Dilanchian Lawyers & Consultants
(02) 9269 0229
Purchase-order

Legal essentials for online retailers

Over many years our firm has assisted an increasing number of new online distributors, traders and retailers.

We’ve developed standardised procedures and documents to make legal services economical and efficient.

This article provides a framework for Australian-based entrepreneurs seeking to buy, sell and conduct commerce securely to build valuable online businesses.

Half the enquiries from prospective online retailers arise only after the retailer gets into a tangle over legal requirements, rights and responsibilities. The other half comes from ventures which recognise the value, savings and competitive advantage created by customised legal services.

Names, logos and other brand elements

Very often the first problem for online retailers is how to secure a good trade mark registration or overcome an IP Australia adverse examiner’s report against a do-it-yourself or self-filed application. So we'll begin examining online retailer needs by first considering name and brand issues.

The initial questions we ask the retailer reveal the trade mark problems and required next steps. This provides basic facts for our detective work.

This begins with a thorough professional search across many registers and sources of information to determine if our client's target trade mark is legally available for use. In dialogue with our client we also examine the retailer’s claim to ownership and intended use of the name, logo and other brand elements. Just because our retailer-to-be seeks to sell a branded product from abroad does not entitle it to claim the trade mark as its property in Australia, or to claim copyright to the product label or logo, or to register a related .com.au or other domain name.

For many new online retailers these name issues are the tip of a business and intellectual property law iceberg to avoid.

Less apparent to the new retailers are legal risks submerged in that iceberg. Prominent among them are risk arising if the retailer has no legal relationship terms and conditions in writing with suppliers on one side or customers on the other side. Treatment of this risk requires legal documentation. But for that there’s no simple one size fits all solution. Each case requires a custom made solution. Customisation is needed. Products differ, retailers differ, business models differ, just to mention a few of the variables a contract drafter must review.

Before further considering the need for contracts, as a next step we audit the retailer's legal positioning with respect to its documentation for branded products.

Branded Products Audit

In both trade mark and business contracting, the more the legal adviser understands the relevant product, the more customised and effective the legal advice can be. With this approach the longer term advantages and money saved is considerable.

Audits help build understanding. For intellectual property they involve seeking to determine who owns product trade marks and product copyrights (eg product photos, logos and other graphics). Patent and registered design considerations are less common.

For auditing purposes, whether it is a purchase order or a distribution agreement that is ultimately required, before contract drafting we conduct what we describe as a Branded Products Audit. This audit is especially needed if the Australia-based retailer is purchasing from an off-shore manufacturer or intermediary (eg wholesaler or reseller of liquidation stock) who claims the products are genuine, non-infringing, not counterfeit and can be distributed in Australia.

For the audit we have developed questionnaires and related templates to make the work more economical. For example we have a questionnaire retailers can send a prospective supplier to conduct a preliminary assessment of the supplier's claims.

The fact is that it is legally vital for Australian online retailers to ask their suppliers the right questions.

It is the responsibility of the parallel importer (ie the distributor or re-seller) to not only ask “are the goods genuine?” but to also enquire whether the owner of the registered trade mark in the applicable territory consented to the use or application of the brand to the goods or services. This is clear from recent case law regarding parallel importation in Australia, in particular Lonsdale Australia Limited v Paul’s Retail Pty Ltd [2012] FCA 584 (one of the many cases involving the Paul’s Warehouse discount retail business).

In the words of Justice Gordon in that case: “If you ask the wrong question, you get the wrong answer.” Her statement provides a pointer to distributors and parallel importers to audit supplier representations before importing for sale branded products. We provide clients with the training, templates and support to conduct these audits.

Purchase Order

Once rights auditing is completed we turn to the options for online retailers to document their critical legal relationships with suppliers on the one side and customers on the other.

For the supply side, purchase orders and distribution agreements are two options for documenting relationships, rights and responsibilities between retailers and suppliers.

To manage legal and practical risks it can be a good idea for online retailers to have their own in-house template purchase order and not to always go with the documentation (or lack of it) of suppliers.

Purchase orders are among the most fundamental types of contracts for retailers and others who buy products.

Inexperienced retailers often rely only on supplier invoices, expecting they are sufficient for documenting transactions. This is a big mistake.

Major transactions based on invoices alone create enormous risks and legal exposure, especially for the buyers in Australia.

An invoice can be fine for a one-off product purchase for a few goods or personal consumption. But it scales very poorly for domestic or international major transactions for ongoing product purchase, supply and resale.

An invoice documents only some aspects of a transaction. For example a supplier’s invoice usually contains little beyond:

  • identification of the seller and the buyer,
  • a date of invoice,
  • a product name and maybe a short product description,
  • number of units purchased, and
  • price information.

Sounds a lot? No, for proper legal risk minimisation in major transactions more details need to be covered to fill gaps left by invoices.

An invoice provides no express assurance to the buyer that the products are non-counterfeit. It does not document the chain of title or trading in the underlying intellectual property associated with the goods to be purchased. There's also no express consent or authorisation to evidence the claim that the products bear the product trade mark with the approval of the trade mark owner in Australia.

This leads us back to the justification for use of purchase orders.

The core nature and content of a purchase order agreement provides terms and conditions for purchase and sale of products. Purchase orders can deal with these intellectual property concerns as well as set out additional terms and conditions for retailers who buy from suppliers (eg head distributors, wholesalers or manufacturers). Purchase orders can be very lightly detailed or multi-page contracts. They can incorporate specifications for products so that they are fit for their intended purpose. They can minimise insurance premiums. They can allocate responsibility if goods arrive damaged or are lost in transport.

Distribution Agreement

distribution-agreementIn discussions about how a new retailer seeks to buy and sell products, it can transpire that what’s really needed is a distribution agreement. These contain clauses which do what a purchase order does as described above, and go onto do much more.
 
The nature and content of a distribution agreement suits a longer-term and integrated relationship between a distributor and its supplier. They are usually for ongoing transactions between the parties, not one-off or occasional transactions, as is usually the case for purchase orders, and certainly for simple purchase invoice transactions.

Moreover, under a distribution agreement the distributor and supplier often agree on exclusivity for the distributor regarding the products, future product models, sales channels, and territory. They can grant rights too for the distributor to appoint sub-distributors. The distribution agreement can itself can be treated as an asset, capable of being transferred to another distributor or for a buy-out by the supplier.

Product-specific distribution agreements also facilitate inclusion of extensive intellectual property definitions, grant of rights and warranties and indemnities.

Perhaps the most practical benefit of a distribution agreement is its documentation of which precise products are required and how they are to be ordered, priced, paid for, transported, marketed, supported, returned if not in order or otherwise compensation provided if things do not go to plan.

Website

Completion of the audit and documentation we’ve discussed puts our retailer client on track for a successful retail website launch.

Here too precaution is recommended and achieved by:

  • selecting domain names which do not infringe the trade marks of others;
  • registering in a number of domain spaces and filing a trade mark application for the site name if feasible;
  • having a website development agreement;
  • ensuring all content on the website is subject to a proper licence and keeping copies of those licences (eg stock library licences); and
  • using Adwords and keywords and other forms of search engine optimisation that do not infringe the rights of others.

Failure to properly attend to these task can expose the distributor to claims under many laws:

  • Competition and Consumer Act 2010 (Cth);
  • Trade Marks Act 1995 (Cth);
  • Copyright Act 1968 (Cth);
  • common law tort passing-off; and
  • domain name dispute in Australian Domain Administration proceedings.

The High Court of Australia recently considered the use of Adwords in Google Inc v Australian Competition and Consumer Commission v Google Inc (2013) 294 ALR 404. The case confirmed that it is the advertiser (in our case the distributor or online seller) who is liable, not Google as an intermediary, for conduct that misleads the public into thinking there is a connection between the advertiser and a competitor when there is in fact no such connection.

A similar case decision arose in the 2013 England and Wales High Court decision in Interflora Inc and Interflora British Unit v Marks and Spencer Plc and Flowers Direct Online Limited. The court decided retail giant Marks & Sencer had infringed the trade mark rights of Interflora by using the word “Interflora” as a keyword. The Court considered the Adword use to be interference of the advertising function of Interflora’s trade mark.

Terms of Service

With all ready to go for online sales, there’s this one final requirement for risk minimisation before our distributor client can commence trading safely.

Well drafted and customised terms of service (aka terms of trade or online terms and conditions) should be written to reflect the business process of the website. In this way legal issues and their treatment can be aligned with practical procedures for such matters as user registration, invoicing, customer service and refunds.

Conclusion

This post provides a general framework for services and documentation which our firm has developed from successful delivery of legal services for literally hundreds of clients. We have translated traditional ways of working to suit the online and new legal landscape of today's market for retailers, resellers and distributors.

For each client effective legal and commercial advice requires review of the client's specific circumstances. Call us to discuss your circumstances and our suggestions for what would work for your venture.


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