The FTC's Amazon Paradox

The wait is finally over as the Federal Trade Commission, under the leadership of Chair Lina Khan, has filed its long-anticipated case against the popular online retailer Amazon. The fact that the agency brought the case is far from surprising as Chair Lina Khan originally rose to prominence in antitrust circles on the popularity of a law review article “Amazon’s Antitrust Paradox.” 

Now though the FTC finds itself in its own paradox emerging from its suit against the retailer.  The agency’s lawsuit exposes the retailer to inconsistent legal obligations – ones that could make it virtually impossible for the company to comply with the law.

Understanding the case 

As part of its antitrust complaint, the FTC asserts that Amazon improperly limited the ability of third-party sellers to use their own shipping services within Amazon’s Prime program. When consumers purchase items eligible for Amazon Prime, they are guaranteed free two-day shipping, at no extra cost to them. The FTC alleges that, as a condition of qualifying for Prime treatment, Amazon required third-party sellers use Amazon’s shipping and distribution services, rather than affording them the flexibility to ship items themselves.

Strictly as a matter of antitrust law, the FTC’s theory will likely face strong headwinds in court.  Amazon has strong procompetitive rationales for its choice, namely, a desire to protect its Prime brand, to assure two-day shipping for customers, and to expand the number of customers who can benefit from this guarantee. If third-party sellers are unable to deliver items within two days, not only does Amazon’s brand suffer, but more importantly consumers are also harmed. Indeed, during the pandemic, some delivery times slipped, and customer satisfaction fell.

As a factual matter, Amazon does offer third-party sellers an alternative to Amazon’s distribution services. In 2015, the company began a “Seller Fulfilled Prime” program, which allows sellers to designate Prime-eligible inventory without paying for Amazon’s fulfillment services. Over the years, Amazon has sometimes retooled the program to ensure that third-party sellers are complying with the program. Prior to the pandemic, according to Amazon, fewer than 16% of seller fulfilled Prime orders were filled within two days, in large part because many sellers did not operate on weekends.  After pausing new enrollment in the program to fix its defects, Amazon recently re-opened this program to new applicants, with strict performance metrics to ensure sellers could meet consumer expectations.   As the FTC’s complaint notes, “sellers would need to meet rigorous pre-qualification criteria to enroll in a 30-day [seller fulfilled] trial, after which Amazon will determine whether they may participate.”

The complaint’s paradox 

Beyond these legitimate procompetitive business reasons, Amazon also may have legal reasons for wanting to closely monitor the shipping performance of its third-party sellers. In 1975, the FTC created the Mail Order Rule, which requires mail, phone, and online sellers to have a reasonable basis to expect that they can ship within the advertised time frame, or, if no time frame is specified, within 30 days. The Rule also requires that, when a seller cannot ship within the promised time, the seller must obtain the buyer’s consent to a shipping delay or refund payment for the unshipped merchandise. Violations can result in civil penalties of up to $50,000 per violation.

The Mail Order Rule arguably requires Amazon to closely monitor, and ultimately bear responsibility for, the shipping performance of its third-party sellers.  If Amazon failed to monitor third-party sellers, Amazon could risk running afoul of the Mail Order Rule, or for deceptively advertising two-day shipping under Section 5 of the FTC Act, or both.

Therein lies the paradox. On one hand, the FTC’s complaint alleges that Amazon has violated antitrust laws by exerting control over its third-party seller, while on the other hand, the FTC’s Mail Order Rule arguably requires Amazon to fulfill orders within its advertised time of two days.  In other words, the FTC has put Amazon between a rock and a hard place.

About the authors

Sean Heather

Sean Heather is Senior Vice President for International Regulatory Affairs and Antitrust.

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