Have you ever felt tired or discouraged about your current job? Ever wondered about a quicker way to make money? Ever tried to set up the perfect business, with a maximum number of customers and a minimum amount of logistics? In other words: have you ever fantasized about being the next Amazon – but without the warehouses?
Well – if these thoughts ever crossed your mind, the good news is that the internet community has found the perfect business idea for you – dropshipping! A word which makes thousands of people dream, with the promise of quick dollars, euros or yens at arm’s reach. Just have a look at YouTube and you will find countless testimonies and tutorials that will make you think – “why not me?”. After all, who does not want to relate to a guy who went “from broke student to millionaire within a year”, or to a 16-year old who “made $20k in a day”?
But wait – what is dropshipping then? The Oxford dictionary defines dropshipping as the activity consisting of “provid(ing) goods by direct delivery from the manufacturer to the retailer or customer”. In practice, this word is mostly used to describe situations in which an online seller creates its own platform (typically via providers such as Shopify), through which it will then sell products advertised on other platforms (typically websites such as AliExpress) – to its own customer base, and with a profit. The advantage for the seller here is that there are no manufacturers to be in touch with, and no stocks to manage (thus no costs or planning associated to such logistics): the products are ordered from AliExpress (or similar) upon creation of a customer order, and will be shipped directly to that customer. In short, dropshipping is advertised by its enthusiasts as the perfect business model – flexible and cost-efficient.
While this all seems exciting, we would suggest waiting a bit before quitting your job and jumping head first into the dropshipping adventure. First because many testimonies, albeit less visible than the YouTube tales of overnight success, show that not everyone can be the next Jeff Bezos. In fact, many experts call out the scam that dropshipping businesses turn out to be – for customers and business owners alike. Secondly because (you may have guessed it) the dropshipping model raises a lot of questions and risks related to intellectual property rights.
Some of these questions have actually reached our IP Experts directly during the past few months, via enquiries sent to our IP Helpline.
For this reason, we decided to shed a bit of light on dropshipping in this week’s blog post, knowing that it is not a risk-free practice as it involves the reselling of products whose quality, origin and lawfulness you do not necessarily know.
First of all, remember that various intellectual property rights (IPR) can protect various aspects of a single product. While copyright usually protects original creative works (e.g. a novel, a song, a film, software code), trade marks are protected signs (logos, names) used in trade to identify a product, industrial designs will protect a product’s outward appearance and shape (these are common in the worlds of fashion and furniture design), and patents will protect new, innovative products or processes that have a technical effect. While these IPR all protect the creations of the mind (the intangible invention or work of art) rather than individual objects, they will determine who has the right to market products encompassing them, and in which territories. For instance, the owner of a patent has a monopoly over the manufacturing and the sale of products that contain the patented technology, in the territories where the patent was obtained. This strong IP protection is tempered by exceptions, to ensure a balance between the rights of creators / inventors / IP owners and the necessities of free trade.
For this reason, many IP legislations worldwide adopt the so-called “exhaustion of rights” principle (called “first-sale doctrine” in the US). Accordingly, the IP rights vested in a tangible product cease to apply (they are said to be exhausted) upon the first sale of that product in a given market, i.e. starting from the moment when that object has legally been put on that market by the IP owner. Accordingly, the IP owner cannot oppose the further resale of such goods in that same market. You can find many examples of application of this theory. Take for instance a copyrighted novel. The copyright will belong to the author and/or his publishing house, which has the exclusive right to publish the novel, offer books for sale, distribute books to the public etc. Nobody else has the right to publish this work, distribute it (e.g. print copies and sell them), translate it or adapt it: all such acts would be considered as copyright infringement. However, the exhaustion principle allows the owner of a physical copy of the work lawfully purchased in the EU (e.g. a paperback book) to resell this particular copy to others in the EU without having to ask the right holders for permission or pay royalties.
In short: buying an object on a given market and then reselling it on the same market is generally allowed, provided that the IP rights on that individual object are exhausted. This is in principle the case if that product has been acquired lawfully on that same market. This is the very principle that allows flea markets or garage sales to exist. This is also the same principle that allows dropshipping… provided that you are reselling lawful goods. In other words, the basis to any dropshipping business is ensuring that the goods you would be selling:
- Have been put on the market purposefully by the relevant right holders (to be clear: this is not the case of goods that “fell off the truck” or goods that have been put on the market in the context of a closed distribution chain);
- Encompass IPR that are exhausted on the market where you intend to sell them. Here, it is important to highlight that the notion of exhaustion of rights is not harmonised worldwide. It is not defined the same way in all jurisdictions, and not applied by all courts homogeneously. Since this would be the core of your business model, it is essential to consult a business lawyer to check these points before getting started.
Starting a dropshipping business without checking the two points mentioned above may turn out to be extremely risky from a legal standpoint. Indeed, the practice of reselling original goods outside of the market where they were lawfully put, or outside of their closed distribution chain (think selling Louis Vuitton bags at your local supermarket), is referred to as parallel trade, also called “grey market” practices. Such practices can be sanctioned under IP and/or competition laws. For this reason, it is very important to consult a business lawyer to check those aspects before going further.
Now – all of the above was written assuming that the goods you would sell would be original goods. Things get more problematic if you fall into the trap of reselling infringing products (perhaps without knowing) via your online platform – for instance, products infringing trade mark or patent rights.
Indeed, if the uncertainty linked to IPR exhaustion is cleared and you decide to go forward, you should then be very diligent when selecting the items to sell on your own platform. Just because these items are available on renowned platforms such as AliExpress does not guarantee that they have a right to be sold there, or to be sold in the EU. Here, keep in mind that IP protection is territorial: a product may be legally sold in China (for instance, if no patent was filed there) but infringing IP rights in Europe (if one of its components is protected by patent in European countries). Therefore importing this product to Europe may expose to you patent infringement claims.
The product may also be infringing IP rights in both China and Europe: think for instance of counterfeit “Fenndi” or “Channel” handbags or any knock-off brand you may think about – most of the original brands are also registered trade marks in China – so producing copies and selling them in China is illegal in the first place. Importing them to Europe – equally so. You may argue that a “Channel” handbag is so obviously fake that you would not fall for it. But what about Star Wars or Spider-Man merchandise that looks just like the real thing, but was produced without Disney or Marvel licence? This is the issue that many dropshipping sellers face: thinking that they are selling goods free of risks because those goods are available online and look legitimate (think: a fun kids t-shirt with the Batman logo) – and later facing infringement claims (trade mark infringement claims from DC Comics for selling Batman-branded goods produced without authorisation).
Finally, note that copyright infringement claims may also be part of the dropshipping troubles “package”, if IPR are not understood and managed correctly from the start. With this, we mostly refer to the fact that many “dropshippers” (is this a word?) use third-party pictures on their web platforms, to advertise the products sold. Rather than taking pictures of the products by themselves (which may be hard when you have no stocks and thus, no products at hand), sellers tend to use the product pictures made available by the manufacturers, or by global platforms such as AliExpress. The result? You have guessed it – copyright infringement claims from the owners of the pictures.
As you can see, it is unfortunately very easy to unwillingly end up infringing third party intellectual property rights, when setting up an online dropshipping business. To sum up, while the purpose of this article is not to scare you away from the dropshipping dream (other websites already do so), we would recommend:
- Before going any further, contacting a business lawyer to perform an in-depth check about the exhaustion of the rights on the relevant markets, and on possible restrictions linked to distribution / competition law;
- Performing proper due diligence when selecting items to sell: are they infringing any industrial property rights?
- Refraining from using third party photos on your webplatform without authorisation.
Image by Eveline de Bruin via Pixabay