Supplier liability and product claims in dropshipping

The comforting version of dropshipping is that you are a marketing business and the supplier makes the product. The legal version is less comfortable: you sold it, and product liability generally reaches sellers as well as manufacturers.

Why being a reseller is not a defence

Product liability doctrines commonly extend along the chain of distribution — manufacturer, distributor, retailer — on the reasoning that each participant placed the product in the stream of commerce and is better placed than the consumer to seek recovery upstream. Some states limit a non-manufacturing seller's exposure where the manufacturer can be identified and sued.

That last point is the problem. The protection commonly depends on being able to identify and reach the manufacturer. In dropshipping, the manufacturer is often an anonymous listing on an overseas platform with no US presence, no registered agent and no assets a US judgment could touch. The seller who cannot name the manufacturer is the seller left holding the claim.

Which categories generate the claims

Exposure is not evenly distributed. In rough order of risk:

• Anything ingested or applied to skin. Supplements and cosmetics have their own regimes as well — see the supplements and beauty guides.
• Anything electrical, particularly with a battery. Lithium cells are the single most common source of serious dropshipping claims.
• Anything for children, which is also the most heavily regulated category and requires testing and certification.
• Anything load-bearing or safety-related — car parts, climbing equipment, ladders, child seats.
• Counterfeits, which bring intellectual property claims on top of everything else.

The margins in several of these categories are attractive for a reason. That reason is that the risk is being priced by people who understand it.

What actually reduces the exposure

1. 1Product liability insurance. Cheap relative to the exposure and the only thing that pays a claim. Check what your policy excludes — some carve out precisely the categories above.
2. 2An LLC. It keeps the claim away from your personal assets. It does not reduce or prevent the claim, and it does not help if you have been running the business out of your personal account.
3. 3Category selection. The most effective control, and the one nobody wants to hear.
4. 4Knowing your supplier. A named manufacturer with a real business, verifiable certifications and product documentation is a materially different position from an anonymous listing.
5. 5Honest listings. Overstated claims in your own copy create liability that has nothing to do with the product being defective.

The recall you cannot execute

If a product turns out to be dangerous, the seller may have reporting and recall obligations. A dropshipper typically has customer records but no control over the product, no relationship with the factory and no ability to stop distribution. Thinking about this before it happens — knowing who your customers are and being able to contact them — is the difference between a manageable event and an unmanageable one.