Plaintiffs Challenge Walmart’s Section 230 Defense In Organized Retail Crime Class Action Suit
The legal battle to hold Walmart accountable for stolen goods sold through their marketplace continues as victims of organized retail crime (ORC) counter the company's Section 230 defense.
Plaintiffs Artistic Industries, LLC, Knight Distributing Co., d/b/a Regency Cosmetics, Longstem Organizers Inc. and EZ-Step Mobility, Inc. filed a class action lawsuit in September alleging Walmart profits from and fails to prevent a form of organized retail crime perpetrated through the Walmart Marketplace.
The initial complaint leveled multiple claims against Walmart including RICO, Lanham Act, Unfair Competition, Deceptive and Unfair Trade Practices, Consumer Sales Practices and False Advertising violations all related to fraudulent sellers using Walmart Marketplace to "fence" items from the plaintiffs' individual ecommerce businesses operated on the Amazon marketplace using a variation of triangulation fraud which weaponizes Amazon's buyer-friendly policies against legitimate merchants.
Liz Morton
This sophisticated form digital shoplifting is a variation of triangulation fraud, which occurs when a buyer makes a genuine purchase on a third-party marketplace, but the seller of that item fraudulently purchases the product from another merchant - and it's rampant across many of the most popular online marketplaces.
Typically, triangulation fraud will use stolen credit card information to pay for an item being shipped to an unsuspecting buyer, with the legitimate seller receiving a chargeback after the item has been shipped, leaving them out both the item and the money.
But in the scheme described in this case, it appears the fraudulent sellers didn't even need to go through the effort of using stolen credit cards.
Instead, they take advantage of Amazon's notoriously buyer-friendly policies to obtain refunds by falsely claiming items are not received, which triggers a refund of the order at the seller's expense and ends up with the same result - the legitimate seller is out both the item and the money.
Walmart responded to the lawsuit in December, filing a motion to dismiss citing Twitter, Inc. v Taamneh to argue that Section 230 of the Communications Decency Act shields the company from liability for the actions of third party sellers on their marketplace, even if those actions involve criminal fraud and theft.
Liz Morton
That argument is not surprising - in fact Amazon, eBay, Etsy and others have historically been successful in distancing themselves from responsibility for illegal or fraudulent activity on their sites, often arguing Section 230 protects platforms like them from liability for actions taken by their users.
But the plaintiffs in this lawsuit clearly contemplated Walmart would use this defense, preemptively arguing in their initial claim it's not applicable because Walmart is a commercial digital platform, not a social media site.
Walmart is entitled to no statutory immunity for the claims asserted in this
Complaint. Its Marketplace is not a social media site; it is a commercial digital platform created and operated by Walmart for the sole purpose of making a profit by the onboarding of merchants and for extracting a share of revenue generated on every transaction conducted by its merchants on the Marketplace.
Walmart professes that it fully controls the operation of its Marketplace by,
among other things, allegedly thoroughly scrutinizing and vetting each merchant applying for approval to appear on the Marketplace and, further, by monitoring merchants’ postings for legitimacy, and possessing and using the power to remove illegal and inappropriate merchants and their content.
Walmart’s representations of its allegedly taking such measures are grounded in its recognition that, absent these and related measures, its Marketplace would be a breeding ground for fraudulent conduct and criminal activity.
The plaintiffs' attorneys responded to Walmart's motion to dismiss this week, saying the motion "ignores almost every well-pleaded factual allegation made in Plaintiffs’ almost 300-page Complaint" while it "glibly characterizes Plaintiffs as 'spinning a tale' and predicates each of its arguments on the self-serving proposition that its conduct was innocuous."
The response goes on to describe that not only were Walmart's actions far from innocuous, they were the result of an intentional initiative to recruit and onboard a large number of sellers within a short time period, mostly from China, in an effort to boost inventory available on the marketplace quickly to compete with Amazon.
Far from innocuous, Walmart: changed its policy in 2021 to open the Marketplace to China-based sellers; and, accepted the Fraudulent Sellers’ inability to demonstrate any indicia of legitimate operations, including inventory or a legal means to acquire or re-sell the thousands of unrelated products they listed with fake Brands.
Under false pretenses, Walmart acquired orders from customers, conveyed the customers’ contact information and payment to the Fraudulent Sellers, and the Marketplace order was fulfilled by the fraudulent conversion of the Plaintiffs’ products.
Walmart knew of the ORC: directly, because Walmart was told about it; and, at minimum, circumstantially, by virtue of the special exceptions Walmart afforded Fraudulent Sellers.
Walmart's efforts to increase the number of sellers and skus available on their marketplace were apparently successful, according the the plaintiffs, in large part due to allowing the site to be flooded with China-based sellers who were not required to prove they were legitimate businesses with stock on hand or authorized access to the products they were offering for sale.
...Walmart accomplished what it set out to do: Walmart immediately increased its seller census and SKUs, and by April 2024, thousands of new active sellers were on the Marketplace of which 73% were based in China, and by November 2024, the Marketplace listed 700 million SKUs.
The Complaint details the next steps of the scheme and the ORC’s operations. Once the Fraudulent Sellers and their Product Pages go live on the Marketplace, unwitting Legitimate Walmart Customers place their orders on the Product Pages under false pretenses.
Once Walmart receives the order and takes payment from the customer, it transmits the customers’ personal contact information to the Fraudulent Sellers. Walmart expressly controls the transactions and transmission of information to the Customer.
Since neither Walmart nor the Fraudulent Seller have inventory to fulfill the order, or the authorization to otherwise legally secure and re-sell the fraudulently listed products, fulfillment of the order is necessarily accomplished by additional fraudulent, deceptive transactions, namely, the product is misappropriated from the AZ Merchants via a Fraudulent Amazon Order.
Plaintiffs also provide exhibits showing multiple examples of how listings on Amazon were hijacked and copied verbatim on Walmart by the 17 fraudulent sellers also named in the suit, saying far from being a "simple case" of "small scale fraud", these accounts alone listed thousands of items fraudulently.
Walmart was well of the issue, since plaintiffs began directly reporting it to the company's Organized Retail Crime division in 2022, but have not taken action to stop the fraud which continues to harm plaintiffs and other Amazon sellers.
It is rather incredulous that Walmart characterizes the ORC as involving “some small number of third-party sellers” and a “simple case” by four Amazon sellers.
From just the standpoint of Walmart’s association with the 17 Fraudulent Seller Defendants, there were thousands of product listings hijacked from Plaintiffs and countless AZ Merchants as part of the ORC.
As alleged, because of the thousands of products offered on the Marketplace by the Fraudulent Sellers, Plaintiffs are not the only AZ Merchants victimized by the ORC.
To no avail, since 2022, Plaintiffs have informed Walmart employees, including in its Organized Retail Crime division, of the details of the ORC, including the identity of Fraudulent Sellers. The ORC is no small-scale fraud, and it continues to harm Plaintiffs and AZ Merchants to this day
Plaintiffs argue that lack of action, along with Walmart's control over the marketplace, seller vetting processes, and various aspects of transactions through the site make them participants in the fraudulent scheme, aiding and abetting the Organized Retail Crime.
Walmart’s conduct is completely intertwined with and fosters the Fraudulent Sellers’ misconduct. It is axiomatic that the Fraudulent Sellers could not become sellers on the Marketplace, a very fundamental part of the ORC, if Walmart was a passive or unwitting actor.
This started with Walmart, when it changed its policy about non-US third-party sellers, which coincided with China-based sellers being kicked-off Amazon’s platform, and Walmart’s recruitment of non-US sellers in 2021.
The ORC requires affirmative conduct by Walmart to put Fraudulent Sellers on the Marketplace. At bottom, the Fraudulent Sellers were only able to appear with their fraudulent Product Pages on the Marketplace because of Walmart’s undisclosed abandonment of its onboarding requirements for the Fraudulent Sellers, driven by competitive zeal and corporate greed.
The Complaint pleads Walmart’s participation in the next stages of the ORC, and the ORC’s dependence on Walmart’s continued conduct and complicity.
After Walmart gives legitimacy to the Fraudulent Sellers, to further the purpose of the ORC Walmart: solicits and receives orders through the Fraudulent Seller’s Product Pages; confirms the order with the customer; takes the customer’s payment and contact information; and, transmits that to the Fraudulent Seller who, posing as the customer, places the Fraudulent Amazon Order (which is the only way to fulfill the order) and, compounding the fraud, makes a Fraudulent Refund Request.
The ORC continues back on the Marketplace, including to provide the Legitimate Walmart Customer with shipping information...
...Walmart argues that Plaintiffs’ allegations of its involvement in the ORC “def[y] common sense.”
What defies common sense is why Walmart did not shut down the Fraudulent Sellers when confronted with the facts of the ORC and prevent the Fraudulent Sellers from listing on the Marketplace.
...Walmart was told about the ORC, and Walmart knew it had changed its policy to open the Marketplace to China-based sellers, accommodated the absence of any indicia of legitimate operations by the Fraudulent Sellers and their ability to lawfully fulfill Marketplace orders. Walmart did not use the information in its possession to identify, shut down, and prevent new listings by Fraudulent Sellers.
As such, plaintiffs' attorneys say Walmart's motion to dismiss should be denied and the suit should be allowed to continue.
If the claim does move forward, plaintiffs are seeking to certify and maintain a class action that could include "All Amazon Merchants domiciled in the United States who fulfilled an order placed by a Fraudulent Seller that originated on Walmart Marketplace between January 1, 2021 to the present" with injunctive relief, restitution, and damages to be determined at trial.
Download the full complaint:
Walmart's Motion To Dismiss:
Plaintiffs' Response in Opposition to Walmart's Motion to Dismiss:
Declaration In Support of Opposition to Motion to Dismiss, including exhibits showing examples of hijacked Amazon listings copied to Walmart Marketplace.
If you are an Amazon seller who has experienced this type of fraud perpetrated through the Walmart Marketplace, Chimicles Schwartz Kriner & Donaldson-Smith wants to hear from you - and so do I!
Leave a comment below or contact VAR.
