6 Legal Challenges for E-Commerce Businesses

Legal issues e-commerce businesses face

E-commerce businesses that fail to comply with regulations can face steep legal, financial and reputational consequences.

“You can be subject to fines, injunctions and a loss of reputation,” said Shaun Jamison, associate dean of academics at Purdue Global Law School. “In addition, you have to spend money to revise to come into compliance. It’s much less costly to design your website and processes to be compliant in the first place.”

To avoid potentially devastating outcomes, e-commerce businesses must stay aware of the following legal issues and their associated requirements.

1. Business structure logistics

According to Chris Rivera, founder of The Ecommerce Accountants, setting up a proper legal structure for your business is a necessary first step. Otherwise, you, as a business owner, may be personally liable for your company’s debts and obligations.

“This provides essential liability protection and a clear framework for operating your business,” Rivera said. “Setting up a legal entity, like an LLC [limited liability company] or corporation, provides personal protection, but this protection can be jeopardized if not properly maintained.”

Choosing the right structure for an early-stage e-commerce business can be challenging and will ultimately depend on your business goals. Paul Koenigsberg, managing partner at Koenigsberg & Associates, said each structure has pros and cons and affects tax obligations, personal liability, paperwork and more. 

“For example, a sole proprietorship is easy and inexpensive to start, but it doesn’t protect your personal assets if the business runs into trouble,” Koenigsberg noted. “Forming an LLC or corporation offers more legal protection, but it involves more upfront costs and ongoing requirements, which can feel overwhelming if you’re still figuring things out.”

Choosing on a legal structure becomes even more challenging if you’re unsure of your plans for achieving profitable growth or can’t decide on your future trajectory.

“Starting too small might expose you to risks, while jumping into a more formal structure, like a corporation, could mean taking on unnecessary complexity and costs early on,” Koenigsberg added. “Many business owners end up revisiting their structure later, which can involve paperwork, fees and sometimes legal challenges.”

2. Liability and contractual information

Even the world’s largest e-commerce businesses have encountered legal challenges. In 2019, a three-judge panel ruled that Amazon could potentially be sued for product liability after a dog collar it sold from a third-party vendor caused a Pennsylvania woman to permanently lose her vision. Amazon settled with the plaintiff at a later date, and the U.S. Court of Appeals for the Third Circuit was prevented from finding Amazon liable for the consumer’s injuries. However, this case remains a lesson for many e-commerce businesses.

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. Customers can sue you for product defects in items your business doesn’t even manufacture, and you may spend thousands of dollars on legal fees in a business lawsuit. The INFORM Consumers Act, which became effective in 2023, sets further requirements for online marketplaces and high-volume third-party sellers.

To protect your e-commerce venture from liability issues, follow these best practices: 

• Ensure that your terms-of-use section is as detailed as possible. 
• If you sell products from third-party vendors, disclose that. 
• Clearly explain how customers can cancel or return purchases from your site. 
• Have a mechanism in place that notifies customers of their purchases within 24 hours. 
• Consider purchasing product liability insurance to further protect your e-commerce business. 

3. Data protection and privacy

Most e-commerce platforms store sensitive customer information, which is often collected via contact forms, customer registration and the online checkout process. Protecting your business’s sensitive information is crucial — and often legally mandated. In many countries, e-commerce sites are required to protect customers’ data. Note the following laws:

• In the European Union, the General Data Protection Regulation requires e-commerce websites to notify visitors when they gather user information and to seek explicit consent before collecting or reusing personal data.
• Several U.S. states have enacted data privacy laws and bills, with more expected to go into effect between 2025 and 2026. For example, California mandates that certain for-profit companies implement and maintain policies and procedures that protect consumers’ personal information.    

To ensure your e-commerce website complies with data protection rules, create a comprehensive data protection policy and a cookies policy that outline what data is collected from visitors and how it is stored. Links to both policies should be clearly visible on your website, and visitors should be able to opt out of having their information sold to third parties. These measures will help you build trust with e-commerce customers and promote loyalty.

4. Fraud protection and e-commerce security

Online security issues, including credit card fraud, have skyrocketed over the past few years. According to Security.org’s 2024 Credit Card Fraud Report and Statistics, 93 percent of fraudulent credit card transactions were completed through remote access to personal data and account information.

E-commerce website security is vital. Online businesses must go beyond protecting customer data and ensure secure electronic transactions on their platforms. Application performance management is one preventive measure to ensure that your systems run smoothly. 

Despite your best efforts, your e-commerce site may experience a security breach. If this occurs, you’re legally obligated to inform your customers and the public. Many countries require businesses to report breaches involving personal and sensitive user data. In the U.S., most states mandate that businesses report a data breach to customers within 45 days, although requirements vary by industry and state. It’s always best to stay on the safe side of the law and report any suspected breach, even if you’re tempted to downplay it.

5. Intellectual-property infringement

If someone uses another company’s intellectual property without its consent, whether intentionally or accidentally, that company can ask for millions of dollars in damages. E-commerce businesses must guard against unintentionally infringing on someone else’s intellectual property while also taking steps to protect their own. 

There are several effective strategies for preventing the unintentional infringement on someone else’s intellectual property:

• Rely on original materials. Custom-make your graphics, advertisements, marketing materials and branding materials in-house.
• Avoid copyrighted materials. Use work only from reputable, licensed sources, such as platforms that require a subscription fee.
• Don’t assume citation is enough. Many businesses mistakenly believe citing the source of copyrighted material allows them to use it, but owners can still pursue legal claims.
• Obtain legal counsel. Consult a lawyer to ensure you’re not infringing on someone’s intellectual property.

There are also ways to protect your e-commerce business’s intellectual property from being stolen: 

• Secure appropriate trademarks and copyrights. Apply for copyrights to protect your e-commerce business’s unique creations, and submit trademarks to protect phrases or symbols that represent your brand. “Many e-commerce businesses don’t realize the importance of securing trademarks for their business names, logos or product designs,” Rivera said. “If you don’t take steps to protect your IP early on, your brand could be vulnerable to copycats, and you could face legal disputes down the road if someone else claims ownership.”
• Get intellectual property insurance. Obtain intellectual property insurance to pay for the legal costs if someone infringes on or steals your property.

6. Unauthorized resellers

Authorized resellers can help boost online brand awareness and increase sales. Unauthorized resellers, by contrast, can undercut your sales by offering your products at lower prices, which may lead authorized resellers to stop carrying your products and potentially harm your brand’s reputation.

Legally, unauthorized resellers cannot sell a product that differs from the original, as this constitutes trademark infringement. Still, it’s essential to ensure your trademark is registered. If you discover an unauthorized reseller offering your product, make a test purchase to verify the product. If you confirm trademark infringement, send a cease-and-desist letter. If the reseller fails to comply, file a claim.

What are the Electronic Commerce Directive regulations?

Companies doing business in EU member nations must comply with the Electronic Commerce Directive (also known as the E-Commerce Directive). This directive streamlines rules across the European Union while defining standards for conducting online transactions. It also covers e-commerce marketing and unsolicited commercial communications and applies to online information services, online sales of products and services, online advertising, and entertainment services.

Here’s what you should know about the E-Commerce Directive: 

• Information rules: The directive dictates what information companies must provide to customers when they make an online transaction.
• Transparency rules: The directive establishes requirements for transparency, information disclosure, commercial communications, electronic contracts, and limitation of liability. For example, retailers must clearly outline terms and conditions; disclose prices, taxes and shipping costs; and include details about any trade or professional group the seller belongs to.
• Internal market clause: One of the directive’s fundamental principles is the internal market clause, which ensures that e-commerce businesses only have to follow the laws of the EU member state in which they are established, rather than the laws of every state where their services are accessible.
• Anti-discrimination rules: The directive strives to prevent unfair discrimination against those who use e-commerce businesses within the EU. 

The directive’s main goal is to establish business transparency and trust for customers who make online purchases. It also aims to remove obstacles for online businesses that operate across EU member state borders. Companies in EU nations should stay informed about updates to the directive and any impacts from additional rules that are specific to individual EU member states.

The European Commission regularly updates these rules to adapt to the evolving e-commerce landscape. Most recently, the Digital Services Act was proposed to address emerging challenges, especially those related to intermediary services.

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

Understand your legal obligations

Running a successful e-commerce business requires a comprehensive understanding of the legal obligations in every jurisdiction. E-commerce business owners are often subject to multiple regulations covering taxes, payment safety, intellectual property, shipping restrictions, inventory, age restrictions, business insurance, licenses and permits, Payment Card Industry compliance and customer privacy.

Taxes are a particularly important consideration, since regulations vary by state. Check your state’s tax laws, and consult a tax law expert for guidance on specific situations and sales tax advice. Failing to collect and calculate the correct sales tax can reduce profits and cause additional stress during tax season.

Jamison recommended hiring a lawyer who specializes in representing e-commerce companies. These legal professionals can assist in ensuring legal compliance. Educating your employees is also crucial to avoid mishaps.

“Make sure that each person in your organization knows what they are responsible for as to compliance and have accountability in place,” Jamison advised. “Specifically, have someone in charge of coordinating compliance.”

Danielle Fallon-O’Leary contributed to this article.