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
Product Liability
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.
Sources:
What Is Ecommerce? A Comprehensive Guide (2023)
What Is Dropshipping? Everything You Need To Know
Disney is Suing a Kissimmee Business for Knockoff Disney Merch and Copyright Infringement
Dropshipping Risks: How to Avoid Copyright Infringement Issues
Does cryptocurrency have the potential to transform today’s reality and how the world does business? Many believe so! More than 2,300 US businesses accept Bitcoin as a form of payment, according to a late 2020 estimate. Some say that Bitcoin and other cryptocurrencies will positively affect businesses in both the present and the future by providing a decentralized digital form of payment that is fast, secure, and global. Here, I will explore some ways a business can prosper using cryptocurrencies for business transactions.
When allowing debit or credit card purchases, businesses often deal with bank chargebacks. Ultimately, businesses suffer the consequences of these chargebacks. Specifically, businesses may pay additional fees, receive fines, and spend valuable time fighting chargebacks from fraudulent activity.
American work culture is an international standout—and not always for a good reason. For many, working within Corporate America comes with an all-or-nothing approach of bending over backward for minimal thanks and bragging about who has taken the least time off. Across the pond, this mentality is not the norm. Instead, Europeans emphasize and adhere to a healthy work-life balance, take maternity and paternity leave, and refrain from checking work emails after hours. Recently, a new wave has taken over and carried its ripples over to American shores: the four-day work week. Studies have shown that employees who work four days per week without a cut in a pay report increased job satisfaction, higher productivity, and overall greater happiness. But what are the legal implications for such a drastic shift in the traditional work format? Can smaller companies and start-ups keep up with the trend?
Another possible model — and perhaps one that fits more seamlessly into American hustle culture — is a four-day work week in which employees work the same amount of hours spread over longer days. For a traditional forty-hour week, employees need to work ten hours on each of the four days while pay and benefits stay the same. Ten-hour days also pose legal challenges for companies. Will some employees need additional breaks throughout the day, especially minors or those with disabilities? Are all of the employees physically capable of working longer days? A business must consider these factors before implementing change to avoid alienating workers who may have challenges working longer shifts.
If a company does elect to shift to a shortened week, the employee handbook must reflect that change. Any compensation or policy alterations based on this change should be elaborated upon in the employee handbook to ensure employees understand the updates.
The rate of Americans with multiple jobs has risen since 2010. Today, 16 million Americans – around 10% of the U.S. workforce – work more than one job. Many healthcare, food service, retail, and administrative employees work more than one job and still make less than $20,000. Inflation, weak wages, and lack of pay transparency all contribute to the need for people to work multiple jobs. Many people in the U.S. workforce do not have the luxury to “shop around” for a better-paying position because the hiring process puts a financial strain on their already dwindling savings. However, lack of pay transparency means that even those who can research new positions can be caught off guard when their new pay range finally gets disclosed.
State or local pay transparency laws are currently in effect in ten states: California, Connecticut, Maryland, Nevada, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, and Washington. Pay range disclosure requirements vary, but each law prohibits complete pay secrecy.
Pay transparency does not (and should not) end after the hiring process. Regardless of whether or not an employee is aware of their pay range before joining the company, Section 7 of the National Labor Relations Act gives employees the right to communicate with their fellow employees about their wages. The National Labor Relations Board recently confirmed that an agreement between an employer and an employee “is unlawful if its terms have a reasonable tendency to interfere with, restrain, or coerce employees in the exercise of their Section 7 rights.” Section 7 rights are important because employees can discover inequities and pay gaps by communicating with each other about their wages. Companies can avoid employee dissatisfaction and resentment by consistently providing pay transparency throughout both hiring and employment.
Most start-up pharmaceutical, biotechnology, and medical device companies are formed with the intent to eventually be bought out by larger, well-established companies such as Abbott, Sigma Aldrich, or Bayer. However, the option of being bought out only comes to fruition once a start-up has established scientific proof that leads to medical or pharmaceutical advancement. In the course of novel scientific innovation, start-ups and inventors are often quick to get a patent. But, when being bought out, one might find themselves confused about the status of their application or the ownership of the patent. This blog post aims to explain (1) the ownership and assignment of a patent when it is first filed, and (2) how assignment rights can be transferred when a company is bought out.
Utility applications and patents are the most common type of filings and are what people often think of when hearing “patent.” Scientific developments will always be utility applications that end in utility patents. However, these filings come in many types including provisional, nonprovisional, divisional, substitute, continuation, and continuation-in-part applications. While the precise differences between these applications and their functions are irrelevant to this post, it is important to note that a nonprovisional application is always a parent application. The remaining types of applications, except provisional applications, stem from the originally filed parent application and are therefore known as child applications. Provisional applications themselves are not a type of application that leads to a patent, but rather, they act to “hold your place in line” at the United States Patent and Trademark Office (“USPTO”).
While not required, it is always best to record an assignment at the USPTO. Recording the assignment provides public notice of the assignment and prevents your company from losing rights if a later transfer occurs to a third party as they will be aware of the original assignment. While that may sound complicated, it simply means that recording the assignment prevents any later transfers to a third party because the first party to record and publicly claim ownership in good faith is given priority in ownership.
If the start-up only holds partial ownership in an application or patent, the transfer does not provide the assignee with complete ownership but is rather defined as an “assignment of patent rights.” In other words, you can only assign the percentage of rights held by your start-up. This situation is often seen in joint ventures between two companies or where multiple inventors exist and fail to unanimously agree to assign the application or patent. To illustrate this, if four inventors each own a 25% interest in the application or patent, with two refusing to assign to the start-up, the start-up can only obtain 50% ownership, and may only further assign that 50% right to another. The main issue in this scenario is that all owners must act together if the application undergoes prosecution before the USPTO. This can create difficult scenarios where application owners have differing opinions on how to proceed with prosecution, thus slowing down the entire process and ultimately leading to more issues.
Although solar energy has recently become one of the cheapest forms of generating electricity, the upfront capital cost of solar installation remains high. Large companies like Google, Walmart, Apple, and Amazon have made major investments in solar energy, reaping the benefits of reducing energy costs, promoting a cleaner environment, and taking advantage of climate-friendly policies. Meanwhile, start-up companies and small businesses have shied away from solar installations, causing them to lose out on these benefits. Despite the decreasing prices of solar technology, commercial solar installation costs remain high for small and mid-sized businesses, ranging from $43,000 for a 25-kilowatt (kW) system up to $175,000 for a 100-kW system. However, financing options like Solar Power Purchase Agreements (PPA) provide a vehicle for businesses that lack the capital to invest in solar energy.
While utilizing solar energy is the right move from an environmental and socioeconomic perspective, the upfront costs of investing in solar technology remain costly and the savings may not be recouped until four years after installation. Before entering a solar PPA, small business owners and start-up companies should consider many factors. One factor to consider is the price of electricity specified in the terms of the contract. Although solar PPAs provide predictable rates of electricity pricing, many solar PPAs contain a fixed escalator clause, typically raising the price the customer pays between 2-5% annually. While this rate is often lower than the projected utility price increases, customers risk overpaying for solar energy as retail electricity prices may decline or increase more slowly than the escalator plan. Further, negotiating favorable solar PPAs may be complex and potentially have a higher transaction cost than buying the solar system outright. Nevertheless, solar PPAs provide predictable, predetermined rates allowing businesses to budget accurately.
Often, at the very heart of a successful business is successful advertising. Advertising is a decades-old industry. Sponsorships, however, are relatively new and exciting, especially for new business owners. Small businesses may feel that brand deals and sponsorships are only something larger businesses can pursue. However, these advertising tools are incredibly valuable for businesses of all sizes. Business owners should not overlook them.
Sponsorships and brand deals can work in several ways. Often, a brand will reach out to an influencer they believe will bring attention to their product to help increase their revenue. In exchange for this advertisement, the brand or business will pay the influencer or send the influencer free merchandise.
The FTC Disclosure Provision requires social media influencers to disclose any payment they receive to promote a product or service. The disclosure provision helps protect consumers from false or misleading advertising. If an influencer does not disclose the advertisement, consumers will not know that corporate funding is involved and might be swaying the influencer’s opinion. This business practice constitutes unfair competition.
“Why did ChatGPT go to the therapist? Because it had too many layers and couldn’t figure out which one was the true self!” I prompted ChatGPT to tell me a joke about itself, and it responded with the “joke” above. A bit too eerily self-aware for my liking!
Dr. Thaler developed an AI system called Device for the Autonomous Bootstrapping of Unified Science (“DABUS”). DABUS, without any human involvement, invented a flame device used in search-and-rescue missions and a food/beverage container. Dr. Thaler sought to patent both of these inventions. Interestingly, Dr. Thaler filed both patent applications with DABUS listed as the inventor. The United States Patent and Trademark Office (“PTO”) rejected the applications, reasoning that AI could not be the inventor on a patent. Dr. Thaler unsuccessfully challenged the PTO’s rejection in the U.S. District Court for the Eastern District of Virginia and appealed its decision to the Federal Circuit.
Today, many consumers, especially young ones, care about the environment and sustainability. Consumers strongly consider ingredients when deciding whether to purchase products. NielsenIQ, a global information services company, recognized consumers’ concerns about the ingredients in their food and personal care products and whether the products comply with sustainability practices. Specifically, the company found 60 percent of consumers have been making more “environmentally friendly, sustainable, or ethical purchases” since the beginning of the pandemic. Customers engaged in this “mindful consumption” are demanding transparency from companies. NielsenIQ reported 81 percent of shoppers surveyed said transparency is “important or extremely important” when shopping in-store and online. NielsenIQ also explained that products focusing on health and wellness will be assets for the growth of companies. Thus, these consumer preferences are essential when preparing to open or continue operating your small business.
With the power of social media, as well as apps, consumers are able to expand their knowledge of the ingredients that are in the products they purchase. Yuka, a French app developed in 2017, has become increasingly popular thanks to social media. The app simplifies the long and confusing list of ingredients on product labels. Consumers simply scan the barcode of the food or personal care product, and the app will then develop a score out of 100 to reflect whether the product is healthful for consumers or harmful to the environment. Once a score is developed, Yuka provides explanations and risks of the ingredients found in the product. The app further provides alternative, “healthier” recommendations. Even if Yuka does not recognize the barcode of a product, the app allows users to take a picture of the ingredients, then Yuka will develop a score in approximately two hours and email the users the results. Currently, the app has approximately 36 million users in 12 countries, including the United States.
Yuka may result in consumers taking businesses to court. As Yuka provides transparency and knowledge to consumers, businesses should be cognizant of how they advertise their products. Specifically, entrepreneurs should be cautious when labeling their products as “all-natural” or “organic” when the ingredients say otherwise. Companies in the cosmetic industry have faced settlements because they marketed their products as “all-natural” or “100% natural” when their products really contained synthetic ingredients. It is also important that businesses understand state law on false advertising. For example, California prohibits spreading information about products or services that is “untrue and misleading,” with civil and criminal enforcement.
Sarah Donley, at the time of this post, is a recent graduate of Penn State Dickinson Law. She has a BBA in Economics & Finance with minors in Entrepreneurship and Psychology from Shenandoah University. Sarah served as an Articles Editor for the Dickinson Law Review. Sarah has also earned her LL.M. in European Business Law from Radboud University.
Investing in affordable housing is a necessary step in community development and advancement. The Federal Housing Administration’s (“FHA”) Multifamily Mortgage Insurance program is one of many programs facilitated by the Department of Housing and Urban Development (“HUD”) to secure the advancement of affordable rental housing in the United States. Under the FHA loan program, HUD provides mortgage insurance for loans issued by FHA-approved lenders for the construction, rehabilitation, acquisition, and refinancing of affordable and market-rate multifamily housing. A property must contain five or more rental units to be eligible for the FHA Multifamily Mortgage Insurance Program. FHA Insured properties are not subject to income limits unless the property is operating under an additional state or federal affordable housing program, such as receiving Section 8 subsidies or Low -Income Housing Tax Credits (“LIHTC”).
Under the FHA Multifamily guidelines, the mortgagor (also referred to as the borrower) of any FHA-insured project must be a single asset entity (also referred to as a single purpose entity or “SPE”), meaning that the subject property must be the sole asset of the mortgagor entity. HUD has established entity types that are acceptable forms of SPEs for participation in the FHA Multifamily Mortgage Insurance program, some of which are more popular than others. An investor must weigh the benefits and drawbacks of each entity type to determine which will be best for their real estate investment.
Another popular option for investors is the Limited Liability Company. The LLC is composed of managers and members. Managers have management rights in the LLC, and members are like investors. In a typical HUD transaction, an LLC will have either a manager who is not a member and owns 0% interest in the entity or a “managing member” who is both an interest-holding member and a manager of the LLC. Additionally, LLCs provide liability protections for managers and members. LLCs are popular options for new real estate investors because they can be owned and managed by a single “managing member” individual and provide that individual with liability protection. LLCs are easy to form, with most states requiring only a few documents for formation and registration. Like general partnerships and limited partnerships, the LLC is subject to pass-through taxation. Some states do require annual reporting and fees to maintain active status.
Choosing (and forming) a mortgagor entity for your multifamily investment property is one of the many steps required to participate in the FHA Multifamily program. Consulting with an attorney to make an informed decision as to which entity type is suitable for your investment is imperative, as the mortgagor’s entity structure and organizational documents will be subject to lengthy due diligence review in the approval process.