(Bloomberg Opinion) -- One day in January 2015, Heather Oberdorf took her dog for a walk, using a $20 retractable leash she had bought from Furry Gang, a third-party seller on Amazon. It did not go well: her dog lunged, causing the collar to break; the leash snapped back, hitting Oberdorf in the face and permanently blinding her in one eye. She tried to seek recourse from the original merchant, but no luck -- Furry Gang had vanished.

This story is extreme, but it illustrates a fundamental characteristic of Amazon's business. Although Amazon.com Inc. is, of course, a huge web-based retailer, it also hosts millions of sellers of varying repute. The resulting marketplace can be a bit of a Wild West, with little or no accountability for the merchants hawking their wares. If something goes wrong, Amazon generally disclaims liability, shielding itself behind a 1996 law that is usually interpreted as meaning that online platforms are just “publishers” of content owned by others.

But Oberdorf's case could be different: Earlier this month, a federal appeals court in Philadelphia found that Amazon might have legal exposure. That has major implications for Amazon, which had $160 billion worth of third-party seller transactions last year. And it may affect the legal treatment of other online platforms, too.

The issue revolves around Section 230 of the 1996 Communications Decency Act, which says:

No provider […] of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

This passage is typically interpreted as meaning that a company like Amazon isn't responsible for the content its users post, even if that content consists of false or misleading claims about a product or business. Consistent with this reading, courts have found Amazon not liable for defective goods sold by third parties, from inflammable headlamps to self-immolating hoverboards.

Amazon reviews third-party merchants' details when they sign up to sell through the company's platform. And Amazon does maintain ratings and host reviews. But beyond that, Amazon provides relatively little oversight. That's not just because Amazon doesn't have to; filtering as little as possible bolsters Amazon's claim that it's just hosting content -- in other words, that it is simply a publisher.

But the appeals court in Philadelphia determined that Amazon qualified as more than just a publisher because the company's management of transactions “extends beyond a mere editorial function” to encompass many parts of the sales process. In principle, that means Amazon can be found liable as a seller of defective products like Oberdorf's collar under Pennsylvania law.(1) A similar appeals court ruling in Cincinnati just reinstated one of the hoverboard lawsuits.

The Philadelphia court reasoned that “Amazon is fully capable, in its sole discretion, of removing unsafe products from its website.” And indeed, Amazon is not just able to block low-quality products, but is uniquely positioned to do so: the company has the ability to oversee marketplace transactions and use algorithms to identify the characteristics commonly associated with low-quality listings. It can also track and evaluate ratings and -- at least in principle -- deny service to the sellers who get consistently bad reviews.

Amazon demonstrated the power of this approach just recently, when it took the unusual step of issuing a blanket warning and refund for a range of counterfeit nutritional supplements. (It's unlikely this move was directly related to the appeals court rulings -- correlation doesn't imply causation -- but it's still a great example of what platform-led quality monitoring can look like.) It also has made efforts to purge its marketplace of sham goods.

However, if we want Amazon to police its marketplace, the company must be given an incentive to do so. Some of that incentive comes from the need for user trust. But the pressure there is not particularly strong because marketplace quality issues aren’t apparent to most users.

Making Amazon at least partially liable for defective products sold through its marketplace swings the incentive far in the other direction. That could backfire: it might cause Amazon to overcorrect by screening out sellers that look risky but aren't actually problematic, and it could empower buyers to extort sellers by threatening to make false reports of product defects.(2) But still, it's a move in the right direction.

Amazon's marketplace needs oversight, and Amazon itself is the one that can best provide it.

(1) The lower court now has to revisit the case and determine whether the dog leash actually was defective.

(2) That's a common scam on eBay, and similar scams apparently even work on Mario Maker.

To contact the author of this story: Scott Duke Kominers at skominers1@bloomberg.net

To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Scott Duke Kominers is the MBA Class of 1960 Associate Professor of Business Administration at Harvard Business School, and a faculty affiliate of the Harvard Department of Economics. Previously, he was a junior fellow at the Harvard Society of Fellows and the inaugural research scholar at the Becker Friedman Institute for Research in Economics at the University of Chicago.

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