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These 3 Legal Issues Can Make or Break Your E-Commerce Startup

ByHoward Goldstein, Last Modified
Feb 28, 2019
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The e-commerce ecosystem has become one of the most crowded startup spaces over the past few years. In the period between 2012 and 2016, ecommerce startups raked in over $46 billion in funding, with many startups easily closing over $100 million worth of deals. And even after a lackluster funding phase in 2016, funding for ecommerce startups has been on an upward trend since 2017, with only fintech startups creating a bigger buzz within that period.

That growth, however, hasn't come without its challenges. The e-commerce industry, just like every other niche within the tech industry, has had to adapt to an increasingly demanding legal and regulatory environment that has often led to lawsuits, product recalls and even closures in some parts of the world.

For entrepreneurs running e-commerce startups, legal infractions can come in many forms, with each infraction presenting a different challenge for the business. As such, it is vital for every e-commerce outfit to stay ahead of the game when it comes to individual legal responsibilities.

Here are a few things to note when pursuing legal compliance as an e-commerce business.

1. Liability and contractual information

Amazon, easily the most recognizable face of the e-commerce industry, has had to navigate the treacherous world of regulation for years. Last year, the company survived a $2 million-dollar lawsuit after a U.S. District Court ruled that the company was not liable for products sold on its website after an online buyer sued the company for injuries sustained by a defective coffeemaker bought from Amazon.com.

For the average e-commerce startup, the Amazon ruling illustrates just how important it is to clearly define product liabilities and warranties, especially if you deal with third-party vendors. You can easily get sued by customers for product defects that have nothing to do with your business, which might see you spending unnecessarily on legal fees while damaging your business's reputation.

As a first step, always ensure your terms of use section is as detailed as possible, making sure customers understand, among other things, your relationship with vendors on the site. Also, ensure you’ve clearly defined all the technical means available to customers in case they want to cancel or return purchases and make sure you have a mechanism of notifying customers of their purchases within 24 hours of the purchase.  

2. Data protection and privacy

Most e-commerce platforms are reservoirs of sensitive customer information, which is often collected via contact forms, customer registration, and during payment for purchases. In many regions around the globe, e-commerce platforms are obliged to protect their customers' data as a requirement for legal compliance.

In the EU, for instance, e-commerce websites are required by the General Data Protection Regulation (GDPR) to notify their visitors when they gather user information and also seek explicit consent before collecting or reusing personal data. Some states in the U.S. require website owners to assign at least one employee to manage internal data protection programs.     

To ensure your e-commerce website is compliant with data protection rules, start by creating a comprehensive data protection policy in addition to your cookies policy. The links to both these policies should be clearly visible on your website and should give your visitors information about whose responsible for storing their data and how they can access, cancel, or modify any of their information.

3. Managing fraud and securing electronic transactions

Payments fraud and other issues related to online security have become quite popular over the past few years, coinciding with the growth of the ecommerce industry. One report projected that card-not-present (CNP) fraud will grow by 14 percent annually up to 2023, which is a significant figure for e-commerce platforms that accept on--site payments.

So, in addition to protecting customers' information on your site, it is important to go deeper into the inner workings of your e-commerce site to prevent fraud. One preventative way to ensure your systems run smoothly is application performance management, APM, a product that mirrors an MRI machine by providing insight into your ecommerce system. Gartner defines APM along three main veins that touch on application diagnostics, experience monitoring, and analytics, which all help to identify and fix vulnerabilities within your system before getting into problems with your users and, eventually, the law.    

But when you do get hacked, you're legally obliged to inform the public. Many countries require businesses to report any breach to the public, especially one that deals with personal and sensitive user data. In the U.S., for instance, most states will require businesses to report any data breach to its residents within 45 days, though this varies from state to state. So, always be sure to stay on the safe side of the law when you suspect a breach, even when you’re tempted to sweep it under the carpet.

Just because your customers don't walk through a physical store doesn't mean your e-commerce platform is above the law. Take time to ensure your online store meets stipulated legislation across all jurisdictions that your products or services are available to potential customers. These measures, while simple, might save your business from costly litigation and eventual loss of brand reputation when you're found on the wrong side of the law. 

Howard Goldstein
Howard Goldstein
See Howard Goldstein's Profile
Howard Goldstein is the Chief Executive Officer of Priceless Funding Group. Mr. Goldstein has been in the business lending industry for over 20 years in a career that has helped hundreds of businesses launch and grow. Mr. Goldstein aims to help business owners get the capital that is needed with the terms that are deserved.
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