The Federal Trade Commission, joined by 22 state attorneys general, sued Amazon.com Inc. on Monday, August 31, alleging the e-commerce giant systematically overcharged advertisers by more than $20 billion since 2019 by secretly manipulating its advertising auction system.
What the Lawsuit Alleges
The 181-page complaint, filed in US District Court for the Western District of Washington in Seattle, alleges Amazon spent seven years secretly overriding the results of its own advertising auctions, deceiving 1.2 million advertising customers — including more than 500,000 small and medium businesses — about the pricing and terms of its sponsored listings, the paid placements users see at the top of search results on Amazon's marketplace.
How the Alleged Scheme Worked
At the center of the case is a pricing mechanism Amazon introduced in 2019 called a "soft reserve price." Amazon had long described its advertising auctions as a form of second-price auction — where the winning bidder pays the amount of the second-highest bid rather than their own full bid, a standard mechanism not unique to Amazon. But according to the complaint, Amazon internally referred to the mechanism as an "invented auction participant" and used a "proxy 2nd price" to help determine what the winning advertiser actually paid — effectively adding a hidden surcharge on top of the market-determined price, while continuing to publicly describe the auction as operating on a genuine second-price basis.
The Numbers Behind the Alleged Harm
The shift's scale, according to the FTC, was substantial: Sponsored Products advertisers paid their full bid amount about 30% to 40% of the time in 2021. That figure climbed to 70% in 2022 and roughly 80% by 2024 — a trajectory the FTC says shows advertisers increasingly paying their maximum bid rather than benefiting from genuine second-price competition, even as Amazon continued describing the system in terms that suggested otherwise.
FTC's Characterization
FTC Chairman Andrew Ferguson didn't mince words in describing the alleged conduct: "This bait and switch betrayed advertisers' trust and extracted billions of dollars at their expense. Amazon imposed this elaborate scheme on Americans for a simple reason: it wanted more money." New York Attorney General Letitia James, who joined the suit, tied the alleged harm directly to consumer prices: "Consumers across the country are likely paying more for everything from groceries to electronics because Amazon has wrongfully inflated its ad prices. Deceptive practices like this hurt consumers and small businesses, and we are taking Amazon to court to get justice for those who were harmed."
Amazon's Defense
Amazon disputes the allegations and published a rebuttal the same day, arguing that its auction changes actually improved ad performance and saved advertisers money overall. The company said average cost-per-click stayed flat in real terms and that advertisers saved more than $8 billion between 2021 and 2025 as a result of Amazon incorporating ad relevance into its auction algorithm, rather than selecting placements purely on bid price alone. In the company's framing, prioritizing relevance over raw bid amount ultimately benefited advertisers even if it meant some paid closer to their full bid on individual transactions.
The Central Legal Question
A key issue at the heart of the case is how advertisers understood the auction to work. If advertisers expected their maximum bid to function primarily as a ceiling — with genuine competition typically determining a lower final cost-per-click — that expectation would naturally shape how aggressively they bid. The FTC argues Amazon continued fostering that impression even as more and more winning advertisers ended up paying their full bid amount, allegedly misrepresenting the underlying mechanics of the system throughout the period in question.
How This Fits Into Amazon's Broader Legal Troubles
Monday's lawsuit is the FTC's third major legal action against Amazon. Last year, Amazon agreed to pay $2.5 billion to resolve a separate FTC probe into its Prime subscription enrollment and cancellation practices. Separately, Amazon is headed to trial in February 2027 as part of a sweeping federal antitrust case brought by the FTC and 17 states, accusing the company of undermining competition by inflating prices and exploiting monopoly power over third-party sellers.
What the Lawsuit Is Seeking
The FTC and state plaintiffs are seeking civil penalties, restitution, and additional relief under federal and state consumer protection statutes. Notably, while there are limits on the FTC's own ability to obtain monetary penalties directly, several states' consumer protection and unfair competition laws allow for penalties calculated per individual violation rather than as a single lump sum — a structure that could significantly increase the total financial exposure Amazon faces if the states prevail on their claims.
What This Means for Advertisers and Amazon's Ad Business
The case lands at a pivotal moment for Amazon's advertising business, which has become one of the company's fastest-growing and most profitable segments in recent years, driven substantially by Sponsored Products revenue. If the FTC's allegations are proven, the case would represent one of the largest consumer protection actions in the history of digital advertising — with implications not just for Amazon's finances, but potentially for how other major platforms disclose and structure their own ad auction mechanics going forward.
What's Next
With Amazon publicly disputing the allegations and the case likely to hinge heavily on internal documents and advertiser testimony about how the auction system was actually understood and marketed, the litigation is expected to be lengthy and closely watched by the broader digital advertising industry. For continuing coverage, see the full Business Standard report.