The U.S. Government Wants eBay To Pay $2.9 Billion in Fines

Last week was a busy week for eBay. The company hosted its annual eBay Open seller conference and released its Fall Seller Update.

But there was also another story that may have fallen a bit under the radar, one that exposes the company to staggering penalties from the U.S. government for violating environmental laws.

As we reported last week, the U.S. Department of Justice (DOJ) filed a complaint against eBay, alleging numerous violations of environmental laws, including provisions in the Clean Air Act (CAA), the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), and the Toxic Substances Control Act (TSCA).

According to the complaint, these violations occurred over multiple years, with some dating back to 2016 (where legally applicable), and the EPA claimed it continued to find listings on the marketplace in violation of at least one of these laws as recently as July 2023.

So, how bad is it? Let’s first look at the fines for each violation of these Acts:

• Toxic Substances Control Act (TSCA): up to $46,989 for each violation.
• Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA): up to $23,494 for each violation.
• Violations of Section 203(a)(3)(B) of the Clean Air Act (CAA): up to $5,580 for each violation.

The definition of violations is unique for each Act. In general terms, illegal items do not have to be sold, and simply offering the sale of prohibited items is typically considered a violation by itself. (See lawsuit*) 

In the complaint, the government summarized violations for each Act, which was used to calculate eBay’s potential exposure.

• TSCA: The “EPA identified at least 5,614 items containing methylene chloride for paint and coating removal that were distributed in commerce by eBay after November 22, 2019, in violation of the Methylene Chloride Rule.” Based on the maximum penalty, this has the potential exposure of fines totaling nearly $263 million.
• FIFRA: The EPA claims it contacted eBay in 2017 regarding the sale and distribution of products violating FIFRA. The company responded, claiming it was not subject to FIFRA. In the complaint, the government showed numerous examples of alleged violations and suggested that at least 31,074 violations occurred on the marketplace. This means a potential exposure to fines of more than $730 million.
• CAA: And this brings us to the big one. The government alleges that “between January 1, 2017, and September 3, 2020, eBay sold, offered for sale, and/or caused the sale or offer for sale of at least 343,011 Aftermarket Defeat Products” in violation of the CAA. This allegation alone means eBay faces fines exceeding $1.9 billion. 

The total is staggering! Adding it all up, the U.S. government is seeking fines in the neighborhood of $2.9 billion**, which is more than the $2.3 billion in net income the company reported for 2022.

eBay The Marketplace

What is interesting about the government’s lawsuit is how it describes the marketplace’s involvement in the sale or offering for sale of these violating products.

DOJ recognizes that listings are by independent third-party merchants but places responsibility on the marketplace by stating, “eBay is involved in and controls every stage of a transaction on eBay.com.”

The complaint spends a lot of time discussing eBay’s control. Here are a few examples:

“Some of eBay’s involvement in transactions on its website is complex,” the government said. “Collectively, eBay’s involvement in the transaction guides, encourages, and controls every step of the interaction between a buyer and a merchant.”

Furthermore, the complaint said that eBay offers a product catalog to help sellers make listings more professional and provides guidance about its search algorithms, proposing best practices for listing and selling products on its marketplace.

“eBay suggests that, by following those [best] practices, a merchant can ensure that its products will appear higher in a potential buyer’s search results and thus sell more effectively.”

Diving deeper into how sellers promote products, the government said eBay is giving sellers tools in its Seller Hub to aid “merchants in understanding how buyers are searching for and finding a merchant’s products,” and provides “product description tools that help merchants create and refine their product listings to attract buyers and maximize sales.”

In addition to this tool, eBay is also helping sellers to compete by offering “information on competing merchants’ product pricing to assist [sellers] in creating competitive offers.” This seems to refer to the features in Terapeak.

On the seller side, the government said, “eBay exercises this control to, among other purposes, substantially aid merchants by providing them with eBay’s expertise in advertising and pricing products.”

On the buyer side, it is “helping buyers find products eBay determines they may be interested in purchasing; accepting payment for the product and remitting taxes and fees; and, as a general matter, increasing the overall likelihood of completed transactions on eBay.com.”

Summing it all up, the government said, “eBay exercises significant control over every transaction on its site, and it profits accordingly.”

Addressing the probable defense by eBay claiming it is just a venue that brings buyers and sellers together, the government said, “eBay.com is far more than an internet venue that connects purchasers and merchants – it also actively promotes, controls, consummates, and guarantees the transaction.”

eBay – Prohibited Items

But what about the policies eBay has regarding the listing of illegal products? Does this not absolve the company in some way? Let’s look at what the government said in the complaint about its efforts to reign in prohibited products.

DOJ acknowledges that “eBay policies prohibit, among other things, the sale of products on its site that are unlawful.”

To enforce its policies, it revealed eBay utilizes an “automated filtering tool it calls the Listing Violation Identification System (‘LVIS’) to identify products that violate its policies.”

Furthermore, it acknowledged that such automated systems are not perfect and said eBay also uses “manual sweeps to search for products that get past its LVIS.”

However, “Notwithstanding these efforts, unlawful products are listed and sold on eBay.com,” suggesting the government believes the company is not doing enough to catch prohibited items from being sold or offered for sale.

Veteran sellers will agree this is a consistent complaint by the eBay community. One we highlighted in 2021, when Nazi figurines were offered for sale on the marketplace for weeks, despite being in clear violation of the company’s policies.

Sellers frequently have complained that using the ‘Report this item’ link on listings doesn’t appear to make much of a difference, and unless the company receives a legal notice or copyright/trademark complaint through its VeRO (Verified Rights Owners) program, listings seem to remain on the site.

How Much Did eBay Know?

Of course, these are very technical products that require product knowledge and understanding. However, according to the complaint and official records, there were definitive communications between the EPA and eBay. 

eBay was made aware of potential TSCA violations since at least 2020. The complaint states that on July 24, 2020, the EPA issued a subpoena “seeking additional records of methylene chloride-containing products,” to which the company provided a series of responses by December 11, 2020. The government used this information to determine the 5,614 items that violated the TSCA. 

Regarding the CAA violations, on September 3, 2020, the EPA issued an information request to eBay, seeking records of Aftermarket Defeat Product sales that had occurred on the marketplace since January 1, 2017.

The company provided a series of formal responses by December 21, 2020, through which the EPA identified the “sale or offer for sale of at least 343,011 Aftermarket Defeat Products designed for use in vehicles manufactured by Ford, General Motors, Nissan, and Dodge, among others.”

Noteworthy here is that eBay apparently was not issued a subpoena, but provided the information voluntarily.

The EPA notified eBay about potential FIFRA violations dating back to February 14, 2017. As mentioned earlier, the government said eBay refused to provide information on the basis it was subject to FIFRA.

Through manual review, the EPA claims hundreds of listings on eBay.com resulted “in the sale and distribution of thousands of unregistered, misbranded, or restricted use pesticides.”

Furthermore, the EPA sent a ‘Stop Sale, Use, or Removal Order’ (SSURO) on June 6, 2020, and an amended SSURO on June 16, 2021.

• June 2020 SSURO
• June 2021 SSURO
• June 2021 SSURO Attachment

The government claims that at least 23,000 unregistered, misbranded, or restricted use pesticides were sold in violation of FIFRA on eBay. It also added that at least 8,074 additional FIFRA violations occurred after the SSURO notices, forming the basis of at least 31,074 violations in total of FIFRA.

I think it’s fair to say, that eBay was aware of the EPA’s stance on these issues, and while it made changes to its prohibited items policies, it wasn’t enough to deflect from the DOJ filing a lawsuit on behalf of the EPA.

Will eBay Have to Pay Nearly $3 Billion in Fines?

As I mentioned earlier, these are maximum fines. While the situations are different for each Act, there appears to be a meticulous effort by the government to connect the dots trying to tie eBay into being primarily responsible for the violations.

However, we can look at one of the Acts and dig a bit into previous settlements to get some idea of how extensive this could become for the company.

The CAA violations are the biggest potential penalties eBay faces, but it is also one of the ones with the most recent history of settlements.

Let’s take a look at some of the most noteworthy consent settlements in the list over the past two years, which include a larger volume manufacturer, primarily wholesale distributor, and primarily physical and online retailer.

• Borla Performance Industries, Inc. (Manufacturer): 4,787 violations resulting in a penalty of $1,022,500 or $213.60 per violation.
• Keystone Automotive Operations, Inc. (Distributor): 15,621 violations resulting in a penalty of $2.5 million or $160.04 per violation.
• Autosales, Incorporated dba Summit Racing Equipment (Retailer): 2,390 violations resulting in a penalty of $600,000 or $251.04 per violation.

In determining consent decree settlements, the government considers factors such as the company’s size, the duration and scope of the violations, and a company’s readiness to settle the allegation.

Using the Keystone settlement as a reference, it implies that eBay could potentially be liable for about $50 million solely for the CAA violations.

In its full-year financial 2022 10-K SEC filing, eBay stated that it had reserved $64 million to cover potential losses from legal matters, including specifically mentioning the EPA and CAA.

Over the past two quarters, eBay continued to warn about the potential for losses due to settlements or litigation, stating the “company have begun discussions relating to allegations of noncompliance arising under the Clean Air Act, among other alleged violations, which discussions include a potential settlement.”

While the company responded to the lawsuit intending to “vigorously defend itself,” a settlement is the most likely outcome, especially now that the DOJ has filed the complaint and the company’s admission there have been such discussions.

In addition to the DOJ complaint, eBay continues to address an ongoing lawsuit in its financial filings, initiated by the owners of EcommerceBytes, an online blog, related to a widely publicized cyberbullying incident.

This scandal led to the incarceration of several lower and former mid-level employees, as well as the dismissal of CCO Steve Wymer, alongside the sudden and lucrative departure of former CEO Devin Wenig. 

Despite this lawsuit – which on its surface has a potential for a multi-million outcome – it appears the $64 million eBay has set aside for legal matters is chiefly allocated for settling the EPA allegations.

Moreover, as the cyberbullying case only is showing slow progress – and without a significant shift from eBay to resolve the matter – recent court documents suggest it may continue to linger until the end of 2024 or possibly into 2025 if it has to go to a jury trial.

It’s quite unlikely that eBay will let the EPA allegations persist for an extended period. They would likely prefer to resolve the matter swiftly, provided they can negotiate a just settlement with the government.

But it’s a complicated case and unique to the fact that eBay is an online marketplace, relying on sellers to adhere to all applicable laws.

* EPA/DOJ Complaint: United States of America vs. eBay Inc.

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