Exploding hoverboard case shows how hard it is to beat Amazon in court

Kyle Walsh | CNBC

A judge in Tennessee this week ruled that Amazon isn't liable for damages caused by a hoverboard that spontaneously exploded and burned down a family's house, even though they bought it on Amazon's website. The plaintiff claimed that Amazon didn't properly warn her about the dangers they knew existed with the product, but the judge didn't agree.

It's the latest legal victory for Amazon, which has for years fended off litigation related to product quality and safety by arguing that, for a big and growing part of its business, it's just a marketplace. There are buyers on one end and sellers on the other — the argument goes — and Amazon connects them through a popular portal, facilitating the transaction with a sophisticated logistics system.

The courts are reinforcing the power of Amazon's business model as the ultimate middleman. But for American consumers, there's growing cause for concern.

We're all buying more stuff on Amazon. Whether it's the hottest gadget like a hoverboard or drone, health supplies like vitamins, or skin and haircare products, Amazon has become the place where we can get everything quickly and have it delivered in two days.

Increasingly those products are coming from third-party sellers in China and other places all over the world, who are sometimes impossible to find when something goes wrong.

More than half of products sold on Amazon now come from Marketplace merchants.

Amazon said in a statement to CNBC that third-party sellers are "required to comply with all relevant laws and regulations when listing items for sale in our stores." The company said it has measures to prevent suspicious products from being listed and that it removes items when necessary.

'They don't have to play by the same rules'

But if Amazon isn't liable when faulty products sold through its website cause personal injuries and property damage, customers are often left with no recourse. That's because it's frequently impossible for consumers to figure out who manufactured the defective product and hold that party responsible.

"It's the wild wild west," said David Wilk, a personal injury lawyer at Lepley, Engelman, Yaw and Wilk in Williamsport, Pennsylvania. "Amazon is prolific and dominant and only getting bigger and throwing brick-and-mortar stores out of business left and right. But they don't have to play by the same rules."

Wilk has experienced firsthand how difficult it is to take on Amazon. His client, Heather Oberdorf, was partially blinded in 2015 after a retractable dog leash that she bought on Amazon snapped backward and hit her in the face.

After the incident, Oberdorf says, she couldn't locate a representative of the third-party seller, The Furry Gang, which operated on Amazon under the name Dogaholics. Amazon was the only point of contact. Nevertheless, in December, the judge in Pennsylvania dismissed the case and used an old-media example to bolster Amazon's marketplace defense.

"The Amazon Marketplace serves as a sort of newspaper classified ad section, connecting potential consumers with eager sellers in an efficient, modern, streamlined manner," the judge wrote. "It cannot be liable to the Oberdorfs under a strict products liability theory."

Wilk is appealing the case in Pennsylvania's Third Circuit. He says Amazon should be held to the same standard as Walmart or Sears, which are liable for products on their shelves because they place "the product into the stream of commerce."

Amazon was also victorious in a 2016 case, in which a customer's LG cell phone battery exploded in his pocket.

The company's successes in the courtroom have gone beyond safety-related issues. Amazon has also won intellectual property suits against companies like pillowcase maker Milo & Gabby, which sued Amazon in 2013 for listing knockoffs. The court ruled that Amazon was not the seller and not liable for infringement.

Then there's this week's ruling in Tennessee and the hoverboard that destroyed Megan Fox's home.

In late 2015, Fox, a mother of four in Nashville, bought a hoverboard for her 13-year-old son for Christmas. The two-wheeled self-balancing scooters were all the rage at the time. Amazon sold almost 250,000 of them over a 30-day period.

But by mid-December, there were so many cases of fires and explosions that Amazon had halted sales.

On January 9, 2016, just after the holidays, Fox's hoverboard spontaneously exploded and burned her house to the ground, forcing two of her kids to jump through windows and leaving her husband with two broken bones.

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

The Foxes sued Amazon for $30 million, claiming the company had an obligation to warn customers properly about the dangers it knew existed. Fox bought the hoverboard on Amazon, the receipt came from Amazon, the box had an Amazon label and all the money was in Amazon's hands. Fox has been unable to find the Chinese manufacturer of the device.

Fox argued that Amazon was a co-seller of the device, even though it was sold under a storefront with a different name. Amazon has rejected that label.

'Non-alarmist email'

Fox's case was filled with testimony and evidence illustrating that Amazon execs were concerned about the hoverboards sold on its site. One executive deposed in the case said he'd removed a hoverboard from his house before Christmas after hearing about "potential issues." CEO Jeff Bezos received an email directly from a customer whose hoverboard had caught fire while his daughter was riding it in the house, court documents showed.

Additionally, where Amazon typically holds a merchant's cash for 30 days or less, sellers of hoverboards didn't get their money for 90 days because the company was preparing for a flood of returns. "There's a potential to run off with this money," an employee wrote in an internal email revealed in court.

In a memo to top executives on December 11, 2015, an Amazon vice president said the company had decided to halt sales of hoverboards and send a "non-alarmist" email to existing customers, according to court documents. That was after the product safety team identified 17 complaints of fires or explosions in the U.S. from hoverboards sold on Amazon.

Fox received the email the next day. It referenced "recent news reports of safety issues" and offered "safety tips" for using the product as well as an option to return the device for a refund. There was no use of the word "fire" or "explosion."

Fox testified that if Amazon had said that "they knew what they knew, I certainly would have gotten it out of my house."

Still, the judge wasn't convinced that Amazon was legally responsible. The case was supposed to go to trial on July 10, but Judge William Campbell dismissed it on Wednesday. He ruled that even though it's undisputed that "the manufacturer of the hoverboard at issue is unknown," Amazon was simply used by an outside merchant as the platform to list the product.

Christopher Furlong | Getty Images

"Amazon's role in the transaction was to provide a mechanism to facilitate the interchange between the entity seeking to sell the product and the individual who sought to buy it," Campbell wrote. He also said that, under Tennessee law, Amazon hadn't violated any duty to warn customers about the product, which was being manufactured and sold by other entities.

Steven Anderson, the Foxes' lawyer, said he's evaluating whether to appeal.

"We're disappointed in the decision and weighing our options with our clients and should make a decision in the next week or two," Anderson told CNBC.

Amazon defended its 2015 actions in a statement. The company said that it "closely monitored risks with hoverboards since they were first offered for sale," and that it was the first retailer to stop sales, send out an alert and offer refunds to customers after learning of "safety concerns about this toy."

Amazon is now the world's second most valuable company, rocketing up at the same time that retailers like Sears and Macy's are closing stores and Toys R Us is liquidating. According to One Click Research, Amazon accounted for 44 percent of U.S. e-commerce sales last year.

But while Amazon is rapidly displacing physical stores, the legal system isn't giving Amazon customers the same protections it offers to traditional retail shoppers.

Wilk said the laws need to catch up to reality. In the meantime, his lesson for people is "don't buy so much stuff on Amazon," he said. "If it comes directly from the company, that's one thing, but if it's on the Marketplace, I'd stay the hell away from it."

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