California has joined the Federal Trade Commission and 21 other states in a sweeping lawsuit accusing Amazon of secretly inflating advertising costs in a scheme regulators say may have extracted tens of billions of dollars from businesses and ultimately raised prices for consumers.

California Attorney General Rob Bonta announced the state’s involvement in the federal case, accusing the e-commerce giant of misleading more than 1 million brands and sellers about how advertising auctions on its platform were priced.

“For years, Amazon has misrepresented how it calculates the cost of advertising on its platform,” Bonta said. “Over the years, Amazon has rigged billions of ad auctions, inflating Amazon’s profits at the expense of Americans who rely on Amazon’s advertising to generate business.”

Amazon strongly denies the allegations, calling the case “a misguided lawsuit” and saying it “strongly disagrees” that advertisers were misled about its Sponsored Ads pricing and auction system.

The FTC and states allege Amazon imposed undisclosed additional costs on advertisers for more than seven years, affecting more than 500,000 small and medium-sized businesses.

Regulators claim the practice allowed Amazon to “likely extract tens of billions of dollars” from advertisers, with some of those higher costs ultimately passed on to shoppers.

The dispute centers on auctions businesses use to buy advertising space alongside search results on Amazon’s website and app.

According to the lawsuit, Amazon represented for years that it operated a “second price” auction in which the winner would pay only slightly more than the next-highest bidder.

Regulators allege the reality was very different.

The lawsuit claims Sponsored Products advertisers were charged their full winning bid nearly 80% of the time, effectively operating as a first-price auction while advertisers believed they were participating in a different system.

The complaint alleges the practice generated billions in additional revenue, with advertising costs pushed even higher during major shopping events including Prime Day and Black Friday.

It also cites notes from a 2024 discussion involving senior Amazon executives that allegedly described a “clever non-transparent way to charge first price” as an “incredibly effective way to drive revenue.”

FTC Chairman Andrew N. Ferguson said the alleged conduct had potentially enormous consequences because of Amazon’s size.

“Amazon has millions of advertising customers who were misled into paying significantly higher prices,” Ferguson said. “These higher costs were largely passed on to American consumers.”

Amazon rejected claims that shoppers were harmed, saying its pricing practices contradict that assertion and that the company works to ensure its retail and grocery prices meet or beat competitors’.

California is joined by Alaska, Arizona, Colorado, Florida, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Nebraska, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Vermont and Washington.

The lawsuit was filed in U.S. District Court for the Western District of Washington.