Alleviating Legal Risks of Dropshipping

Dropshipping has become a popular low-cost entry point to eCommerce for many small businesses. When dropshipper sells a product, dropshipper then buys it from a supplier who sends it directly to the customer. Your warehouse costs are zero and orders can be processed with minimum staff. It sounds like a great model but, with many advantages of dropshipping, there are significant risks. 

Dropshippers often compete on price and sell the same product that they do not themselves produce or even see. Suppose, you dropshipped to the U.S. a cheap toy manufactured in China but the toy causes a child to have rashes all over. Parents will sue you, not the Chinese supplier. That's because they purchased from you, which means they have a contract with you, not the supplier. They don't even know the Chinese supplier exists. Or, let's say you dropshipped products that turned out to be counterfeit or infringing on somebody else's trademark. Unwillingly, you have become a frontman for a factory of fake goods. Rightful IP owner starts sending you aggressive cease and desist letters that threaten to sue.

What to do? To shield dropshipping business from unnecessary liability and other risks:

- Include a disclaimer that consumers have to agree to before they can purchase anything. The disclaimer should state that you are not the manufacturer and that you disclaim all warranties for the products sold. 

- Your website Terms of Use should include the aforementioned disclaimer and more clauses that protect you from unnecessary liability to the maximum extent allowed by law.

- Incorporate, consider offshore jurisdictions, especially if you do not have physical presence in the market you are selling to. If you are selling as an individual sole proprietor, you will be personally liable with your personal assets for any problems that the dropshipped products may cause. If you have a company, customers can only sue that company for up to whatever it's worth (which could be minimal). If that company is incorporated somewhere remote (e.g. the British Virgin Islands), that will discourage potential plaintiffs even more.

- Buy a product liability insurance.

- Have a good dropshipping contract which includes indemnity clause and other guarantees that shift liability away from you.

- Screen suppliers (and products) carefully. Your business reputation is in their hands.

- Adopt a return policy. It can be difficult to get  a supplier to accept a return, although some allow exchanges.

- Consider only selling products with Minimum Advertised Price (MAP) Policy to alleviate downward pressure on pricing from large retailers and have better control of margins. With dropshipping, you can lose bulk purchase discounts, and the shipping costs will be higher. That's because the supplier will have to pack and ship each product individually.

- Talk to a competent eCommerce lawyer before you start receiving aggressive cease and desist letters and calls from angry customers. The aforementioned protections are unlikely to protect you completely, especially in jurisdictions where strong consumer law will override them.