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Law360 (September 22, 2020, 5:01 PM EDT )
The COVID-19 pandemic has brought new compliance risks and considerations for companies and individuals. In this Expert Analysis series, state attorneys general share their enforcement priorities.
Dana Nessel
Overwhelmed by having too much money in your bank account? Tired of paying too little for the consumer goods you need or enjoy? Frustrated by the tedium of getting packages delivered to your home that contain exactly what you ordered and that arrive on the date you expected them?
Fear not! A fast-growing brand of online retailers called drop shippers are working to unburden you of such concerns. During the COVID-19 pandemic, many of us are shopping from home more than we had in the past. If you routinely make online purchases from stores with unfamiliar names, you may have already done business with a drop shipper without even realizing it.
What is drop shipping?
Drop shippers do not make consumer goods, nor do they have any inventories. Drop shippers sell products that never even pass through their hands, fulfilling online orders by placing a separate order through a different website. They are online middlemen profiting from the difference between what they charge for a product, and the amount they must pay to have someone else deliver it to the consumer.
Often, the goods are shipped from China or other overseas locations. In some instances, the products are of low quality, or simply never show up at the consumer's door.
For the drop shipper, the key element to the business is developing an enticing website or webpage. Since it is inherent in the drop-shipping model that the goods are available elsewhere at a more affordable price, the focus of these websites is on making a pitch or presentation that convinces the prospective buyer to stop looking and start buying.
It is here that the lines of law and good conscience are being crossed. Cloaked by the anonymity the internet affords, some drop shippers will say anything needed to clinch the sale — even if that means putting overtly false information on their websites. And, having already pocketed — and sometimes even having already spent — the consumer's money, some drop shippers fail to provide compensation when the goods do not live up to the advertisement or fail to be delivered.
As the coronavirus pandemic has increased both consumer reliance upon online purchasing and the potential pitfalls surrounding online shopping, drop shipping has emerged as an area deserving more attention from both regulators and consumers.
State attorneys general can bring consumer protection laws to bear on identifiable offenders. And, since problems are arising on an interstate and international level, there is a significant role that federal agencies could play in enforcement. In the meantime, however, consumers must learn how to protect themselves.
Enforcement Activity
Last year, the Michigan attorney general's office began to take a closer look at drop shipping. We were receiving numerous complaints, both directly from consumers to our consumer protection staff and from our colleagues at the Better Business Bureau, which led our corporate oversight division to learn more about this burgeoning area.
We observed that there were quite a few resources available online, through YouTube and otherwise, aimed at creating more drop shippers. Conversely, there was a relative dearth of information helping consumers understand, recognize and avoid this practice.
In December 2019, in coordination with our launching of an investigation into Blvck Pods LLC — an apparent drop shipper of earbuds in Grand Rapids, Michigan, that was the subject of numerous consumer complaints across the country and the world — and in partnership with the BBB, we released a consumer alert aimed at helping buyers learn how to protect themselves against companies like that which we were investigating.[1]
Some reflection on the facts leading up to the start of this investigation is instructive of the potential problems that can arise when the only prerequisite to establishing a business is designing an effective website.
The complaints to the BBB about Blvck Pods generally alleged that the products ordered from the company's website did not work properly, that the business did not fulfill its guarantees, that the products were not shipped promptly or were never shipped, that the business did not promptly refund customers, and the like.
As a result of its business practices, Blvck Pods began to receive negative media attention. A West Michigan television station interviewed a man who explained that his 16-year-old son and his son's friend were the true owners of Blvck Pods, and that the teenagers had enlisted a Chinese manufacturer to ship the products directly from China to consumers, which caused issues.
The station also interviewed the teenage son, who explained that Blvck Pods had recently sent the Chinese manufacturer $75,000 to cover about 5,000 orders, and subsequently sent another $110,000.[2]
Less than two months later, after problems persisted for consumers and the company's website went down, the same station published a second story regarding Blvck Pods.[3]
As reflected in the court filing giving rise to our investigation, before Blvck Pods disappeared from the web, the company's original site indicated that its products were "100% Custom and Unique" and that, "[b]ased on our own Pod Concept, our technologies are fully authentic."
The website also provided a Grand Rapids address for the business, thus creating an impression the products were being manufactured in the U.S. Nothing on the website alerted consumers that the goods were being shipped from China, much less that the site operators were fulfilling purchases by simply placing an order with a Chinese entity.
As our investigation into this company and its operators was unfolding, the pandemic reached Michigan. The insights that our team had gained about drop shipping quickly proved useful.
Over the past six months, our office has targeted three different drop shippers with enforcement actions based on solicitations related to face masks — one of the most popular forms of personal protection equipment featured in news stories from the inception of the COVID-19 crisis.
Early in the pandemic, when even hospitals were struggling to obtain N-95 face masks, a Michigan anesthesiologist received an email solicitation from a Wyoming-based company called Seek Everest LLC, offering such masks. A review of the company's solicitation and its website revealed assurances that the products were approved by the U.S. Food and Drug Administration.
Throughout the website, however, the masks were referred to as both N-95s and KN-95s. The latter designation indicates the product is of Chinese origin, a significant fact given that — at the time of the solicitation — the FDA had not approved any such masks for distribution in the U.S. due to counterfeiting concerns.
Seek Everest's website suggested that the entity was an international manufacturer that had turned its attention away from its usual production activities to help meet the need for masks during the pandemic.
In light of our concerns about the email solicitation and website, we reached out to our partners at the BBB to learn more about Seek Everest's history. The BBB shared 16 consumer complaints with us, including two from Michiganders.
The complaints primarily showed consumer frustration over ski pants that were shipped to them from China, and that were improperly sized or defective. Consumers were consistently unable to get refunds or replacements from Seek Everest.
We were able to identify the woman who runs Seek Everest's website. It later became clear to us that the representation of this business as a manufacturer was nothing more than a snow job. After we issued a notice of intended action under the Michigan Consumer Protection Act, the website disappeared from the internet.[4]
We also received a complaint from a paramedic within our state who had paid EM General LLC, a Michigan-based company, for N-95 face masks that were never delivered. An online search revealed news stories about EM General demonstrating that other consumers were experiencing similar problems. Such stories also explained that photos on the EM General website purporting to depict the company's executives were simply stock photos being used elsewhere on the internet.[5]
The BBB shared with us approximately 90 complaints against EM General from consumers throughout the country who had paid for face masks that were never delivered.
As reflected in the court filing commencing our investigation into EM General, the company was avoiding refunds by sending emails to consumers stating that delivery delays were caused by a nationwide lockdown affecting their supply from Turkey, but that the products were coming soon.[6]
Soon after our office commenced its investigation, the U.S. Department of Justice announced it was bringing charges against the operators of this business.[7]
Finally, we received a consumer complaint alleging that a Michigan-based company called Direct Home Supplies was gouging on face masks.
Unlike other drop shippers we had looked into, Direct Home Supplies was selling a broad range of consumer goods, rather than designing its website to specialize in a particular item. Moreover, in addition to having its own website offering goods for sale, Direct Home Supplies is a third-party seller on Amazon.com Inc.'s and Walmart Inc.'s marketplaces.
Although it did not actually sell any face masks at the elevated prices, we found that Direct Home Supplies had a number of unresolved BBB complaints related to its sales of other products. It also was falsely advertising that it was selling goods at a discount — a claim inherently contrary to the drop shipping business model.
Ultimately, we entered into a settlement with Direct Home Supplies, under which Direct Home Supplies agreed to correct its marketing. The settlement also made more than $17,000 available for refunds to consumers.[8]
Legal and Practical Protections
State attorneys general can improve the online marketplace by applying consumer protection laws that prohibit deceptive business practices against drop shippers who engage in misconduct. Since online vendors know no geographical boundaries, and large sums of money can quickly become involved, federal authorities must also address what is happening with drop shipping.
But, because of the online marketplace is so vast, a consumer's best protection against unfair trade practices comes from being an informed buyer. Consumers must research products and compare prices among multiple sellers.
An online image search of a product image from an unfamiliar website will allow a consumer to make those price comparisons.[9] Image searches of other photos on the website will help a consumer determine if the website is using stock photos to mask that a seller is not what it pretends to be.
And, when considering doing business with an unfamiliar website, a consumer should read online reviews, such as those assembled by the BBB, which can be extremely valuable.
The pandemic has created a situation where more people are buying online. The hit the economy has taken also means that more people will turn to drop shipping as a means of creating or supplementing income. Buyers need to remember that not every online seller is telling the truth. And sellers who choose to lie should be ready to face the consequences.
Dana Nessel is the attorney general of Michigan.
The opinions expressed are those of the author and do not necessarily reflect the views of Portfolio Media Inc. or any of its respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] Press Release, Michigan Department of Attorney General, AG Nessel Investigating Kent County Online Drop Shippers Selling Wireless Earphones, available at: https://www.michigan.gov/ag/0,4534,7-359-92297_47203-514545--,00.html (Dec. 12, 2019).
[2] Cunningham, Darren, GR earbuds business facing global complaints for failing to deliver, Fox 17 West Michigan, available at: https://www.fox17online.com/2019/05/31/gr-earbuds-business-facing-global-complaints-for-failing-to-deliver/ (May 31, 2019).
[3] Cunningham, Darren, Complaints persist for Grand Rapids online earbuds business, Fox 17 West Michigan, available at: https://www.fox17online.com/2019/07/10/complaints-persist-for-grand-rapids-online-earbuds-business/ (July 10, 2019).
[4] Press Release, Michigan Department of Attorney General, Drop-shipping Business Misleads Michigan Consumers About Face Masks During COVID-19 Crisis, available at: https://www.michigan.gov/ag/0,4534,7-359-92297_47203-525796--,00.html (April 17, 2020).
[5] Sofastaii, Mallory, Woman says she was conned after trying to buy face masks online, WMAR-2 News Baltimore, available at: https://www.wmar2news.com/matterformallory/woman-says-she-was-conned-after-trying-to-buy-face-masks-online (March 17, 2020).
[6] Press Release, Michigan Department of Attorney General, AG's Office Investigating Muskegon Business Ripping Off Face Mask Customers During COVID-19 Pandemic, available at: https://www.michigan.gov/ag/0,4534,7-359-92297_47203-526124--,00.html (April 16, 2020).
[7] Press Release, Department of Justice, U.S. Attorney's Office, Northern District of California, Michigan Man Charged With COVID-19 Related Wire Fraud Scheme, available at: https://www.justice.gov/usao-ndca/pr/michigan-man-charged-covid-19-related-wire-fraud-scheme (April 28, 2020).
[8] Press Release, Michigan Department of Attorney General, AG's Office Signs Agreement with Online Company Resolving Alleged Violations of Consumer Protection Laws, available at: https://www.michigan.gov/ag/0,4534,7-359-92297_47203-534308--,00.html (July 16, 2020).
[9] Michigan Attorney General, Reverse Online Image Search, YouTube, Nov. 22, 2019, available at: https://www.youtube.com/watch?v=VBHtZ3W7fmo&feature=youtu.be.
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