product liability

by Anthony Austin

Online businesses have made life significantly more convenient for people worldwide. Today, thanks to E-commerce, buyers can go online and find almost anything they want and have it shipped to their homes with relative ease.

E-commerce, defined as buying and selling goods and services through the Internet, has been growing and evolving exponentially. Entrepreneurs everywhere have benefited from the growth of E-commerce since they can sell goods and services with far more efficiency than ever before. While many models of E-commerce business practices exist, dropshipping has emerged as one of the most popular and attractive ventures for new entrepreneurs.

What is Dropshipping?

Dropshipping enables retailers to sell products without holding any inventory. The retailer gets an order from a customer, contacts their supplier for the product, and that supplier sends the product directly to the customer.

This business model is attractive because of the low start-up costs, ease of making an online store, and the convenience of not worrying about inventory, shipping, or handling. Instead, the business owner can focus on building a store, finding products, and gaining traffic. The owner can then rely on their supplier to fulfill their orders for them. Dropshipping can be operated from one individual’s laptop and is both flexible and scalable. Dropshipping sounds straightforward but it isn’t as simple as many entrepreneurs believe.

The Misconceptions

Dropshipping can be a very lucrative and accessible business, with relatively low barriers to entry, making it a highly competitive industry. However, most entrepreneurs who utilize this business model do so without considering any of the legal ramifications that may come from their online business activity. Many businesses use the dropshipping business model in unethical and borderline illegal ways. These businesses may have no idea that they are partaking in wrongful actions. Many entrepreneurs believe that they don’t need to worry about legal issues until their business grows and begins making a larger profit.

They are grossly mistaken.

The dropshipping business model and community encourage “asking for forgiveness instead of permission,” causing many entrepreneurs in this field to violate regulations regarding operating a business in America. By continuing down that path, these businesses are exposing themselves to considerable risks and liabilities. Below are some of the common legal risks that come with dropshipping.

The Legal Risks

Many entrepreneurs sell products they haven’t touched or seen in person before, especially when they first start dropshipping. This practice is problematic because even though the entrepreneur does not handle manufacturing or shipping, they could still be held liable for any harm the product does to the consumer. Product liability in the U.S. is a strict liability tort, meaning the entrepreneur could be found liable regardless of their intent or knowledge of the product’s deficiency.

To make matters worse, the entrepreneur would be personally liable for the harm done by the product if they do not have a registered entity that shields them from liability. Many entrepreneurs don’t bother registering their online businesses, looking for the fastest way to get started. They fail to realize that they have just created a business entity that provides them with no liability protection. If they get sued, they could lose everything their business has and all their personal assets as well. Registering a dropshipping business shields personal assets from consumers and should be done before any marketing, especially the marketing of products that have yet to be vetted.

IP Infringements

When entrepreneurs start dropshipping, they usually use existing photos, videos, and reviews to make advertisements and build out their online store’s product pages. These actions rarely get done with the original creator’s permission, violating U.S. copyright law. Those images and videos are the intellectual property of the original creator. For use of those images and videos, the original creator must give their explicit permission. It would be best for entrepreneurs to create their own images and videos of the product by buying it and taking their own photos. Still, many don’t have the budget to produce their own content. But, regardless of cost, businesses should not use product content without permission.

Dropshipping clearly branded products will also get entrepreneurs into trouble. Companies like Disney are very quick to send out cease-and-desist letters or sue businesses that use any of their copyrighted materials. Many suppliers from other countries will manufacture and sell products that violate copyright in the U.S., so it’s best not to try and dropship them.

Taxes

Everyone knows we need to pay taxes on all income gained in a taxable year. However, entrepreneurs need to be aware of their state’s tax policies and how many times per year they may need to file, depending on their business structure.

Ethical Marketing & Misrepresentation of Products

As stated above, the dropshipping community often uses existing content for advertising products. Sometimes, sellers go as far as advertising products that aren’t their own or using misleading descriptions when explaining the product’s features and quality. These actions constitute unethical practice and borderline misrepresentation that could be grounds for a breach of contract lawsuit. Businesses should only market the exact product they are selling and should avoid being dishonest while describing the product and where it is from.

Navigating the Legal Minefield

Although there are plenty of legal risks that would make a risk-averse person abandon the dropshipping model, plenty of entrepreneurs will charge onward, regardless of the dangers ahead. It would be wise of them to watch where they step and to consider the risks as they traverse this E-commerce business model. By adhering to regulations from the start and avoiding common mistakes, entrepreneurs can save themselves from the stress of dealing with legal action against them and their businesses.

This post has been reproduced and updated with the author’s permission. It was originally authored on February 3, 2023 and can be found here.

Anthony Austin, at the time of this post, is a 3L at Penn State Dickinson Law. He was born and raised in Levittown, Pennsylvania, and has a bachelor’s degree in Business Management from Penn State Harrisburg. Anthony is currently interested in practicing corporate and entrepreneurial law and has interned as a summer associate with Stevens & Lee. Anthony spends his free time engaging in hip-hop and ballroom dance, cooking, and obstacle course races.