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3 Legal Challenges for E-Commerce Businesses

Derek Walter
Derek Walter

These three legal challenges make or break an e-commerce business. Here's how to ensure you are prepared when it comes to starting your e-commerce business.

The e-commerce ecosystem has become one of the most crowded startup spaces over the past few years. According to Shopify, e-commerce accounts for more than three-quarters of all retail growth. The company also predicts global sales will reach $3.9 trillion in 2020.

That growth, however, has not 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 closures in some parts of the world.

For entrepreneurs running e-commerce startups, legal infractions 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.

Liability and contractual information

Amazon, easily the most recognizable face of the e-commerce industry, has faced legal scrutiny for its practices. In 2018, the U.S. Court of Appeals for the 3rd Circuit ruled that Amazon was liable for a dog collar it sold from a third-party vendor that caused permanent vision loss to a Pennsylvania woman.

For the average e-commerce startup, the ruling illustrates the importance of clearly defining a product's liabilities and warranties, especially if you deal with third-party vendors. You can be sued by customers for product defects for items that your business doesn't even manufacture, yet you may spend thousands of dollars on legal fees defending your business in a lawsuit.

As a first step, ensure your terms of use section is as detailed as possible. If you sell products from third-party vendors, disclose that. Also, clearly explain how customers can cancel or return purchases they've made from your site. It's also imperative that you have a mechanism in place that notifies customers of their purchases within 24 hours of the purchase. 

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 the checkout process. In many countries, e-commerce sites are required to protect customers' data.

In the European Union, for instance, e-commerce websites are required by the General Data Protection Regulation to notify visitors when they gather user information and seek explicit consent before collecting or reusing personal data. In the U.S., California mandates that certain for-profit companies must implement and maintain policies and procedures that protect consumers' personal information.    

To ensure your e-commerce website is compliant with data protection rules, create a comprehensive data protection policy, in addition to a cookies policy, that outlines what data is collected from visitors and how it is stored. Links to both these policies should be clearly visible on your website and should provide visitors with a way they can request to not have their information sold to other parties.

Managing fraud and securing electronic transactions

Incidences involving payment fraud, and other issues related to online security, have skyrocketed over the past few years, coinciding with the growth of the e-commerce industry. One report projected that card-not-present (CNP) fraud will grow by 14% annually up to 2023, which is a significant figure for e-commerce platforms that accept onsite payments.

Besides protecting customers' information on your site, it is important to delve into the inner workings of your e-commerce site to prevent fraud. One preventative measure to ensure your systems run smoothly is application performance management, or APM. According to Gartner, APM is a software suite that helps e-tailers identify and fix vulnerabilities within their system so they don't run into problems with consumers and, eventually, the law.   

If you are hacked, you're legally obligated to inform your customers and 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 a data breach to its customers within 45 days, though this varies from state to state. 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 regulations across all the jurisdictions that your products or services are sold to potential customers.

What are the e-commerce directive regulations?

Companies that do business in EU-member nations must ensure they comply with the e-Commerce Directive. Its purpose is to streamline the rules across the EU nations while also defining how businesses should conduct online transactions. The regulation dictates what information companies should provide to customers when they make an online transaction with the retailer.

For example, retailers must outline clear terms and conditions, disclose the price and tax/shipping costs, as well as details about any trade or professional registration the seller is a member of.

The main framework behind the directive is to build trust and transparency for customers who are making purchases online. Any company that operates in an EU nation should know about the latest interpretations of the directive and any additional impacts from doing business in specific EU-member states. The European Commission continues to revise the rules to adapt the regulations for changing commerce needs.

While the regulations are written to present strict guidelines, another goal is to expand e-commerce throughout the common market. Staying atop of commission guidance is essential for best practices on the continent.  

Running a successful e-commerce business requires that you understand your legal obligations in every jurisdiction in which you operate. For e-commerce owners, you could be subject to multiple different regulations, all of which you must follow. Consult with an attorney to ensure you do your best to comply with all applicable laws and regulations. In the end, it will be critical to protecting your business's success.

Howard Goldstein contributed to the writing in this article.

Image Credit: Pinkypills / Getty Images
Derek Walter
Derek Walter,
business.com Writer
Derek Walter is the founder of Walter Media, which offers writing and content strategy services. He is also the author of Learning MIT App Inventor: A Hands-On Guide to Building Your Own Android Apps.