FTC and 22 states sue Amazon over alleged secret ad auction surcharge scheme

What the lawsuit alleges

Amazon is facing a new legal challenge from the US Federal Trade Commission and attorneys general from 22 states, who contend the company spent more than seven years quietly inflating what advertisers paid in its online ad auctions. According to TechCrunch, the complaint was filed Monday and estimates that the alleged practice affected more than one million brands and sellers while potentially adding tens of billions of dollars to Amazon's revenue.

The participating states span the country, including Alaska, Arizona, California, Illinois, New Jersey, New York, Pennsylvania and Washington, among others.

The auction mechanics at issue

At the center of the case are the ad formats Amazon sells alongside its search results: Sponsored Products, Sponsored Brands and Display placements. As TechCrunch reports, the company told more than 500,000 small and medium-sized businesses that these ads were sold through a "second-price" auction, meaning the winning bidder pays one cent above the runner-up bid rather than the full amount they offered. That design invites aggressive bidding, because advertisers assume the mechanism itself will keep their final cost in check.

The FTC alleges that in 2019 Amazon altered this arrangement without telling its customers. Internally, the complaint says, the change was framed as a "soft reserve price," and it depended on what an internal document called an "invented auction participant" — effectively a phantom bidder that Amazon itself controlled. Because advertisers had to outbid this fake competitor, winning prices rose above what genuine competition among real advertisers would have produced. The FTC says the practical outcome was that Sponsored Products advertisers paid their own full bid nearly 80 percent of the time, converting what was promoted as a second-price auction into a first-price one in everything but name.

The agency argues the motivation was simple: more advertising revenue, a business that generated more than $68 billion for Amazon last year. It also claims the change was kept hidden deliberately, on the theory that disclosure would encourage advertisers to lower their bids and cut into that income.

Amazon pushes back

In a blog post, Amazon described the lawsuit as "misguided" and said the complaint "fundamentally misunderstands how advertisers operate." The company countered that its auctions evaluate billions of bids across many formats and placements, which naturally produces variation in prices, and it maintains that advertisers are properly informed about how the pricing system works.

Why it matters

This suit targets the plumbing of digital advertising rather than its packaging. Auction rules are effectively invisible to participants — advertisers cannot audit them and bid largely on trust. Second-price auctions in particular are built to encourage honest, high bids precisely because participants believe overbidding carries little financial risk. If a platform can silently rewrite that bargain, the price signals across the whole marketplace are distorted.

The scale alleged here is considerable: more than a million advertisers affected and potentially tens of billions of dollars in excess charges. Depending on how the case unfolds, it could set disclosure standards for ad auction design, expose Amazon to significant financial liability, and push advertisers across the industry to re-examine their assumptions about how the auctions they participate in actually behave.