Last fall, members of the United States Senate introduced the American Innovation and Choice Online Act (the “Act”), a bipartisan supported bill that aims to prevent online marketplaces, like Amazon, from favoring its own products over third-party products sold on its platform. In January 2022, the Senate Judiciary Committee moved the bill forward for further debate. The bill has laudable goals, worthy of pursuit. However, as is often the case with new legislation, the law of unintended consequences is around almost every corner. One consequence of this legislation (unintended or not), would be a likely increase in the number of third-party sellers and merchants selling on platforms like Amazon. If firms like Amazon and Walmart are restricted from competing with sellers on their own platforms, competition will rise. Within this influx of new third-party sellers using the platform, there will be many who sell counterfeit, sub-standard, or grey-market products.
The bill, drafted primarily due to anti-trust concerns, restricts many activities commonplace today, and requires online marketplaces to refrain from unfair and discriminatory practices which include the following:
- No Preference for Platform’s Products. Marketplaces cannot promote their own products over those of another business user in a manner that would harm competition.
- No Limitation on Third-Party Sellers. Even more broadly, marketplaces cannot take any action that unfairly limits the ability of another business to compete on its platform.
- No Discrimination in Enforcement of Terms of Service. Marketplaces cannot enforce their terms of service in a manner that harms competition on the platform.
- No Use of Seller Non-public Data. Marketplaces cannot use non-public data regarding seller activities to support the offering of a platform’s own products in competition with those sellers, nor can marketplaces restrict a seller from accessing the data needed to move its store to another platform.
- No Use of Ranking Functionality. Marketplaces cannot utilize search or ranking functionality that favors their own products relative to those of another business.
- No Retaliation Against Sellers. Marketplaces cannot retaliate against sellers who raise concerns with law enforcement about marketplace violations of state or federal laws.
While the proposed legislation, if enacted, would certainly address some of the anti-trust concerns that many in Congress have with online marketplaces, these limitations might, in effect, make it easier for counterfeiters to stay on the platforms and do business.
First, the legislation might make marketplaces warier to remove “gray market” goods for fear that this action unfairly limits the ability of businesses to compete for the sale of goods by other sellers, licensed to sell those products in other markets. To remain compliant, Marketplaces would need to not only become experts in the licensing and supply chain dynamics of the brands sold on its platform but would become active members in managing those channels.
Second, marketplaces may decide, to avoid potential liability, not to enforce certain terms of service that prescribe what actions sellers can and cannot do for fear of being accused of discrimination. For example, a marketplace may decide not to terminate a seller for selling a few counterfeit goods in violation of its terms of service for fear of the seller making a complaint that the marketplace is acting unfair, being discriminatory, or is being heavy-handed in its enforcement processes. As in all areas of business today, being accused of acting in a discriminatory manner is a real and serious risk to a companies reputation.
Third, preventing the marketplace from using sales data to make decisions on search and ranking functionality may allow counterfeit sellers to thrive because often illicit sellers have found ways to leverage “Buy Box” Data to raise their visibility for product sales, thereby artificially lifting their rankings.
Despite the concern that the proposed legislation might open the door to more sellers and more counterfeits, the bill does expressly provide that the restrictions on marketplaces shall not apply if the platform establishes that its actions were necessary to “prevent a violation of or comply with, federal or state law.” Because the production, sale, and distribution of counterfeit goods is a crime in the US and in most countries around the world, marketplaces may have enough “legal cover” to continue some of its anti-counterfeiting practices that come close to violating provisions of the legislation.
All actions have consequences, most intended, but it's the unintended variety that tends to go overlooked until it's too late. Let's hope in this case, careful consideration is given to not exacerbating an already growing, complex, online brand protection problem.
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