INFORM Consumers Act imposes new requirements for online marketplaces – key takeaways

Beginning June 27, 2023, online marketplaces covered by the Integrity, Notification, and Fairness in Online Retail Marketplaces for Consumers Act (the INFORM Consumers Act) must collect and verify information regarding high-volume third-party sellers of consumer products and disclose certain high-volume seller information to consumers.

Passed by Congress on December 29, 2022, the INFORM Consumers Act imposes a myriad of new obligations for online marketplaces. It intends to “deter the online sale of counterfeit goods by anonymous sellers and prevent organized retail crime rings from stealing items from stores to resell those items in bulk online.”[1]

This alert summarizes who and what the Act covers, its main requirements, and compliance implications for current and future online marketplaces and sellers.

I.  Online marketplaces and high-volume third-party sellers have new obligations

The INFORM Consumers Act focuses on two market participants: online marketplaces and high-volume third-party sellers of consumer products – ie, tangible property for personal, family, or household purposes. Intangible goods, such as services and digital goods, and products normally used for commercial purposes are not covered under the Act. 

An “online marketplace” under the Act includes “any person or entity that operates a consumer-directed electronically based or accessed platform that—

1. includes features that allow for, facilitate, or enable third party sellers to engage in the sale, purchase, payment, storage, shipping, or delivery of a consumer product in the U.S.,
2. is used by one or more third party sellers for such purposes, and
3. has a contractual or similar relationship with consumers governing their use of the platform to purchase consumer products.”

Importantly, this definition does not hinge on size – on its face, it sweeps up the major international platforms; niche online marketplaces catering to enthusiasts; small, established companies that facilitate third-party sales; startups; and other online spaces outside of those categories.

In contrast to “online marketplace,” “high-volume third party seller” is more precisely defined. It is a third-party person or entity that, “in any continuous 12-month period during the previous 24 months, has entered into 200 or more discrete sales or transactions of new or unused consumer products and an aggregate total of $5,000 or more in gross revenues.” 

II.  Collecting, verifying, and disclosing seller information are at the crux of the INFORM Consumers Act

Under the Act, the three main compliance requirements for online marketplaces are to collect, verify, and disclose seller information – and, to do so timely, marketplaces will need monitoring systems in place.

Collect (promptly and regularly)

Within ten days of a seller qualifying as a “high-volume” seller, online marketplaces must collect that seller’s:

• Banking information – either an account number or the payee’s name for payments issued by the marketplace to the seller
• Contact information – for individual sellers, their name, and for non-individuals, either a valid government-issued ID with the name of the person acting on behalf of the business or a valid government-issued record or tax document with the business’ name and physical address
• Tax ID – either a business tax or taxpayer identification number, and
• Working email and phone number.

Online marketplaces must contact high-volume sellers at least annually to confirm whether required information must be updated. If the seller does not disclose required information within ten days, the online marketplace must suspend the seller’s sales activity until it does.

Verify (promptly and securely)

Once collected, online marketplaces must verify the seller information within ten days of receipt. “Verify” means using “one or more methods that enable the online marketplace to reliably determine that any information and documents provided are valid, corresponding to the seller or an individual acting on the seller’s behalf, not misappropriated, and not falsified.”

While not required documentation, verification is presumed where a copy of a valid government-issued tax document is provided, but no presumption is afforded to government-issued identification documents.

High-volume sellers reasonably may be concerned about providing sensitive verification data to online marketplaces, particularly smaller or startup platforms that are still building operational and security infrastructure. Likely to address those concerns, the Act outlines various data security measures. For example, the Act prohibits online marketplaces from using the collected information for purposes other than what the Act addresses. It also requires implementing and maintaining “reasonable security procedures and practices” to protect against unauthorized use, disclosure, access, destruction, or modification, though what counts as “reasonable” is undefined, leaving it to the regulated entities to determine what measures to employ.

Disclose (clearly and with reporting recourse)

Online marketplaces generally must “clear[ly] and conspicuous[ly]” disclose to consumers, either on the product listing page (directly or through a hyperlink) or in the order checkout flow and the buyer’s order history, information concerning high-volume sellers with $20,000 or more in annual gross revenue, including the seller’s:

• Name – ie, the individual seller’s name, the seller’s company name, or the name by which the seller or the company operates on the online marketplace
• Physical address, and
• Contact information – including a current working email address, phone number, or other means of direct electronic messaging that allows the consumer to have direct, unhindered communications with the high-volume seller.

If the high-volume seller uses a different seller to supply the product to the purchaser, the Act’s disclosure requirement extends to that additional seller.

In addition to the seller information disclosure requirement, online marketplaces must clearly and conspicuously offer consumers a reporting mechanism that allows them to report suspicious marketplace activity on any high-volume seller’s product listing page to the online marketplace.

Exceptions to disclosure requirements

The Act carves out several exceptions or alternatives to the disclosure requirements. If a seller has a separate physical address for product returns, the online marketplace can disclose that information instead of the seller’s actual business address. If a seller has no business address, or has a combined residential and business address, the online marketplace need only disclose a seller’s residential country or state and advise the consumer to contact the seller through other means provided by the online marketplace. Similarly, if a seller does not have a separate business phone number, the online marketplace need not disclose the seller’s number and can inform the consumer to contact the seller through other means, such as through the online marketplace’s messaging system.

But these exceptions have several limitations. If an online marketplace learns a high-volume seller falsely represented its information and the seller fails to correct its information within ten days of being put on a notice by the online marketplace, or if a seller fails to provide responsive answers to consumer inquiries within a reasonable time frame, the seller’s sales activity must be suspended until it fixes those deficiencies.

III.  Enforcement authority and potential penalties

The INFORM Consumers Act bestows enforcement authority on the Federal Trade Commission and state attorneys general. A state attorney general may institute civil actions in federal court with prior written notice to the FTC, but the FTC can intervene in such cases. The Act also provides that states cannot create regulations contradicting the Act’s provisions, but it does not expressly prohibit creating additional requirements. The Act treats a violation of its requirements as a violation of the Federal Trade Commission Act (15 U.S.C. 57a(a)(1)(B)), which imposes a statutory civil penalty of $46,517 per violation.

IV.  Compliance implications for online marketplaces and sellers

The INFORM Consumers Act aims to deter the exploitation of online marketplaces by anonymous sellers of counterfeit goods and organized retail crime rings that steal items from stores to resell them online in bulk, as well as protect consumers who patronize those marketplaces. As is often true with new legislation, the law contains ambiguities that FTC regulations, administrative opinions, and courts ultimately will need to address.

However, in order to remain compliant, marketplaces and sellers are encouraged to consider several key points ahead of time:

First, it is the sales volume of sellers that trigger compliance requirements, not the size of the online marketplace. So, smaller marketplaces and startups cannot hold off on developing compliance policies and procedures until they obtain a greater market share. Their performance relative to their peers is not a factor the FTC or state attorneys general will weigh in levying penalties for abuses on their marketplace platform.

Second, online marketplaces must have processes to identify when sellers, “in any continuous 12-month period during the previous 24 months,” enter into “200 or more discrete sales or transactions of new or unused consumer products and an aggregate total of $5,000 or more in gross revenues” to trigger the collection requirement, or exceed $20,000 in annual gross revenue to trigger the disclosure requirement.

Third, in addition to identifying qualifying sellers, online marketplaces must have procedures that outline how the required high-volume seller information is collected, how the marketplace tracks response time to comply with seller suspension requirements for non-compliance, and how annual outreach to sellers is tracked and implemented to ensure necessary updates to seller contact information are promptly made.

Fourth, online marketplaces must decide how they will verify the information received from high-volume sellers. Obtaining a copy of a valid government-issued tax document listing all required information counts as presumptive verification and may well be an attractive option for smaller marketplaces that cannot afford third-party verification options and cannot spare employee time to contact and follow up with sellers that cross the high-volume line. Without presumptive verification, the methods an online marketplace uses must enable it “to reliably determine that any information and documents provided are valid, corresponding to the seller or an individual acting on the seller’s behalf, not misappropriated, and not falsified.”

Fifth, as noted in the second identification point, online marketplaces must be able to identify when a high-volume seller crosses the $20,000 revenue threshold and triggers the Act’s disclosure requirements, and have procedures in place outlining how, and where, they will “clear[ly] and conspicuous[ly]” disclose to consumers the information about high-volume sellers that the Act requires.

Finally, while most of the Act’s compliance requirements fall on marketplaces, sellers approaching the high-volume threshold (200+ sales and a total of $5,000+ in gross revenues in any continuous 12-month period during the prior 24 months) must be ready to disclose all required information because not doing so within ten days forces the marketplace to suspend their sales activity until they provide the information.

For any questions about the information provided in this alert, please contact any of the authors.