E-Drop Shipping Alters Seller’s Legal Liabilities 

New Jersey Law Journal   January 20, 2023     By Jonathan Bick is counsel at Brach Eichler in Roseland, and chairman of the firm’s patent, intellectual property and information technology group. He is also an adjunct professor at Pace and Rutgers Law Schools.

E-commerce allows sellers to reduce or eliminate the costs and ameliorate legal liabilities associated with manufacturing, buying, warehousing, shipping and carrying charges by implementing e-drop-shipping transactions. An e-drop-shipping transaction arises when an e-commerce seller (e-seller) uses the Internet to have a manufacturer or distributor ship goods purchased from the e-seller directly to a buyer rather than having the e-seller do so. Such a transaction alters the e-seller’s contractual and intellectual property liabilities.

E-sellers use the Internet to promote products and provide an Internet storefront for use by Internet buyers. Most e-sellers do not own the products which they sell. E-customers place orders with e-sellers via the Internet, who in turn buy goods from manufactures or distributors and request the goods be shipped directly to the e-buyer, resulting in an e-drop ship. The e-seller then informs the e-buyer the purchased products have processed.

The drop ship transaction results in an alteration of the contract liabilities associated with the physical fulfillment process wherein the e-seller’s risk of loss and delivery liabilities are transferred to the manufacturer or supplier. While some drop-shipping agreements require the e-drop-shipper to provide customer service, e-drop-shippers are generally not responsible for manufacturing, warehousing, or shipping goods which they sell.

The term “drop-shipping” originally referred to a contract between a manufacturer and a distributor wherein the manufacturer would ship its goods to a third party designated by the distributor. Such transactions resulted in new and additional taxation and licensing liabilities for traditional drop-shippers. Those legal responsibilities and duties also apply to e-drop shippers.

More specifically, while neither e-sellers nor traditional distributors commonly handle a product directly, when using a drop-shipping fulfillment system, both may be held liable for items that don’t meet the safety standards in any jurisdiction to which it is selling into. Likewise, both are required to collect sales tax if they have sales tax nexus in the state to which the item ships.

In addition, e-sellers like traditional drop-shipper distributors, are required to secure jurisdictional business licenses. However, this requirement may differ from state to state for drop-shipping businesses Internet or traditional.

Since the Internet may be used for publishing, broadcasting or telecommunications, the Internet’s use allows e-sellers to engage in transactions which are not available to traditional sellers. Most importantly, processing all phases of a sale through the Internet results in a faster buying process, affordable advertising and marketing, flexibility for customers and no reach limitations, faster response to buyer/market demands, and product and price comparison.

These characteristics result in increased legal responsibilities and duties resulting from drop-shipping for e-sellers when compared with associated traditional distributors. Contractual and intellectual property liability differences are most conspicuous. Consequently, traditional distributors engaging in drop-shipping do not normally execute agreements with the manufacturer, whereas e-sellers typically do. Traditional drop-shipping arrangements do not require a written contract, whereas e-drop shipping frequently does.

A traditional distributor need only send an order to a manufacturer with an appropriate payment (check or credit card) with a send to address (that of the distributor’s customer). Once done, the manufacturer is responsible for product quality, shipping, and tracking. The traditional distributor using drop-shipping may use some of the manufacturer’s intellectual property, such as the manufacturer’s product trademarks without consent.

The use of the manufacturer’s trademark without consent by the traditional distributer is lawful due to the first sale doctrine. This doctrine allows the use of trademarks by a party other than the trademark owner without the trademark owner’s consent for the purpose of reselling items bearing a trademark, after the trademark owner has sold those items.

Mostly, e-sellers display images of trademarked goods and display those images on e-commerce sites. Without a contract authorizing the use of the manufacturer’s trademark and images of the manufacturer’s goods (from the manufacturer or authorized reseller), the e-sellers use without prior consent frequently results in intellectual property infringement.

Since the e-seller rarely secures consent to use a manufacturer’s trademarks or copyrights and the first sale doctrine normally does not apply to e-sellers who e-drop-ship intellectual property, infringement often results in legal difficulties. Such legal difficulties are typically eliminated or ameliorated by a contract.

Copyright law protects images. Images of goods are often created and distributed by manufacturers to promote the sale of their goods. As noted, the unconsented use of these images will result in infringement.

Traditional distributors, unlike e-sellers, commonly have manufacturer’s goods in their possession. The possession of these goods allows traditional distributors a technical work around. More particularly, a traditional distributor may take photos of the manufacturer’s goods for the purpose of selling and use their own images of the manufacturer’s goods rather than the images copyrighted by the manufacturer. As a result, a traditional distributor will be able to lawfully use these images (in traditional media or the Internet) to promote the manufacturer’s goods they ultimately drop-ship.

Most often, an e-seller will not own the manufacturer’s goods which the e-seller e-drop ships. Consequently, e-sellers will copy images of manufacturer’s goods, generally from the manufacturer’s Internet site. Such use is not lawful without the manufacturer’s consent and lack of consent will typically result in copyright infringement. Copyright infringement may also result from reusing any Internet content without consent, such as the manufacturer’s written product descriptions.

While not required, traditional distributors regularly have a drop-shipment agreement with manufacturers. Such agreements usually address terms regarding shipping, handling and delivery and assigning liability in the event things go wrong, as well terms of use for the manufacturer’s intellectual property.

E-sellers, in contrast, normally must have e-drop shipment agreements. Every significant e-commerce platform, including Amazon, eBay, Etsy, Facebook Shop and Shopify requires the execution of an e-drop-shipping agreement. These e-drop-shipping agreements, also known as fulfillment agreements, protect e-commerce platforms from claims of trademark and copyright infringement, which may account for the extensive requirement by the e-commerce platforms.

In addition to trademark and copyright intellectual property difficulties, patent infringement difficulties arise from 35 U.S.C. §271(a), which states: “Whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” This is most commonly known as patent protection rights. A patent owner may sell or license their intellectual property, but absent those authorizations, anyone who makes, uses, sells, or offers to sell the patented item has infringed on the monopoly and is liable to the patent owner.

In In re Biogen, 335 F. Supp. 3d 688, 745 (D.N.J. 2018)), the court found that “an offer to sell is a distinct act of infringement separate from an actual sale” and it “differs from a sale in that an offer to sell need not be accepted to constitute an act of infringement.”

Lawful manufacturers are the owners or license holders of the patent for the goods they produce and sell. Thus, the manufacturers are authorized to “offer to sell” their product to traditional distributors who may resell via drop-shipment with impunity. However, ordinary e-commerce protocol results in e-sellers offering to sell goods subject to patent protection without consent from the manufacture or other authorized entity. When a third-party chooses to sell the invention without permission from the patent owner, the third party has violated the patent owner’s rights as disclosed by 35 U.S.C. §271(a) and the patent owner may seek damages or an injunction against the party.