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Big Brands Are Using Amazon’s Anticounterfeiting Measures to Crush Small Businesses

Amazon sometimes requires small businesses to get permission from manufacturers to sell their products on Amazon Marketplace.

by Lauren Kaori Gurley
Aug 16 2019, 1:02pm

Image: Christopher Lee/Bloomberg via Getty Images

In early 2018, Card & Party Giant, a discount party supply store in the Chicago suburbs, discovered Amazon had banned it from selling a popular brand of Halloween costumes. It believed Amazon had done this allegedly at the behest of Rubie’s Costume—the self-proclaimed “world’s largest costume manufacturer and supplier.”

Things quickly escalated. Card & Party is now suing Rubie’s Costumes for violating antitrust laws. The complaint alleges that “in an effort to curb competition,” Rubie’s “has misused Amazon’s Branding Registry…as a way to exclude Card & Party from access to Amazon.” (Rubie’s also sells its costumes directly on Amazon.) And crucially, Rubie’s holds exclusive manufacturing licenses over Barbie, Superman, Batman, and Star Wars costumes.

This is not the first time a small business has been prohibited from selling merchandise on Amazon Marketplace thanks to the whims of a large manufacturer. Last November, Amazon dealt a blow to independent smartphone and computer refurbishers when it cut a deal with Apple that allowed only “authorized” vendors (those with around $10 million in inventory a year) to sell Apple products on the retail giant’s platform. This, of course, was a death sentence for small retailers and refurbishers who received emails from Amazon informing them they would no longer be able to sell on their site. As of July 2018, Amazon accounted for 49.1% of all online retail sales in the United States, and is a vitally important sales channel for people selling refurbished or wholesale goods.

"Our allegation is that they’ve misused the Amazon Brand Registry as a vehicle to boycott third party retailers who compete with them. They can do this because they are both a retailer and a manufacturer."

And so, for a small retailer like Card & Party, Amazon is a pivotal source of online revenue. Aaron Schwartz, Card & Party’s attorney, argues that Amazon’s process for authorizing vendors to sell branded merchandise allows large companies to unlawfully drive smaller competitors, especially discounters like Card & Party who sell the same products for cheaper, from Amazon. “Our allegation is that they’ve misused the Amazon Brand Registry as a vehicle to boycott third party retailers who compete with them. They can do this because they are both a retailer and a manufacturer,” he said. “They’re leveraging their monopoly.”

Amazon allows manufacturers like Rubie’s to authorize third party retailers like Card & Party to sell their merchandise. All retailers must then be approved on Amazon Brand Registry, which has the stated purpose of “prohibit[ing] the sale of counterfeit products.” But Card & Party was not selling counterfeits, according to the lawsuit. The discounter was allegedly selling costumes bought wholesale from Rubie’s and then discounting them on Amazon.

This, Schwartz argues, incentivized Rubie’s to facilitate the deauthorization of a rival on Amazon. Rubie’s said they would not provide an authorization letter for Card & Party to sell their products, because they had not purchased merchandise from them in several years—a practice “explicitly disavowed” by Amazon, according to the lawsuit.

In the United States, thanks to a legal principle called the “First-Sale Doctrine,” individuals have the right to resell copyrighted goods even if the owner of that copyright objects. The exhaustion rule “is the reason we have public libraries and eBay. It’s the reason we can lend a novel to a friend and leave our record collections to loved ones in our wills” write Aaron Perzanowski and Jason Schultz in their book The End of Ownership. “But the rules that permit these uses are not a given. They were established by the courts and Congress, and their survival depends on continued legal recognition.”

For Card & Party and other retailers who have been banned from selling certain brands on Amazon, the retail giant’s authorization process could be seen as an infringement upon these fundamental property rights. An Amazon spokesperson told Motherboard, “We strive to provide customers with vast, authentic and safe selection and to do this, we require sellers to provide additional information to be qualified to sell certain products in our store. If a seller has a concern about meeting those requirements, we encourage them to contact us directly.”

The injury for Card & Party went beyond the loss of Rubie’s sales, it argues. The complaint alleges that after being deauthorized from selling Rubie’s costumes, “Card & Party [had] to forgo numerous sales on the Amazon Marketplace, which would have led to higher ratings, an increase in customer reviews, and a better fulfillment rate.” These metrics affect the algorithm that determines which sellers feature higher up in product searches. The attorneys argue that Amazon is an “essential facility,” for online costume retailers, and without equal access, Card & Party cannot compete and will have trouble surviving.

In June, the Federal Trade Commission (FTC) opened an antitrust investigation into Amazon’s business practices—including the Amazon-Apple deal that removed thousands of independent Apple vendors and refurbishers from Amazon, according to the Verge. An investigation into how Amazon Brand Registry has been used to kill small business could be used as evidence of anti-competitive behavior if the FTC decides to sue, said Christopher Sagers, a law professor and antitrust expert at Cleveland State University.

To be clear, Amazon is not culpable in this particular lawsuit. But this case could foreshadow an influx of similar litigation. “You’re going to see more and more retailers suing Amazon or suing other retailers for stuff that happens on Amazon because their businesses are being killed,” said Sagers. “These courts are going to have to spend the next 10 years figuring out what limits the law puts on that.”

Sagers said that Card & Party will likely lose the case because he believes a court will find the company lacks sufficient evidence to show that its business has been harmed by Rubie’s. Rubie’s did not respond to a request for comment.

Nonetheless, he says this “traditional dispute between manufacturers and retailers” is important. “The presence of Amazon...makes this otherwise mundane lawsuit look more significant. The manufacturer here is able to squash a disfavored retailer in ways that it might otherwise not do.”