A New Consumer Protection Law Set for Implementation This Month Could Expose Online Marketplaces to Civil Penalties Amounting to $50,120 For Each Breach
Letters from the Federal Trade Commission (FTC) were dispatched on Tuesday, June 20, 2023, to 50 online marketplaces. The FTC informed these companies about their obligation to fully adhere to the newly introduced Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act, also known as the INFORM Consumers Act, became effective on June 27, 2023.
As part of the Consolidated Appropriations Act of 2023, the INFORM Consumers Act (“the Act”) was enacted in December 2022, with the objective of safeguarding consumers from counterfeit, unsafe, and stolen goods. The Act imposes responsibilities on online marketplaces related to collecting, verifying, securing, and revealing certain identification information about “high-volume third-party sellers” who market, propose to sell, or agree to sell new or unused consumer products in the United States via marketplace platforms. Moreover, the Act strives to simplify the process for consumers to report dubious marketplace activity by mandating that online marketplaces allow consumers to report certain activities electronically and by phone.
The letters were sent to corporations that could potentially fit the Act’s description of an “online marketplace.” The Act extensively defines an “Online marketplace” as any individual or organization operating a consumer-focused platform, accessible or based electronically, which includes features enabling third-party sellers to engage in various activities like selling, buying, payment, storage, shipping, or delivering consumer products in the United States. It must also be used by one or more third-party sellers for such activities, and have a contract or similar agreement with consumers regarding their use of the platform to buy consumer products. Despite this, the FTC clarified that receiving a letter does not indicate an evaluation of whether the company has engaged in behavior that contravenes the Act.
The letter advises online marketplaces to converse with their affiliated third-party sellers about adhering to the Act’s requirements for collection, verification, and disclosure.
It was also emphasized in the letter that the FTC plans to regard breaches of the INFORM Consumers Act as infringements of an FTC rule, which could lead to civil penalties of $50,120 per infraction. Online marketplaces are encouraged to go through the FTC’s business guide, “Informing Businesses About the INFORM Consumer Act,” which provides useful insights into compliance. We remain available for further consultation.
How Will This New Law Affect Consumer Lawsuits?
The introduction of the INFORM Consumers Act is likely to have a significant impact on consumer lawsuits in several ways.
- Greater Transparency: One of the Act’s primary aims is to enhance transparency in online marketplaces. Consumers will now have access to more information about high-volume third-party sellers, which might help them make better informed purchasing decisions. This transparency could potentially reduce the number of lawsuits related to misleading sales or fraudulent activity, as consumers will be better equipped to avoid such sellers in the first place.
- Improved Reporting Mechanisms: The Act mandates online marketplaces to provide mechanisms for consumers to report suspicious activities both electronically and via telephone. This could lead to quicker resolution of issues, potentially lowering the need for legal action. However, it could also increase the likelihood of lawsuits if consumers can more easily identify and report fraudulent or unsafe practices.
- Increased Penalties for Violations: The Act also imposes heavy civil penalties for non-compliance, which could deter businesses from engaging in practices that harm consumers. However, if businesses fail to comply, this provision could lead to more lawsuits, as consumers or the FTC could take legal action to enforce the penalties.
- Shift in Legal Responsibility: The Act puts a great deal of responsibility onto online marketplaces to regulate third-party sellers. This could shift some of the legal burden from consumers (who traditionally had to sue fraudulent third-party sellers directly) to the online marketplaces (who could now be held accountable for not properly vetting or regulating their third-party sellers). As a result, we could see an increase in lawsuits against online marketplaces themselves.
- Legal Precedents and Interpretations: As with any new law, there will be a period of adjustment and legal testing. The interpretations of the Act’s terms and provisions could impact the number and nature of consumer lawsuits. Some terms might be open to interpretation and could be challenged in court, setting new precedents.
- Consumer Awareness and Education: Lastly, the effectiveness of this Act in reducing lawsuits depends on how well consumers are educated about their rights under this new law. If consumers are not aware of the new law or do not understand its provisions, it may not have the intended effect on reducing lawsuits.
It’s important to note that this analysis is speculative, and the actual impact will depend on a range of factors, including how effectively the law is implemented and enforced.
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