Articles Posted in E-commerce

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As the implementation of the European Union Privacy Shield comes closer, other elements of the shield come into influence and place restrictions on businesses that transfer data between the United States and Europe.  Further adding onto this, is the General Data Protection Regulation.  This can be a major issue in cases where data transfers may occur, but more specifically, it impacts the cloud computing sphere, and services like Dropbox and Google Docs.  So, how do these services work?  What would the General Data Protection Regulation do?  How can they be used with the Privacy Shield in effect?

How do these services work?

Now, these systems work by allocating computing resources to another location.  Usually, this is done through the internet, by transferring data towards other electronic devices or servers.  Effectively, it allows for individuals or businesses to take advantage of greater resources of other entities, like those of Dropbox or Google, by granting use of their services for a fee.  On the flip side, these services could be compromised by hackers, and cause the loss of personal or confidential information.  We have discussed some of the risks associated with cloud computing before and would ultimately encourage our readers to carefully evaluate the risks of submitting any information to the Cloud.

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In recent years, states have continued to collect tax from e-commerce transactions.  Louisiana has recently joined in on the trend and allowed the state to tax businesses without a physical presence there.  This is a trend that we have discussed in the past and we encourage our readers to catch up on previous posts about online taxes in California and the evolving trends.  However, Louisiana’s new regulations has shutdown Amazon’s affiliate program in the state.  So, what is the history of this bill?  Also, aside from retailers like Amazon, who would this legislation impact?

What is the bill’s history?

The bill fundamentally has its basis in something we’ve covered before where we discussed Quill Corporation v. North Dakota.  This case effectively ruled that without a sufficient connection, i.e., nexus, to the state, that state cannot tax it.  This has been interpreted that to tax the entity, the entity usually must have a physical presence in that state.  This would mean “brick-and-mortar” retailers would be taxable, while an entity like Amazon, which may not have any warehouses or physical presence in the state, would be “immune” to taxation.  In response, some states have taken action in legislating a “lowering” of the nexus standard.  For example, Act No. 22, also under HB-30, in the State of Louisiana was authored by Representatives Leger, Carpenter, and White, and enacted into law by the Governor on March 15, 2016.

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Product diversion is when an unauthorized seller sells a product outside of authorized distribution channels. The product goes through various unauthorized channels in order to reach the shelves or listings on a website. This is a common practice with high end and expensive beauty products.

The way these unauthorized retailers and e-commerce sites obtain these products often involves reaching out to an authorized seller of the product. For example, many manufacturers have a contract with various salons to exclusively sell their products. These salons, in turn, sell the products per their contract. However, there are salons that work in the gray market. The ones that are in the gray market enter into deals with a third party that offers to buy the items in bulk. The third party then sells the item to an unauthorized seller. The unauthorized seller then sells the items on websites such as eBay and Amazon.

The danger of diverted products going through these unauthorized channels are high for both the consumer and business. For example, products can be tampered with during the process. Products can change bottles, be diluted, and more. It could cause health problems for those who are sensitive towards certain ingredients. It can also be dangerous to businesses because it will hurt their profits. The businesses will lose their cut of product sales from the authorized seller and can receive negative reviews from the public. For example, if a consumer, who has used Brand X body wash for years, buys the Brand X body wash from an unauthorized reseller because it was cheaper on Amazon than in store and has a severe allergic reaction to it, then he/she may be tempted to post a negative review. The problem is that the blame is not on Brand X, but on whoever tampered with the product before it was sent to the consumer. Although, the blame is on someone else, Brand X will receive the negative review that will discourage other consumers from purchasing its product.

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In recent times, counterfeit items have become a large problem for many designer luxury brands. With the rapid growth of e-commerce, counterfeiters have moved their products from the streets to the Internet. This creates a problem for designer luxury brands because it is not easy for counterfeit items to be sold before their eyes. The sale of counterfeit items can affect everything from sales, to reputation, to good will. Many designer luxury brands are players in the fashion industry. The fashion industry, however, is a fickle one. One day you are in, the next you are out. The biggest asset a designer luxury brand can have is its status. Once the brand starts to lose its status in the industry, it is difficult to recover.

Protection of intellectual properties against unfair competition has become a constant battle for designer brands. The latest battle comes between French luxury company, Kering, and Chinese e-commerce giant, Alibaba. Kering luxury brands include, Gucci, Yves Saint Laurent, and more. In May 2015, Kering filed a lawsuit against Alibaba for encouraging and profiting from sales of counterfeit items on its website. This lawsuit, however, is the second legal action between the two parties. The first lawsuit was filed in July 2014 with similar causes of action. The lawsuit was retracted when Alibaba promised to work towards stricter intellectual property protections. However, Kering became frustrated with the lack of progress and filed the second lawsuit in 2015.

In its complaint, Kering alleges that Alibaba encourages counterfeiting on its platforms by allowing keywords such as “replica” and “guchi” to lead to counterfeit items. The complaint alleges Alibaba fosters the sales and purchase of counterfeit goods by providing a platform for such transactions. Alibaba, however, argues the lawsuit is frivolous and claims that it works with luxury brands to help protect their intellectual property.

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In general, trademarks are marks that are associated with a particular brand. Examples of trademarks include the golden arches for McDonald’s and the mermaid for Starbucks. Trademarks are important to businesses because they distinguish the business from its competitors. Businesses use these marks in marketing to gain consumer attention. Once a consumer is familiar with a brand, has developed a positive opinion on it, then he or she is more likely to buy products from the brand.

However, when a particular business becomes successful, competitors will often try to emulate the business’s model and possibly engage in deceptive practices. A common practice is trademark infringement. Trademark infringement is when a business takes another business’s trademark and creates a similar mark. What the infringing business is banking on is consumer confusion. It is hoping that consumers will be under the impression that the infringing business is associated, or possibly, even be the business that actually holds the mark. The infringing business is then taking away sales from the authorized trademark holder.

Dangers of Online Trademark Infringement

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The Internet has become an important aspect in our lives. With the Internet, people can pay bills, make appointments, and buy or sell products.  For example, websites like Amazon, Craigslist, and eBay allow the public to buy and sell products.  So, due to the ease of e-commerce transactions, counterfeiters have found a new medium to sell products.  E-commerce transactions do not require a physical meeting of the seller and buyer, so it becomes easier for counterfeiters to falsely claim they are selling authentic products.

Not only do online counterfeiters affect the public, but they affect businesses as well. Counterfeit items can affect a business’s bottom line. Counterfeit items can cause loss of sales, bad reputation, and loss of goodwill.

A way a business can address online counterfeiting problems is by hiring investigators to locate and identify the online counterfeiters. These investigators are skilled at online fraudulent transactions and can become valuable assets. The investigators create a list of sellers that are known to sell counterfeit items or have the typical characteristics of online counterfeit sellers. These characteristics include selling designer items for an extremely low price on low quality websites. The list is then sent to the business and the business determines whether or not it wants to conduct a sting operation to confirm the counterfeit nature of the seller. If the business decides to conduct the sting operation, then the investigator will set up a purchase, make an inspection, and determine if the goods are actually counterfeit.

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The United States Census Bureau releases statistics for e-commerce activities on a regular basis.  These statistics compare the percentages from previous years in order to show the growth of the e-commerce industry.  So far, the reports have indicated that the rates are rising, and this trend will most likely continue with the widespread use of the Internet.

Dangers of Online Counterfeiting

Although, e-commerce can be viewed as a great addition to the Internet, but it can create problems for commercial entities.  For example, businesses that engage in the online sale of products, are subject to counterfeiting and unauthorized sales by unlicensed sellers.  Auction sites, such as eBay, have come under fire for the sale of counterfeit goods and product diversion. These websites provide a medium that allows users to sell products to other users. Most of eBay’s sellers are consumers, and not businesses, so there is a danger of buying a designer item that is a counterfeit, i.e., fake.   There is also a danger that the seller is selling a product it obtained from the gray market. In general, eBay and similar websites, do not monitor every single item, so it creates a breeding ground for the sale of counterfeit items and unlicensed sales.

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From a practical perspective, transactions that occur over the Internet can face similar issues that regular business transactions may encounter in their daily operations.  However, e-commerce transactions have the added problems associated with cyberspace laws.  It is nearly impossible for a business to be successful these days without having a website. Although, not all websites actively conduct business over the Internet, however, e-commerce related issues and disputes may arise from having an online presence.

What issues and disputes face e-commerce transactions?

E-commerce transactions have created a new environment for companies that conduct their business on the Internet.  For example, contractual and non-contractual issues, such as free speech, consumer protection, and competition laws now face businesses that ship products, provide online goods/services, and use the Internet for marketing.  Therefore, conducting business online involves unique legal concerns that is distinct from traditional business models.  In sum, the concerns are centered on privacy, security, and regulation.

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E-commerce transactions have become so common that legislators have had to keep up with the demand for regulations. Jurisdictional issues raise concerns of what law is applied in disputes over multi-state transactions. The state or federal laws of the United States, the domestic laws of another nation, international coalition laws, international treaties, or a combination of these laws could be applicable in a single case.

What federal and state laws may apply?

The Federal Trade Commission (FTC) is in charge of regulating e-commerce as a federal agency. The FTC has posted guidelines to help businesses navigate the myriad of e-commerce issues and factors that need to be addressed in order to do business across borders. Twenty-nine nations have signed on to the guidelines, including, but not limited to, United States, Canada, Japan, Germany, and Australia. The guidelines address fair business practices, marketing, commercial emails, consumer privacy, and recommended policies and practices. The laws that the FTC has passed for regulation of e-commerce transactions, include, but are not limited to, the CAN-SPAM Act of 2003, which set standards for email marketing, and Federal Trade Commission Act, which regulates all types of marketing and advertising.

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The phrase “e-commerce transactions” invokes thoughts of a complicated and technical phenomenon.  In fact, many people partake in e-commerce transactions every day.

What is an e-commerce transaction?

An electronic commerce (a/k/a “e-commerce”) transaction involves a commercial transaction that takes place over the Internet. So, any trading of products or services over any electronic network, including, but not limited to, the Internet, is considered a part of e-commerce. The e-commerce transactions covered by the term include, business-to-business, business-to-consumer, consumer-to-consumer, and consumer-to-business.  There are three categories of e-commerce transactions. There are agreements with: (1) Shrinkwrap terms—when a tangible product is delivered to a physical address usually in shrinkwrap or clear packaging; (2) Clickwrap terms—in which a digital product is delivered over a network (e.g., e-book); and (3) Browsewrap terms—when terms are agreed to in order for a consumer to access and use a website.  However, e-commerce does not always involve actual money.   The transaction can involve e-cash, digital currencies (e.g., Bitcoin), or services.

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