the maker of the Snuggie blanket teamed up with creators of other "As Seen on TV" products in an infringement and counterfeiting suit, alleging that Amazon openly contributes to the sale of inauthentic items. In September, a graphic designer whose art is sold on coffee mugs, T-shirts and magnets sued Amazon for impermissibly producing and selling items featuring her artwork, specifically a defecating unicorn. The case was settled this month.

Apple is going after problem vendors on Amazon, filing a counterfeit suit in October against a maker of imitation chargers and adapters. Amazon itself even took the unprecedented step last month of filing two lawsuits against counterfeiters on its site. One of those suits focused on infringers of a product called Forearm Forklift, which CNBC.com profiled a few weeks earlier.

"We'll soon find out if these are sham lawsuits and an effort for them to look like they're being diligent," said Paula Phillips, a managing partner at law firm Phillips & Pfau, which specializes in intellectual property. "What about what they are doing on a daily basis? How are they handling seller requests to take down infringing goods? We have not seen much movement, particularly when requested by smaller companies."

But Berg's hoverboard case is unique. It's not about Amazon's negligence toward counterfeits. Rather, it targets the company's alleged bullying tactics, painting Amazon as an arrogant giant unwilling to honor a contract when market forces turn against it.

Amazon sales

Year Sales (blns) Growth
2016 $137 (est) 28%
2015 $107 20%
2014 $89 20%
2013 $74.5 22%
2012 $61.1 27%
2011 $48.1 41%
2010 $34.2 40%
2009 $24.5 28%
2008 $19.2 29%
Source: FactSet

As the go-to shopping destination for consumers, Amazon has immense leverage over sellers, and Berg's case illustrates how far the company will go to use it.

His story starts in the summer of 2015. Berg was betting that hoverboards would be in high demand for the holidays, and he contracted with a manufacturer in China to start producing them. Shortly after Berg signed up to sell hoverboards on Amazon, the company reached out to him to secure as much inventory as possible.

"They were looking for large bulk purchases for the holiday season," Berg said.

From October to November, Berg sent 3,000 boards to Amazon and was prepping another 1,000 for future delivery. As a vendor, Berg makes slim margins on almost everything he sells and counts on volume purchases to generate profit.

Over the next few weeks, Amazon started to backtrack. Legions of merchants were catching on to the demand. Third-party sellers were adding hoverboards by the truckload and at prices far below the $379 average price that Berg was charging Amazon. According to Statistic Brain, almost $1 billion worth of hoverboards were sold in the U.S. last year.

But the public narrative quickly shifted from rapid growth to horrific disaster. YouTube videos and Vines showed riders falling on their face and scooters bursting into flames. Publications like BuzzFeed, Wired and Quartz wrote about hoverboards catching fire in malls and on sidewalks and causing houses to burn to the ground.

A Tennessee family’s house that burned down from a hoverboard that caught on fire
Source: Nashville Fire Department
A Tennessee family’s house that burned down from a hoverboard that caught on fire

The threats quickly intensified and turned into mainstream concerns, with major airlines banning hoverboards from flights and New York City forbidding them from streets.

One particularly violent case recently erupted into a $30 million lawsuit against Amazon.

Brian and Megan Fox's house in Nashville, Tennessee, went up in flames in January after a hoverboard they purchased two months earlier on Amazon spontaneously caught fire, destroying all of their possessions and physically and psychologically injuring their children. In the suit, the Foxes listed nine U.S. fires caused by hoverboards that were sold on Amazon between the time their family bought their scooter and the time it exploded.

The suit said Amazon had an "ongoing duty" to warn consumers of dangers even if the company learned of them after the sale of related items.

"The Amazon defendants knew that the lithium batteries in the hoverboards that it sold and/or distributed were being manufactured in an unsafe manner," according to the complaint.

An Amazon spokesperson declined to respond to accusations in either the Berg or Fox lawsuit and declined to offer a comment for this story.

"They zeroed out our account." -JC Berg

Working with the Consumer Product Safety Commission, Amazon agreed in late January — 12 days after the Fox family's house burned down — to provide a refund to anyone who purchased a hoverboard on the site. The CPSC commended Amazon for "voluntarily stepping up, providing a free remedy and putting customer safety first."

Given the millions of dollars in damage incurred and the mounting negative publicity, Amazon had little choice. The refund offer did nothing for Berg, who was helplessly seeking a solution with company representatives.

Back on Nov. 23, Berg logged onto his Amazon seller account only to find that the company had attempted to cancel $1 million worth of purchase orders, according to the lawsuit. Later that day, after contacting vendor support, Berg was told by email that his past and pending orders were canceled because his pricing wasn't competitive with other listings.

Amazon was also withholding another $70,000 it owed him for previous orders of office supplies and wireless products, Berg said.

"They zeroed out our account," he said.

Black Friday was four days away and Cyber Monday would arrive in just a week.

"Amazon began to leverage its enormous size, concomitant bargaining power, and media scrutiny surrounding self-balancing scooters in order to convince JC Berg to accept a lower price for inventory than the parties had originally agreed," the lawsuit alleged.

With Christmas rapidly approaching, Berg was stuck in a bind. He couldn't submit to Amazon's demands to cut 30 to 40 percent off the pricing without losing hundreds of thousands of dollars. Yet Amazon had all of his inventory so he had no ability to sell it elsewhere.

Meanwhile, he worried that Amazon was playing fast and loose with a potentially dangerous product. Berg had spent time and resources performing due diligence on the boards he ordered.

Based on the prices he was seeing from other vendors, he was certain that safety was being largely disregarded and that other manufacturers were likely using recycled batteries. To get thousands of boards through customs from China, Berg had to secure all the relevant safety documentation to show his products were compliant. However, third-party sellers could ship directly from China to consumers overseas with minimal restrictions.

Outside sellers account for about half of units sold on Amazon. The company has long claimed that it doesn't police the marketplace, but instead it serves as a platform to connect businesses and consumers.

Berg said he told the company, "I don't know what you're being offered, but we know based on our research and sourcing these products that there are a lot of funny things going on."

In the Fox family's case, Amazon was listed as the seller and shipper of the product on the package, though the company claims that it "did not in any way handle, package or mail the product," according to the suit.

Amazon shares

The complaint said Amazon knew the lithium ion battery in the hoverboard was dangerous because of the mounting number of reported fires in late 2015. The scooter the Foxes purchased was represented as having a Samsung battery, but Samsung said it didn't make that kind of component.

Every entity from the supposed manufacturer of the hoverboard to the storefront listing the product has been difficult if not impossible to locate, even though the package arrived from a Kentucky subsidiary called Amazon.com.kydc, the suit said.

"Amazon has been unable despite our request to identify who the manufacturer was," said Steve Anderson, the Fox family's lead attorney, in an interview. "That seems like an unusual position — to not even know where the product is coming from."

The swell of fires and explosions fed into Amazon's change of tactics in its fight with Berg.

On Dec. 3, Amazon began demanding that Berg's products comply with "voluntary safety standards." Berg said he had provided all of the necessary details. On Christmas Eve, Berg was told that his hoverboards didn't meet Amazon's "terms and conditions," meaning he was suddenly no longer authorized to even sell that type of product and his boards were being returned.

Two days later, Amazon began sending Berg's inventory back to him, but the goods never arrived because the packages were being delivered to a post office box. So back to Amazon fulfillment centers went the scooters.

From there, Berg was sent through an Amazonian labyrinth. One representative said Amazon had received a complaint from scooter manufacturer Razor, demanding indemnification of Amazon by Berg, even though Berg was never forwarded the complaint. Later, the company rejected his safety data as not conforming to requirements.

Amazon Fulfillment center, shipping
Adrian Dennis | AFP | Getty Images

The company offered meek settlements, including the return of some cash and some boards. Berg agreed to an offer at one point, suspecting the company was negotiating in bad faith since Amazon didn't have the hoverboards available that they were promising. After all, he could still see the inventory levels.

Berg called the company's bluff, and Amazon backed out of the deal. "They reneged and said the offer was no longer on the table," he said.

Suing Amazon is never the preferred route, and Berg spent the first half of 2016 focused almost exclusively on finding a resolution.

He was unsuccessful, and there was very little money coming in the door. Having realized that litigation was his only option, Berg had to let go of a handful of employees who worked on the Amazon account.

In recent months, Berg has returned to building up his wholesale business off of Amazon, selling computer accessories and office supplies to small and regional physical retailers.

"Our revenue numbers are a joke compared to previous years," he said.

While Berg hopefully awaits a trial, Amazon remains in the hoverboard business. A simple search for hoverboards on Amazon.com returns pages of self-balancing scooters and peripherals.

Unlike last year's free-for-all, there are restrictions today. The CPSC issued a recall in July on hoverboards from 10 companies, representing about 501,000 units.

A set of voluntary electrical standards was then created and identified as UL 2272. On its website, Amazon has a list of seven requirements for selling the scooters, including certification under that code.

"There was no safety standard in place," said Patty Davis, deputy director and press secretary at the CPSC. "There is now."

Safety may finally be in order, but Berg's problem, like that of other vendors, persists.

Berg said he's totally in the dark about the whereabouts of his hoverboards. As of Monday, according to his vendor dashboard, Amazon had 19 sellable boards from Berg worth $7,200. (The company still owes him over $1 million, Berg said. The rest of the cash he's demanding is for damages.)

Berg isn't convinced that anyone at Amazon has much of a clue about where his close to 3,000 hoverboards reside.

"We have no idea what happened," he said.