Who is Responsible for Drop-Shipper Problems?

Dear Rich: I sell computer accessories online and use a drop-shipper to fulfill online orders for wireless routers. I ran into problem with one drop-shipper who sold some defective items and then wouldn't correct the problem. I got rid of him but now I have some angry customers who are leaving negative feedback and I don't have any way to fix the problem.  Your question reminded us of all the problems we used to have with wireless routers until we bought our Zyxel. It's so great when you actually forget you have an appliance ... y'know when it's just quietly working away TCB-style. I hope that's going to be the case with the new computer that's supposed to arrive today.
Right, you had a question. Drop-shipping is a process in which your business sells items you don’t keep in stock. Instead, you collect the money and forward the order to a distributor or manufacturer, who ships to the customer, often using your business's packaging. The drop-shipper bills you for the sale.
Who's responsible? Short answer dept. The short answer is that, according to the FTC,  you (the person taking the order) are responsible for fixing errors. So even though you may have a contract in which the drop-shipper promises to correct errors, ultimately, you, not the drop-shipper are responsible.  So, we're sorry to report that you're the one who will have to either refund the money or supply a working product.
The downside of drop-shipping. As you can guess, we're not wild about drop-shipping and here are some more reasons why:

• You may be required to pay expensive setup fees — always avoid any drop-shipper who requests this.
• You may have to make monthly minimum orders regardless of your sales — watch out for this requirement.
• You will have little control over an item's price The drop-shipper may suddenly mark up an item, cutting into your profits.
• Drop-shippers are often in long lines of distribution, so that if any step along the way has a problem — manufacturer, wholesaler, middleman — you will suffer.
• You will unlikely have any warning before the drop-shipper runs out of stock — again, more negative feedback.
• Drop-shipping sometimes triggers additional legal requirements.

Accused of Selling Knockoffs: What If I Do Nothing?

Dear Rich: I buy handbags from an importer and resell them online. I advertise them as knockoffs at various sites, including eBay. I never claim they're originals ... I always tell people they're copies. Recently, I got a letter from a lawyer saying I had to stop selling them or I would get sued.  Would I be better off running my business as a corporation so that I won't be personally liable? What will happen if I don't respond to the letter? Sorry, but the Dear Rich Staff has lost its ability to predict the future. (We think it happened when Google implemented Panda One and switched its search algorithm.) In any case, any of the following scenarios are possible after receiving a cease and desist letter:

• you keep selling the knockoffs, the lawyer files a lawsuit, gets a default judgment and enforces it against you personally (assuming you're not an LLC or incorporated) or against your business
• you stop selling the knockoffs, the lawyer drops the whole thing
• you stop selling, the lawyer sends a second letter, gets no response and files a lawsuit and gets a default judgment. 
• you blow off the letter, keep selling the knockoffs, and the lawyer is impressed with your moxie, and decides to hire you as an investigator of trademark counterfeiting. You do really well in that position, give up your handbag business and eventually write a book about the knockoff industry. 

Actually, the last choice --the Catch Me If You Can approach -- isn't very probable at all. If you continue to sell without either fighting the letter or otherwise responding, the lawyers will most likely pursue you because, as the young people say, that's how they roll.

Does forming an LCC or corporation shield you from these lawsuits? Converting your business to an LLC or corporation can establish limited liability and will shield you from personal liability in some instances -- the lawyers can only go after your business assets. But your liability is likely to be tied to your status at the time of the infringement. So if you're a sole proprietor when you got the letter, then you're probably going to be treated that way (personally liable) in court, as well, even if you later convert to an LLC or corporation. In addition, keep in mind that the LLC/corporate shield also won't protect you from the following:

• You personally guarantee a loan or lease.
• You owe federal or state taxes. 
• You act negligently (people are injured by your handbags).
• You fail to abide by corporate rules. 

That Said Dept. That said, perhaps you should reconsider your business model (as well as your business entity). First, you need to determine whether the lawyers are right -- that is, are your bags infringing? If yes, you should abandon the infringing items. If you're not infringing, you should consider whether you want to fight or move on. If you fight, you may be able to have some luck fighting takedown notices (we'll talk about them more this week) but keep in mind that if you're dragged into court, you'll be hit hard in your bankroll and the only guaranteed winners will be the lawyers.