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California hits Amazon with unfair competition lawsuit

Attorney General Rob Bonta said an investigation revealed more than a decade of anticompetitive practices.

SAN FRANCISCO (CN) — California Attorney General Rob Bonta announced an antitrust suit against Amazon on Wednesday, claiming the company broke the law and stifled competition for years, which led to higher prices for families across California. 

Bonta claims Amazon’s practices of penalizing merchants if they offer products at lower prices on other websites thwart the ability of other online retailers to compete. He said the company's required agreements with merchants drive its own dominance in the online retail marketplace, and harm smaller businesses and consumers with inflated fees and higher prices.

At a press conference Wednesday, Bonta said the case filed in San Francisco Superior Court stems from an investigation taking place over more than two years. Amazon is the country’s dominant online retail store, with more than 160 million Prime members nationwide and around 25 million customers in California. According to one survey, 96% of all Prime members said that they are more likely to buy products from Amazon than any other online store, and 74% of all consumers go to Amazon to buy a specific product. 

In other words, merchants must use Amazon. “They can’t succeed without it," Bonta said.

But in required contracts to sell on the website, merchants must agree not to offer lower prices elsewhere — including competing sites like Walmart, Target, eBay and sometimes on their own websites — and accept drastic penalties like loss of the “Buy Box” on Amazon or to “compensate” Amazon if other online stores do lower their prices. Merchants that do not comply face sanctions such as less prominent listings and even the possibility of termination or suspension of their seller accounts.

“In order to avoid competing with other e-commerce sites, since 2012 Amazon required sellers to enter contracts severely penalizing them if their products are offered for a lower price off Amazon,” Bonta said. “Through its illegal actions, the ‘everything’ store has effectively set a price floor, costing families more for just about everything.”

Bonta claims sellers reported they could “pay less in fees on our own and other websites," but that they do not attempt to do this because “Amazon will disqualify (our) offers from the Buy Box.” 

“The reality is: Many of the products we buy online would be cheaper if market forces were left unconstrained,” he said. “We won't allow Amazon to bend the market to its will at the expense of California consumers, small business owners, and a fair and competitive economy.” 

According to the complaint, Amazon's price parity agreements have expanded and entrenched Amazon's market power as an online retail store and resulted in pricing above competitive levels in California, in violation of the state's Unfair Competition Law and the Cartwright Act. Bonta called it “one of the most important lawsuits in recent memory” to address violations of law. 

“Amazon's practices prevent basic price competition and costs consumers more, by preventing different online stores from competing to outdo each other with lower and lower prices, which if it occurred would benefit consumers,” he said. “This is unacceptable. The company needs to follow the law and do business without illegally blocking competition.”

He said the state Department of Justice wants to send a message to every corporation across the country that if they use the same tactics to manipulate profit and suppress competition, “we’ll see you in court.”

The state wants a judge to block Amazon's anticompetitive agreements and prohibit the company from entering into and enforcing contracts that harm price competition. It also wants the court to require Amazon to notify vendors that it does not require sellers to offer prices on par with off-Amazon prices, appoint a court-approved monitor to ensure Amazon’s compliance, order Amazon to pay damages to compensate consumers for harms suffered from increased prices, and make the company return its profits from these agreements and pay penalties “to serve as a deterrent to other companies contemplating similar actions.”

An Amazon spokesperson noted in an email that California's lawsuit resembles one that was recently dismissed.

"Similar to the D.C. attorney general — whose complaint was dismissed by the courts — the California attorney general has it exactly backwards. Sellers set their own prices for the products they offer in our store. Amazon takes pride in the fact that we offer low prices across the broadest selection, and like any store we reserve the right not to highlight offers to customers that are not priced competitively.

"The relief the AG seeks would force Amazon to feature higher prices to customers, oddly going against core objectives of antitrust law. We hope that the California court will reach the same conclusion as the D.C. court and dismiss this lawsuit promptly."

Thomas Jeitschko, professor of economics in antitrust and consumer protection at Michigan State University, said in an interview Wednesday that this kind of case becomes complicated for antitrust litigation due to the type of business Amazon is.

"Amazon is what we call a platform, and essentially a venue that brings together two sides of the market,” he said, referring to sellers and consumers. “That raises some complicated issues in consumer protection, and in antitrust sometimes traditional analyses don't work so well.” 

He said Amazon could argue this is part of the service they deliver, and that they need control of the terms under which people can interact with each other on these platforms. But he said the state may argue Amazon is trying to control behaviors outside their platform.

“A lot of these new marketplaces are things that don’t always map into our traditional model of competition, because some of them have aspects where being big is actually pro-competitive,” he said. “That’s when it becomes a question of, how do you preserve those inherent benefits you have, without the market power that has been implied being abused by others?”

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