5 takeaways from Americas landmark lawsuit against Amazon

Washington CNN —

An antitrust lawsuit from 17 states and the Federal Trade Commission this week against Amazon represents the US government’s biggest regulatory challenge yet against the e-commerce juggernaut.

The landmark case targets Amazon’s retail platform, alleging that it’s harmed shoppers and sellers alike on a massive scale.

Through an alleged “self-reinforcing cycle of dominance and harm,” the plaintiffs claim, Amazon has run an illegal monopoly in ways that are “paying off for Amazon, but at great cost to tens of millions of American households and hundreds of thousands of sellers.”

In response, Amazon has argued the case is “wrong on the facts and the law” and warned that a victory for the FTC would lead to slower shipping times or higher prices, including perhaps for Amazon’s Prime subscription service.

Here are five of the biggest highlights and takeaways from the plaintiffs’ 172-page lawsuit.

The basics

The plaintiffs’ central claim is that Amazon has used a variety of tactics to lure shoppers and sellers onto its platform and then to trap them there, preventing other online retailers like Walmart, Target or eBay from attracting those same consumers and vendors to their own sites.

Walmart, Target and eBay are not parties to the suit.

Not only has that lock-in effect hurt competition between the likes of Amazon and Walmart, the lawsuit claims, but it has also given Amazon confidence it can exploit its sellers and shoppers with impunity — allowing the company to extract ever more value from them without fear those people will leave for a rival platform.

The complaint portrays Amazon as offering a kind of Faustian bargain — first enticing sellers with the ability to access tens of millions of potential customers and drawing in shoppers with low prices and numerous Prime benefits, such as Amazon Music and Prime Video, that other e-commerce platforms can’t hope to match.

Then, in the plaintiffs’ narrative, Amazon takes advantage of sellers’ and shoppers’ dependence by increasing platform fees; bloating its search results with advertising that sellers are forced to buy if they want any hope of reaching shoppers; requiring sellers to use Amazon’s in-house fulfillment services if they want the best seller benefits, including the coveted “Prime” badge; and punishing sellers who try to sell their goods elsewhere online at a lower price than on Amazon.

The overall result, the plaintiffs claim, is a worse experience for Amazon users and artificially high prices for everyone, including on non-Amazon platforms.

“There are internet-wide effects here,” FTC Chair Lina Khan told reporters on a conference call Tuesday.

Amazon has responded that the lawsuit “reveals the Commission’s fundamental misunderstanding of retail.” Amazon’s general counsel, David Zapolsky, wrote in a blog post that the company’s pricing programs for sellers are meant to “help them offer competitive prices,” that consumers “love Prime because it’s such a great experience,” and that the claim “that we somehow force sellers to use our optional services is simply not true.”

A breakup of Amazon?

A big, swirling question is whether Amazon could be broken up as a result of this suit.

Officially, the FTC is saying that talk of a breakup is premature.

“At this stage, the complaint is really focused on the issue of liability,” Khan said at an event hosted by Bloomberg News on Tuesday, hours after the lawsuit was filed.

If the courts find that Amazon did violate the law, then there could be a separate remedies phase to consider potential penalties.

A breakup is not off the table. The plaintiffs’ complaint, filed in Seattle federal court, suggests that any court order to address the issue could include “structural relief,” a legal term referring to a potential breakup of Amazon.

Khan also left open the possibility that Amazon executives could be held personally liable and added to the case if there is sufficient evidence of their responsibility for Amazon’s alleged misconduct.

“We want to make sure that we are bringing cases against the right defendants,” Khan said in response to a question from CNN about whether the FTC considered naming specific executives in Tuesday’s case. “If we think that there is a basis for doing so, we won’t hesitate to do that.”

Those remarks echo what Khan has said elsewhere about her willingness to name individuals in FTC enforcement actions. Just this month, the FTC added three Amazon officials to a separate consumer protection case dealing with Amazon Prime.

Project Nessie

An entire section of the complaint is devoted to a mysterious algorithm Amazon has developed named Project Nessie. Virtually every detail surrounding Project Nessie is heavily redacted from the complaint, but what little is revealed about the program suggests it is an “algorithmic tool” and “pricing system” that has allegedly helped Amazon “extract” an undisclosed amount of “excess profit” from Amazon shoppers.

Amazon did not respond to CNN’s questions about Project Nessie. And Project Nessie isn’t the only matter subject to redactions in the lawsuit; black bars obscuring key business numbers, executive testimony and other evidence are strewn throughout the complaint.

In response to public questioning about the redactions, FTC spokesperson Douglas Farrar said in a statement: “We share the frustration that much of the data and quotes by Amazon executives … is redacted,” and that “we do not believe that there are compelling reasons to keep much of this information secret from the public.”

Farrar added that Amazon has a limited procedural window in which to file arguments for why many of the redacted details should remain sealed.

Market definition

Whether the FTC can prove in court that Amazon’s actions are illegal will hinge, to a large degree, on showing that Amazon has monopolized certain specific markets.

The exercise is not as simple as pointing to Amazon’s sales figures or the percentage of online shopping that happens on Amazon’s platform. Instead, the plaintiffs have to show that Amazon is part of a well-defined geographic and economic market that it dominates.

The complaint tries to define two such markets in the United States: a market the plaintiffs label as “online superstores” — essentially describing large retail websites that offer many different types of goods, with convenient search, checkout and shipping features for consumers — and a seller-focused “online marketplace services” market that grants third-party vendors access to customers, provides them with sales tools like data analytics and listing services, and a review or product ratings system, among other things.

Expect Amazon to try to challenge how the plaintiffs draw their market boundaries. Zapolsky’s blog post argues that the plaintiffs have attempted to “gerrymander” their proposed markets to make it look like Amazon is more dominant than it is.

Whether that argument succeeds will be up to the court, but it is clear the plaintiffs have carefully crafted their market definitions. For example, they claim that in this case, Amazon can’t be said to compete with online grocery delivery services such as FreshDirect or Instacart because of the unique and often hyper-local constraints of shipping perishable goods. The FTC also wants to exclude medium-sized or interest-specific retail sites that don’t offer a wide variety of products. Presumably this might exclude websites belonging to companies like the pet care retailer Chewy, or the electronics seller Best Buy.

FreshDirect, Instacart, Chewy and Best Buy are not parties to the suit.

Excluding those types of companies allows the plaintiffs to make claims such as that “Amazon’s share of the overall value of goods sold by online superstores is well above 60% — and rising.”

What’s not in the suit

Even as the lawsuit takes on some of the most important parts of Amazon’s retail business, there is much that the suit doesn’t cover.

In recent years, critics of Amazon have lobbed a kitchen sink of antitrust allegations at the company, including that it snoops on seller data to figure out what products it should sell under its own brand; that the fact Amazon sells its own products alongside third-party sellers creates an anticompetitive conflict of interest; that Amazon has used predatory pricing to weaken rivals and to ultimately acquire them; and that Amazon wields enormous power in labor markets. Many of these observations were included as part of a 450-page congressional report that Khan helped author while working as a House Judiciary Committee staffer prior to being appointed to the FTC.

Amazon founder Jeff Bezos has acknowledged in congressional testimony the possibility that employees may have inappropriately accessed seller data in violation of company policy, but Amazon has broadly disputed most of the other allegations.

Virtually none of those claims, however, are reflected in this week’s lawsuit. The complaint does allege that Amazon biases its search results to rank its own products higher than those sold by third parties, but largely as a byproduct of Amazon’s main moves to protect its dominance.

The complaint doesn’t articulate how regulators came to select some allegations and not others.

When a reporter asked Khan to reflect on her past criticism of how narrowly courts have focused on the issue of consumer prices, in contrast to Tuesday’s Amazon suit that mentions the word “price” some 223 times, not including any redacted parts, Khan said her job was to present the case that stood the best chance of winning.

“As enforcers, we want to both follow the facts where they take us and also look at how the law applies to the facts,” Khan said. “You want to bring the strongest case that you can.”