Amazon added a first-ever warning about counterfeit products to its earnings report

  • Amazon addressed its counterfeit problem in a regulatory filing for the first time.
  • This is the first time Amazon mentioned the word "counterfeit" in its annual report.
  • It’s a problem that could get worse, as Amazon is shifting more of its sales to third-party sellers.
An employee walks between rows of storage racks at one of Amazon.com's fulfillment centers in Rugeley, U.K.
Simon Dawson Bloomberg | Getty Images
An employee walks between rows of storage racks at one of Amazon.com's fulfillment centers in Rugeley, U.K.

Amazon is warning investors of one of the biggest problems facing its online marketplace: counterfeit products.

Under the "risk factors" section of its annual report, Amazon added a new line addressing counterfeit problems on its marketplace.

"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," the filing said.

The disclosure reflects Amazon's increased concern over the counterfeit problem on its marketplace, as the words "counterfeit" and "pirated" were never mentioned in its annual filing before. While Amazon publicly says it has a "zero tolerance" policy for counterfeit products and has built new technology to deal with the problem, its marketplace that allows third-party merchants sell goods continues to be plagued by knockoffs.

It's a problem that could get worse, as Amazon is shifting more of its sales to third-party sellers. More than half of the products sold on Amazon came from third-party sellers in 2017 for the first time, and in its most recent quarter, Amazon said that third-party products accounted for 52 percent of all products sold.

Amazon's counterfeit problem has drawn the attention of major retail brands as well. In October, The American Apparel & Footwear Association, which represents more than 1,000 brands, recommended that some Amazon sites should be added to the "Notorious Markets" list because of counterfeits, saying Amazon should rather "be a leader in the fight against counterfeits."

Bigger brands like Daimler AG have also raised flags. In 2017, the German automaker filed a complaint alleging trademark infringement by Amazon for failing to prevent the sale of counterfeit Mercedes-Benz parts.

Earlier last year, a widely read blog post written by Elevation Labs' founder Casey Hopkins pointed out how counterfeits make business tough for small companies like his. In the blog post, Hopkins wrote about his experience dealing with Chinese counterfeiters that flooded the marketplace with copies of his product, killing his brand reputation and sales along the way.

"Customers are unknowingly buying crap versions of the product, while both Amazon and the scammers are profiting, and the reputation you've built goes down the toilet," Hopkins wrote.

In a statement, Amazon said, "We strictly prohibit the sale of counterfeit products and invest heavily—both funds and company energy—to ensure our policy against the sale of such products is followed."

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