5 Risks You Face If You Have an Online Business

New business owners may not be aware of all of the risks involved when it comes to starting an online business and could end up with an unsuspecting lawsuit on their hands. To protect young entrepreneurs and prevent that scenario from happening, here are five risks you face when running an online business:

1. Copyright Infringement

Whenever you reproduce someone else’s work that is secured by copyright, you commit copyright infringement. With today’s internet tools, it is quite easy to download and copy pretty much any material you find online. However, if you reproduce another company’s text, images, code, music, videos, and any other content for personal gains, you can face legal persecution.

Copyright infringements are far more likely to occur online due to the immense amount of content that is both readily available and easily accessible. If starting an online business, you must advise your employees not to use content found online without having appropriate permissions, especially if it is from another company. The Digital Millennium Copyright Act (DMCA) of 1998 protects all electronic content available online, so make sure you thoroughly understand the guidelines outlined to avoid any penalties.

Example A notable instance that underscores the risks of copyright infringement involved The Content Factory, a digital marketing firm. This agency faced a legal challenge for using an unlicensed photograph depicting Omaha, Nebraska. Initially, the claimant demanded $8,000 in damages, but after negotiations, the settlement was reduced to $3,000. This case exemplifies the serious financial implications that even small-scale businesses can encounter due to unauthorized use of copyrighted material.

2. Trademark Infringement

Trademark infringement is very similar to copyright infringement. However, trademark infringement has more to do with brandings, such as using someone else’s logo, brand name, or domain name. Whenever you use a trademarked name or logo, it is not only confusing for your customers, but can also get you into a great deal of legal trouble.

When you decide to file for an official business name, you must ensure there are not any other businesses using that name. You can use an online business name directory to see whether or not someone else has it trademarked before completing the necessary paperwork. Even though you cannot legally duplicate someone else’s domain name, you must also be sure you do not choose a name that is too similar to one already trademarked to avoid confusion.

Example In a landmark trademark dispute, Wolfe’s Borough Coffee, a small New Hampshire-based roaster, found itself in a legal battle with Starbucks over its ‘Charbucks’ coffee blend. Despite the global coffee giant’s claim of trademark infringement, a federal appeals court ruled in favor of Wolfe’s Borough. The court concluded that the ‘Charbucks’ name was minimally similar to Starbucks, allowing the small roaster to continue selling its coffee products under the Charbucks brand. This case is a prime example of a David versus Goliath scenario in trademark law, demonstrating the intricate nature of such disputes and the potential for smaller businesses to successfully defend their branding choices.

3. Data Privacy and Security

When operating an online business, you are liable for all of the personal information shared through your business, which includes names, addresses, phone numbers, social security numbers, account numbers, etc. Online hackers are always looking to exploit companies with out of date software and safety measures, which is why you always want your online business at the forefront of data privacy and security.

Customers only want to do business with companies that have the proper security systems in place, so they know all of their personal information is protected. Likewise, they have the right to know how you are using their information, who you share it with, and why, how they can assess it if they need to change it. Most importantly, they must be made aware if their information is ever compromised. As a business owner, it is in the best interest of both you and your customers to have privacy policies in place if you handle personal information, as well as security systems to prevent potential security breaches.

Example In a notable incident highlighting the risks of data privacy and security in e-commerce, Mercari, a well-known online marketplace, suffered a substantial data breach. This breach, stemming from the Codecov supply-chain attack, led to the exposure of a vast array of customer records. The sensitive information leaked included bank codes, account numbers, names, birthdates, email addresses, and additional personal data. Moreover, the breach extended beyond customers to affect Mercari’s business partners and employees. The Mercari case underscores the critical importance of robust data security measures in online businesses, as such breaches can severely impact customer confidence and the overall reputation of a company.

4. Fraud

Another significant risk for online business owners is the threat of fraud or deception. It is a lot easier for someone to commit fraud online than in person because they have the benefit of anonymity behind a computer screen. It is hard to verify whether a credit card number or bank information actually belongs to the person providing the information when you cannot physically see them.

Fraud is especially common for e-commerce businesses due to the frequent exchange of commodity products, rather than personal services. You could easily send merchandise out to someone who gave you false information, costing your company both money and merchandise. To minimize the threat of fraud, you want to monitor all account transactions and bank account information closely, as well as keep all of your online platforms and transaction software up to date.

Example A compelling instance of chargeback fraud in the online retail space involved Organize.com, a retailer with an annual revenue of approximately $10 million. According to John Rampton, the company’s former owner, they encountered several cases of chargeback fraud. In these instances, customers would order products and, on the final day of the return period, file a fraudulent claim with their credit card company, asserting that they never received the items despite having shipping tracking as proof. These claims resulted in challenging disputes that not only demanded considerable effort to address but also adversely affected the company’s financial health. During these disputes, funds were often frozen, impacting Organize.com’s merchant account and overall cash flow.

5. Fair Trade Laws

Fair trade laws address market pricing, monopolization, price discrimination, and the right to boycott competitors or suppliers. These laws promote fair trade and competition while protecting consumers. Companies who violate these laws often engage in misleading or deceiving behavior, where they make outright egregious claims about their product or service.

If you are selling a product or service online, you are liable for the claims you make about that particular product or service. If you are intentionally misleading customers with false information, you can find yourself in a great deal of legal trouble. To protect yourself both legally and ethically, anyone who publishes content online for your business should provide proof for the claim or reference a credible source. Trust is everything between a business and a consumer. And if you do not produce trustworthy information, you are only hurting your business.

Example Highlighting the consequences of exaggerated product claims in online business, a notable incident in 2010 involved Dannon, a prominent yogurt manufacturer. The company faced a class action lawsuit due to allegations of making unsubstantiated health benefit claims in advertisements for its Activia and DanActive yogurt lines. These products were marketed with the assertion of having ‘clinically proven’ health advantages. The legal outcome was significant, with Dannon being ordered to pay around $45 million to the plaintiffs. Moreover, the court mandated a revision in Dannon’s advertising strategies. This case underscores the crucial need for businesses to comply with fair trade laws and avoid overstating product benefits to prevent serious legal and financial consequences.

Minimize Your Online Business’ Risks With Harris Insurance

When running an online business, there are a lot of legal and personal risks you must face every day. If you are not doing everything you can to keep your business protected and your personal information secure, you risk losing your entire business. To ensure your business is adequately protected, you want the guidance of risk management experts.

At Harris Insurance, we can help your business analyze, identify, and mitigate potential uncertainty and security risks your online business may face. Risk management is essential, and the consequences of not mitigating risk are dire. Fortunately for you, we are here to help to ensure you do not have to tackle the problem alone. If you would like to learn more about Harris Insurance and the services we provide, contact us today.