Legal “ambushes” when creating marketplaces
It is believed that online marketplaces are one of the most promising ecommerce industries for making money. Another plus of this business model is that a marketplace removes from the seller the issues with delivery, communication with the customer, and settlement of problems with orders. But at the same time, a marketplace can face a number of legal risks, which it is important for a startup to consider at the very beginning of its business. For example:
1) Liability for quality and safety of goods/services. If the goods or services sold through a marketplace do not meet quality standards or have caused harm to consumers, the platform can also be held liable. Specifically, claims can be brought against a marketplace if the platform failed to provide accurate or complete information or failed to properly vet suppliers.
For example, Wish, a marketplace specializing in low-cost goods from China, has been repeatedly criticized for selling low-quality goods that do not meet safety standards. In France, the government temporarily blocked access to Wish in 2021 for selling dangerous and counterfeit goods, including electronics, children's toys and clothing. Regulators noted that Wish did not conduct proper safety checks on goods before listing them on the platform, and this led to liability for consumer rights violations.
2) Privacy and data protection. Protection of personal data of users and sellers is a key aspect. For example, if a startup fails to ensure a proper level of personal data protection, it can lead to significant fines and jeopardize the further functioning of the platform.
One of the most high-profile data breach cases occurred in 2016. Uber experienced a data breach that affected about 57 million users and drivers. The company's management tried to cover up the incident by paying hackers $100,000 to delete the stolen data. However, information about the privacy breach eventually surfaced, leading to serious legal consequences for Uber. In 2018, the company agreed to pay $148 million to settle claims from U.S. states, making it one of the largest data breach fines at the time.
3) Intellectual Property Infringement. If sellers on the platform sell goods that infringe intellectual property rights (e.g., counterfeits), the marketplace can also be held liable for posting such content.
One such example is the case of Alibaba Group. In 2015, Kering Group, which owns brands such as Gucci, Balenciaga, and Yves Saint Laurent, filed a lawsuit against Alibaba. The company was accused of not only failing to prevent the sale of counterfeit goods on its platforms, but also allowing sellers to actively distribute goods that infringe intellectual property rights.
This case became an important precedent for many other marketplaces, which began to actively implement similar intellectual property protection mechanisms on their platforms to avoid similar lawsuits in the future.
4) Content uploaded by users. If users can upload content (e.g., reviews, images), then the marketplace should provide mechanisms to monitor and remove illegal or malicious content.
An example of a scandal involving user-generated content and lack of adequate moderation is the case of Facebook (now Meta) and its litigation over user-uploaded content. One of the most high-profile incidents involved allegations that the platform was used to incite violence in Myanmar.
In 2017, Myanmar experienced massive unrest, forcing thousands of members of the Rohingya Muslim minority to flee the country and leaving many of them victims of violence. One of the key factors that exacerbated the crisis was active hate propaganda on social media, especially Facebook. The platform was used to spread false news, calls for violence and extremist statements that escalated the conflict.
In 2018, Facebook officials recognized that the company had made serious mistakes in Myanmar by not doing enough to combat the spread of hateful messages.
After this case, Facebook implemented stricter content moderation rules, especially in regions prone to political and ethnic conflict. The company also began working with independent organizations to monitor hate speech on the platform.
5) License agreements. If a startup uses third-party content, software or technology, license agreements must be signed and their terms must be respected.
One of the high-profile disputes related to the use of APIs can be Oracle's lawsuit against Google. Oracle claimed that Google illegally used the Java API in its Android operating system and infringed copyrights by using the Java API without obtaining a license.
The case went through several stages of litigation, including the U.S. Supreme Court. In 2021, the Supreme Court sided with Google, ruling that the use of the Java API was “fair use.” However, this case was an important example of how the absence or improper enforcement of license agreements can lead to years of litigation.
6) Industry-specific licenses. Some jurisdictions and industries may require specific licensing (e.g., for the sale of medicines, alcohol, financial services). For example, in the energy sector.
For example, in 2021, Tesla applied for an energy sales license in Texas. The energy market in the US is highly regulated, and companies that want to sell electricity must obtain the appropriate license from local energy regulators.
Tesla received a license to provide energy sales services and was able to enter the market. But if the company had started selling energy without a license, its activities would have been deemed illegal, and this could have resulted in large fines and a ban on operations.
7) Terms of use. The startup needs to develop clear and transparent terms of use for the platform for users and sellers. They should cover all aspects, including dispute resolution, returns and refunds, and liability for violations.
It is important to include provisions that limit the platform's liability for the actions of users or sellers. For example, if a seller commits fraud or sells substandard goods, the platform can specify that it is not liable for losses incurred by buyers if the platform is not a party to the transaction. For example, Airbnb's Terms of Service lists relevant situations where it is not liable.
To minimize these risks, it is recommended that a startup investor consult with lawyers specializing in e-commerce and data protection issues, as well as develop all necessary legal documents (e.g. terms of use, privacy policy).
It should be noted that our company pays great attention to legal issues when investing in a startup. Therefore, by choosing Activat VC, founders get not only an investor, but also a partner interested in the startup's growth and ready to assist in building a legally correct business model.
