E-Commerce: a Legal Primer

Why Start an E-Commerce Business?

In 2016, Apple increased its online sales by 40% to a total of $16.8 billion – a larger increase than Amazon. At the same time, retailers like J.C. Penny’s and Macy’s closed stores and redirected money into their ever-growing online stores. These are just a few of the examples of an ever burgeoning online marketplace that you can take advantage of.

The business opportunities in e-commerce don’t just apply to big box retailers either. Small merchants can reap the most benefits. By operating online you can avoid the burdens of operating a physical business.

However, with those benefits come costs. Each year the internet becomes a more regulated place. Both federal and state laws dictate everything from privacy, e-mail notification rules, and data security. In addition, there are traditional laws like consumer protection and insurance liability to contend with. Businesses must be aware of these laws or risk hefty civil and criminal penalties for breaches.

Discussed below are some of the issues you may encounter opening an e-commerce business. However, this is NOT an exhaustive list. Just as opening a traditional business comes with numerous legal hurdles, starting an online business adds additional steps to the process. Given the depth, breadth, and perpetual changes in the law, retaining a legal team is the best preventative measure for starting and growing your business online.

Protecting Yourself With Trademarks or Service Marks

Not only do you want to distinguish yourself in the online marketplace but you must also protect your established brand from infringement. A trademark or service mark is the best way to do that. A trademark/service mark is a word, name, symbol, device, or a combination, used to identify and distinguish your goods or services, and to indicate the source of the goods or services.

Trademarks operate under both state and federal protection. The widest nationwide protection is obtaining a federal trademark from the U.S. Patent and Trademark Office (USPTO). But you may also find that getting a state trademark can be advantageous as well.

Federal Trademark

The broadest trademark protection is a federal trademark. Not only does this apply nationwide but it also allows you to prevent foreign imports from infringing on your mark. When your mark is approved by the USPTO it acts as a legal presumption in an infringement claim – a powerful piece of evidence. However, securing a mark can be a long, expensive, and complex process. There are many reasons an application can be denied (e.g. generic, confusing, or offensive). That’s why the USPTO recommends you seek legal help for the process. A lawyer can guide you through the steps and help if an application is denied.

 State Trademark

State trade or service marks don’t have the power of their federal counterparts but that’s no reason to ignore their benefits. They are cheaper and the process is more efficient than going through the USPTO. But a state mark can lack the evidentiary presumption of a federal mark. For example, under California’s Model State Trademark Law, the mark is only admissible evidence that it was in use (and not a presumption). Cal. B&P Code § 14200. Also, a denial of your application could have negative consequences for your federal application. Again, a balance of factors and your own business’ considerations will determine if you should apply for one or both types of marks.

The Madrid System

The Madrid system is the primary system for facilitating the registration of trademarks in multiple jurisdictions around the world. If your e-commerce company does business internationally, the Madrid system is an effective way to achieve bundle registration and protection in multiple countries, eliminating the need to file in each country separately. This saves money and allows for easier management of your intellectual property.

The Madrid system is overseen by the International Bureau of the World Intellectual Property Organization (WIPO). Currently, 90 countries participate in the Madrid system.

Drafting Contracts, Terms of Use, and Other Policies

As an online merchant, your website is your storefront. Online sales are contracted through the terms on your website. These are called “terms of use” (“TOU”) and must be agreed upon to conclude business – you’re probably familiar with having to click an “I ACCEPT”  box.

Within these TOUs are drafted provisions to protect your business, this includes: arbitration agreements, forum selection clauses, refund and shipping policies. However, there are special considerations when you operate a website. In drafting your TOU, a business must be careful to give notice to consumers or else courts could nullify those terms. TOUs have been struck down when they aren’t reasonably apparent to the consumer. See Nguyen v. Barnes & Noble, Inc., 763 F.3d 1171 (9th  Cir. 2014). It might be in a merchant’s best interest to have a web designer consult with their attorney. Case law shows that courts will look at the term’s location, font, color, and size among other easily missed details. Having a court strike down your own TOUs could leave you in a terrible position.

Avoiding Privacy Law Penalties

One of the largest challenges to e-commerce is navigating the extensive collection of online privacy law – federal and state laws. California businesses have to be especially vigilant. The state has been at the forefront of passing online legislation. It was the first state to require privacy policy disclosures when collecting “personal identifiable information (PII)” from residents under the California Online Privacy Policy Act (“CalOPPA”), and the first state to pass data breach laws that require disclosure when a resident’s PII has been compromised. Cal. Civ. Code 1798.29 & 1798.82. Therefore, out-of-state business should also be on alert that they may have to comply with state law when dealing with California consumers.

California provides a good example of the kind myriad laws that can get a business into trouble. Not only are the laws detailed but they are added and amended constantly. The state’s data breach laws have been amended in both 2015 and 2017, adding more stringent standards. An e-commerce business must stay on top of the newest laws or risk violations – which do not come cheap. A single violation can run in the thousands of dollars.

What Form Will Your Business Take?  

One of the first questions when opening your business is: How do you want to operate it? You may prefer to start out as a sole proprietorship and transition to corporate status? Each business structure has advantages and disadvantages.

Sole Proprietorship and General Partnerships

No special legal documentation is required. A typical example is an individual or friends selling goods on Etsy, eBay, or their own website. However, you may have duties which may include: (1) choosing and filing for a fictitious business name; (2) obtaining all licenses, permits, and zoning clearances your city and/or county may require; or (3) other tax obligations. In addition, if you choose to take on an employee other obligations will be required of you.

For partnerships, it is important to create a written “partnership agreement.” If you do not, state law decides any disputes between you and your partners.

And finally, sole proprietors and general partnerships have one other large disadvantage – full personal liability for its owners. You are personally responsible for debts and other liabilities.

Corporations

A corporation’s biggest benefit is that it’s a “separate entity” from you. Your personal assets are protected from liabilities (e.g. debt). In addition, there are certain tax advantages depending on the type of corporation you form: S-corporation or C-corporation.

But the incorporation process is complex. There is no better example of a time when legal help is important. The corporation has to have contracts drafted, by-laws and articles of incorporation written. Furthermore, a corporation must observe “corporate formalities, ” including keeping minutes and you must have a board of directors.

Limited Partnerships (LPs) and Limited Liability Companies (LLCs)

The best of both worlds: (1) limited liability and (2) organizational flexibility. Unlike corporations, LLCs and LPs are not required to follow corporate formalities and their tax designation is flexible. They also do not also do not have the same restrictions as an S-corporation regarding who can be owners of the company. However, for the same reasons as general partnerships, it is necessary for any LLC or LP to consult with an attorney to draft a written operating agreement to spell out and protect the interests of everyone involved. Additionally, if passive investors are involved, paperwork will have to prepared and filed with the Securities and Exchange Commission and with the applicable state agency. One final caveat – general partners in an LP are still personally liable for the LP, so an an LLC is typically preferred for this reason.

Planning Ahead For Success

This is just a basic overview of the nature of e-commerce. Every successful business-person plans ahead whether they operate a brick and mortar business or not. An online merchant just has to take extra precautions. But you may find in the cost/benefit analysis it’s worth the time and expense.

 

*The information in this article is for informational purposes only and should not be construed as legal advice. The information in this article is not privileged and does not create any attorney-client relationship.

Leave a Reply

Your email address will not be published. Required fields are marked *