Amazon ‘Set Out to Destroy’ Zulily: FTC Lawsuit

Vicki M. Young
·6 min read

Amazon is not a consumer’s best friend, according to a complaint filed by the Federal Trade Commission (FTC) and 17 state attorney generals.

The 172-page complaint, filed in a federal district court in Seattle in September but updated last week without certain redactions, detailed some illegal strategies that it accuses Amazon of using to push up consumer prices and boost profits. One strategy was a secret algorithm called “Project Nessie” that allegedly inflated prices and has “extracted over a billion dollars from American households.” Project Nessie was described in the lawsuit as an “unfair method of competition” because by allegedly raising online prices, it gave Amazon an opening to raise its prices too.

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“This case is about the illegal course of exclusionary conduct Amazon deploys to block competition, stunt rivals’ growth, and cement its dominance,” the complaint stated. “Amazon uses a set of anti-discounting tactics to prevent rivals from growing by offering lower prices, and it uses coercive tactics involving its order fulfillment service to prevent rivals from gaining the sale they need to meaningfully compete.” The lawsuit charged that the strategies are “interconnected” to block off every major avenue of competition—price, product selection, quality and innovation—in relevant markets for online superstores and online marketplace services.

The complaint also accused Amazon of using various anti-discounting programs to limit price competition and comparison shopping to stop platform sellers from offering discounts to shoppers buying at the seller’s own website or on another platform. According to the complaint, Walmart in 2017 was allegedly deterred from offering pickup discounts for customers who shopped online, but picked up from a Walmart store. Jet.com, later acquired by Walmart and subsequently shut down by the mass discounter in 2020.

In a redacted section, the FTC and the state attorneys general alleged that Amazon used the anti-discounting strategies to target women’s and children’s fashion and home brand Zulily. Zulily’s primary strategy was offering deep discounts during limited0time “flash sales.” Discounts during those sales often beat Amazon’s prices.

According to the lawsuit, Zulily rolled out its “Best Price Promise” in 2019, displaying its lower price alongside the higher prices of identical products on Amazon or Walmart.com. “This is a classic form of price competition that should flourish in a competitive market,” the court document said. It also claimed that Amazon found “this price competition was intolerable—and so it set out to destroy [Zulily].” Zulily suppliers who also sold on Amazon lost their placement in the coveted, high-exposure “Buy Box”, crippling their sales on the popular marketplace. The lawsuit said the Buy Box generates 98 percent of Amazon sales. Zulily was later sold by parent Qurate Retail to private equity firm Regent LP.

“Amazon’s conduct denies rivals scale, stifles innovation, deadens price competition, reduces output, and deprives the American public of lower prices,” the court document stated.

Amazon also requires sellers who want their products to be eligible for Prime—the company’s popular subscription membership—to use the marketplace’s fulfillment service, Fulfillment by Amazon (FBA), even though many would rather use different method to store and package customer orders. The complaint said that an independent fulfillment provider would allow sellers to fulfill orders across multiple marketplaces and not be tied to any one platform.

The FTC lawsuit also claimed that Amazon’s price hikes in the form of “pay-to-play advertisements” resulted in billions of dollars in U.S. ad sales from from U.S. marketplace seller fees. “Shoppers get lower-quality search results for higher-price products. Only Amazon wins,” the court document said.

It also noted that shoppers get less relevant search results and are steered toward more expensive products. “Notably, Amazon has increased not only the number of advertisements it shows, but also the number of irrelevant junk ads, internally called ‘defects,'” the complaint stated. It also noted that Amazon transitioned its advertising business from a direct sales model to an auction model where sellers bid against each other for advertisement placement.

The charge for advertising services is just one of four key revenue-making tools . Amazon also charges sellers a fee for each item sold, a commission or referral fee based on the price of the items sold on its site, and a fee to use Amazon’s fulfillment and delivery services. While there are other fees, the complaint said the four are the key areas of revenue intake from sellers.

And the lawsuit charged that Amazon tried to impede the government’s probe and hide information about its internal operations. It alleged that Amazon executives—from June 2019 to at least early 2022, despite being told not to do so by the government—”systematically and intentionally deleted internal communications using the ‘disappearing message’ feature of the Signal messaging app.”

An Amazon spokesperson refuted many of the government’s claims.

“The FTC claims that an old Amazon pricing algorithm called Nessie is an unfair method of competition that led to raised prices for consumers. This grossly mischaracterizes this tool,” Amazon spokesman Tim Doyle said. “Nessie was used to try to stop our price matching from resulting in unusual outcomes where prices became so low that they were unsustainable. The project ran for a few years on a subset of products, but didn’t work as intended, so we scrapped it several years ago.”

Doyle also pushed back on the FTC’s claims regarding Amazon’s requirement to use its FBA service. He noted that sellers using their own fulfillment service in 2018 were promising deliveries within two days less than 16 percent of the time. He said Amazon now offers an improved “Seller Fulfilled Prime program that meets our customers’ expectations.”

Doyle called the FTC’s claim that the company and its executives failed to preserve evidence “baseless and irresponsible.” He pointed out that Amazon was upfront about employees’ use of Signal with the FTC.

“Amazon voluntarily disclosed employee Signal use to the FTC, painstakingly collected Signal conversations from its employees’ phones, and allowed agency staff to inspect those conversations even when they had nothing to do with the FTC’s investigation,” Doyle said.

As for the allegations regarding use of “defect” ads, Doyle said: “The claim that Amazon leadership directed employees to accept more advertising defects that would degrade the customer experience is grossly misleading and taken out of context, and does not reflect Amazon’s longstanding dedication to continually improving the customer experience. Amazon works incredibly hard every day to earn customers trust, and customer feedback on our shopping experience is consistently positive.”

Doyle said that the company “works hard to make if fast and easy for customers to find the items they want and discover similar options.” He also cited the results of Kantar’s survey on ad platforms, although it wasn’t clear if consumer responses included any knowledge of how Amazon’s advertising program works.

The independent data and insights firm listed Amazon as the top-ranked ad platform among consumers for the second year in a row. However, the company failed to rank in the Top 5 among marketers. The Kantar Media Reactions 2023 survey also found that the metaverse continues to be an unfulfilled promise, while X, formerly known as Twitter, has suffered reputational damage among marketers.

Joining in the lawsuit were the state attorneys general from New York, Connecticut, Commonwealth of Pennsylvania, Delaware, Maine, Maryland, Commonwealth of Massachusetts, Michigan, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Rhode Island and Wisconsin.