Federal regulators and states challenge Amazon’s ad sales operations in court

The big news about Amazon

If you’ve ever shopped on Amazon, you’ve probably noticed those sponsored products at the top of your search results. Well, the federal government and 22 states just filed a massive lawsuit against Amazon over how they sell those ads.

This isn’t a small claim. The FTC and state attorneys general from New York, California, Florida, and others are teaming up to stop what they call a deceptive scheme. They believe Amazon manipulated its advertising auctions without telling the businesses paying for those ads.

How does Amazon’s ad system work?

When you search for something on Amazon, such as a coffee maker, advertisers can bid for sponsored placements that appear alongside search results. Amazon told advertisers it used a “second-price” auction, in which the winner would pay only slightly more than the next-highest bidder.

That system matters because advertisers use bids to decide how much they are willing to spend for visibility. The FTC says the dispute centers on whether Amazon’s actual pricing matched what advertisers were led to expect.

The secret surcharge scheme

According to the FTC lawsuit, Amazon used what it internally called a “soft reserve price” system. Regulators describe it as a pricing mechanism that could increase what advertisers paid after they had already entered bids.

The complaint cites internal Amazon documents and discussions about the system’s revenue impact. The FTC says one 2024 discussion described Amazon’s approach as a “clever non-transparent way to charge first price” that was “incredibly effective” at driving revenue.

How much did Amazon make?

Amazon’s advertising business has become a major part of the company. Amazon reported about $68.6 billion in advertising revenue in 2025, and regulators say it is one of the largest digital advertising platforms, behind Google and Meta.

The FTC alleges Amazon’s hidden surcharges likely extracted tens of billions of dollars from advertising customers. New York’s attorney general said the alleged overcharges totaled more than $20 billion, but the case remains unresolved in court.

Little-known fact: Amazon said its advertising revenue grew 26% year over year in Q2 2026, reaching $19.8 billion.

Who’s impacted?

This lawsuit affects more than 1.2 million advertising customers who sell products on Amazon. That includes over 500,000 small and medium-sized businesses that rely on Amazon’s marketplace to reach customers.

When advertising costs go up, small businesses feel the pinch the hardest. They have tighter budgets and less room to absorb unexpected price increases. The FTC says these inflated ad costs were largely passed on to American consumers through higher product prices.

Amazon’s defense

Amazon strongly denies wrongdoing and published a detailed response to the lawsuit. The company says its advertising system prioritizes relevant ads for shoppers and that the average cost per click for Sponsored Products search ads stayed flat from 2019 through 2024 after adjusting for inflation.

Amazon also claims its approach saved advertisers more than $8 billion from 2021 to 2025 compared with ranking ads based solely on bid. According to the company, average winning bids for Sponsored Products search ads fell 50% from 2019 to 2025.

Why the disclosure question matters

The FTC claims Amazon’s auction changes were not clearly explained to advertisers who relied on the platform to reach shoppers. In a marketplace with millions of sellers, even small pricing changes can matter when ad spending happens on a huge scale.

Amazon disputes the FTC’s claims, saying its system was designed to improve ad relevance and value. That disagreement is now central to the case, because both sides are arguing over what advertisers were told and what they actually paid.

The soft reserve explained

The key issue in the case is something Amazon internally called “soft reserve prices.” In simple terms, regulators say these reserve prices could serve as hidden pricing thresholds within Amazon’s ad auctions.

For example, in a normal second-price auction, if one advertiser bid $10 and another bid $5, the winner would usually pay about $5.01. The FTC alleges Amazon’s added pricing rules could push that final cost higher.

Bipartisan action

This lawsuit brings together an unusual coalition of states from across the political spectrum. The 22 states joining the FTC include traditionally conservative states such as Florida, Idaho, and Oklahoma, as well as liberal states such as California, New York, and Illinois.

During a press conference announcing the lawsuit, California Attorney General Rob Bonta emphasized this partnership, saying the lawsuit focuses on Amazon’s alleged unlawful activities and deception.

Amazon’s other legal troubles

This is not Amazon’s first major legal fight with the FTC. In September 2025, Amazon agreed to a $2.5 billion settlement over allegations that it enrolled consumers in Prime without proper consent and made cancellation difficult.

Amazon also faces a separate FTC antitrust lawsuit over alleged monopoly power. The FTC says that the case now includes 18 state attorneys general and Puerto Rico, and it accuses Amazon of using unfair strategies that harm shoppers, sellers, and competition.

What’s at stake?

If the FTC wins this case, it could fundamentally change how Amazon runs its advertising business. The government is asking the court to bar Amazon from continuing its allegedly deceptive advertising practices, impose civil penalties, and require Amazon to refund advertisers.

Beyond just money, this case could set important precedents for how tech companies operate their ad auctions. The outcome might force more transparency in digital advertising, requiring companies to clearly disclose how their auction systems work.

What happens next?

The lawsuit has been filed in federal court in the Western District of Washington, where Amazon is headquartered. The FTC and the states are just beginning what will likely be a lengthy legal process.

Amazon has already started fighting back publicly with its blog post and statements to the press. The company is likely to argue that the FTC misinterpreted internal communications and that its advertising practices were always legitimate.

Curious about other legal battles making headlines? Check out how the Alaska Supreme Court upholds ballot language with one change.

Why should you care?

Even if you have never bought an ad on Amazon, the FTC says this case can still affect shoppers. Regulators allege that higher advertising costs were largely passed on to American consumers through higher product prices.

The case also raises questions about fairness and transparency in online shopping. When you see a sponsored product in Amazon search results, you may want to know how that placement was priced and whether advertisers understood the auction rules.

Want to see how the courts are tackling fairness in other areas? Check out how the court orders a new farmworker pay formula after Trump cuts.

Does this change how you feel about shopping on Amazon? Share your thoughts with us in the comments.

This slideshow was made with AI assistance and human editing.

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