California sues Amazon over third-party contracting

SAN FRANCISCO — California is challenging Amazon in a case that could reshape the e-commerce giant’s business model by forcing it to lift restrictions on third-party vendors.

State Attorney General Rob Bonta announced on Wednesday that his office was suing Amazon for requiring merchants to enter agreements that penalize them if they offer their products elsewhere for lower prices. Bonta, a Democrat, argued that Amazon has violated California laws barring anti-competitive practices by shutting out competitors and effectively cementing higher prices — and he is seeking a court order barring Amazon from requiring third-party contracts that limit price competition, along with restitution for merchants and other financial penalties.

"Amazon makes consumers think they are getting the lowest prices possible, when in fact, they cannot get the low prices that would prevail in a freely competitive market because Amazon has coerced and induced its third-party sellers and wholesale suppliers to enter into anticompetitive agreements on price," the complaint alleges. "The intent and effect of these agreements is to insulate Amazon from price competition, entrenching Amazon’s dominance, preventing effective competition, and harming consumers and the California economy."

Bonta cast the lawsuit as a means to ensure Californians are not paying inflated prices during a time of rising costs.

“Through its illegal actions, the quote 'everything store’ has effectively set a price floor costing Californians more for just about everything," Bonta said at a news conference in San Francisco.

An Amazon representative did not immediately respond to a request for comment.

The case adds to the legal clouds encircling Amazon’s use of third-party sellers. The company agreed to shut down its “Sold by Amazon” program earlier this year and paid a fine after Washington Attorney General Bob Ferguson launched a price-fixing investigation.

More recently, a superior court judge rejected a lawsuit from Washington, D.C. Attorney General Karl Racine accusing Amazon of violating the district’s anti-competitive behavior laws by arguing, like Bonta, that third-party contracts artificially inflate prices. The new California lawsuit is nearly identical to that case, which Racine's office said it planned to appeal. The Washington, D.C. Superior Court judge who dismissed the suit wrote that merchants are free to sell wherever they choose, and that they can simply not sell their wares on Amazon if they don’t like the terms.

In 2019 Amazon said it would stop enforcing certain contract terms that blocked merchants from offering lower prices elsewhere. But according to Bonta's office, it continued the practice.

Bonta said he had confidence his suit would succeed under California laws barring anti-competitive behavior. He also said he hoped the Legislature — in which he previously served — would introduce legislation cracking down on business tactics that discourage competition.

Amazon will need to contend with California’s lawsuit as it faces mounting political pressure on Capitol Hill. The company has fortified its lobbying corps, and its CEO has personally urged senators to oppose antitrust legislation that would penalize Amazon and other tech giants for elevating their products over rivals’ offerings. The company has tried to enlist third-party sellers in that effort, arguing federal restrictions would hurt everyone who sells through the website.

Documents provided to POLITICO this summer appear to show Amazon seeking to undercut competitors selling on its platform. The California lawsuit says that Amazon has misled enforcement agencies and investigators from around the world.

Federal regulators are also scrutinizing the company’s business practices. The Federal Trade Commission is conducting a wide-ranging investigation of its retail, device and cloud computing operations, and scrutinizing the company over possible privacy violations and other consumer harms involving its Prime subscription business. It also recently began vetting Amazon’s $1.7 billion acquisition of robot vacuum manufacturer iRobot, and $3.9 billion takeover of One Medical, seeking to determine if the deals violate antitrust laws.

This is not the first time the California attorney general’s office has taken aim at Amazon. Bonta secured a court order last year compelling Amazon to disclose more information about Covid-19 case numbers among its workforce, and he has urged more oversight of a fulfillment warehouse’s environmental impact.

California lawmakers have also increasingly sought to rein in the tech industry in recent years. Democratic Gov. Gavin Newsom is weighing a bill that would set children's privacy and safety standards for websites, apps and platforms often visited by children under 18. A related proposal to create legal liability for platforms that addict kids stalled this year.

Josh Sisco contributed to this report.