A recent decision of the Federal Court of Australia in the case of ACCC v Ozdirect Online Brands Pty Ltd1 illustrates how a seller of goods over the Internet using "drop shipping" may fall foul of the consumer protection provisions of the Trade Practices Act (TPA).2 In this case, the seller, Ozdirect, and its director were banned from engaging in certain online selling practices for 5 years.
What is drop shipping?
"Drop shipping" is the practice where a customer places an order with an online seller of goods and pays for the goods, following which the seller orders the goods from a third party supplier with instructions to the supplier to ship the goods directly to the seller's customer.
The practice of drop shipping is legal and there is nothing inherent in the practice itself that offends the consumer protection provisions of the TPA.
The facts in Ozdirect
Ozdirect offered a range of electronic products for sale on two websites. Prospective customers were required to create an account on the website before ordering products, then to make payment to Ozdirect by credit card or other electronic payment for any products ordered before the products would be dispatched.
Ozdirect used the drop shipping practice described above, but with an important proviso that was not known to its customers – namely, that the suppliers from whom Ozdirect ordered the products were under no obligation to ship the products to the customers if, at the time the order was placed, Ozdirect's credit limit with the relevant supplier had been exceeded by other orders placed previously. The situation developed where, on numerous occasions, Ozdirect exceeded its credit limit and as a result the suppliers did not ship products immediately (or within a reasonable time) to customers of Ozdirect who had paid for them in advance. Coupled with certain information Ozdirect was in the habit of giving to its customers (see below), this resulted in customers being misled and deceived.
Prior to the final hearing, the ACCC3 had received in the order of 600 complaints from customers who, having paid Ozdirect for products, had not received goods either at all or within a reasonable time after payment. The ACCC applied to the Federal Court for interlocutory and permanent injunctions against Ozdirect and its director to prevent them from using the drop shipping technique described above in the Ozdirect business or any similar business.
Ozdirect's contraventions of the TPA
The Court found that Ozdirect had contravened the TPA in numerous ways, including:
- Ozdirect submitted over 900 orders to three major suppliers while it was on credit hold; it submitted over 1700 orders to a fourth supplier while it was on credit hold, resulting in delays of up to five months in orders being filled. Ozdirect was aware of the need to keep its lines of credit current to ensure that the legitimate expectations of its customers could be met and products could be supplied within a reasonable time after payment. Ozdirect failed to do so and as a result, contravened section 58(b) of the TPA.
- The act of taking payment for goods when Ozdirect was on credit hold, or likely to go into that position, was misleading or deceptive as it created an untrue expectation in the customers that they would receive products a reasonable time after payment. This contravened section 52 of the TPA.
- Ozdirect falsely represented to certain customers that products were in stock and available for purchase when, in fact, Ozdirect had exceeded its credit limit with the relevant supplier and the products could not be supplied. This contravened section 52 of the TPA.
- In response to certain customers' complaints about its failure to deliver products in a timely manner, Ozdirect informed the customers that it had been experiencing an influx of orders causing a backlog in order processing, or that it was waiting for information from a supplier. This was false and misleading as the real reason for the delays was the credit hold on Ozdirect, and contravened section 52 of the TPA.
- Ozdirect had an internal policy in relation to refunds that a customer was not to be provided with a refund for a product until they had requested the refund for a second time and until the relevant supplier had given Ozdirect a refund for the product. Contrary to this policy, Ozdirect informed certain customers that refunds would be given as quickly as possible and that money would be paid back into their accounts. This contravened section 52 of the TPA.
- Ozdirect informed one customer, in writing, that Ozdirect's "refund time is within 30 days, which the ACCC allows all businesses". The ACCC had no such policy or practice. This representation contravened section 52 of the TPA.
Also, the Court found that the sole director, secretary and managing director of Ozdirect, the Second Respondent, must have been aware of Ozdirect's financial position at all times and set its policies and practices. The Court inferred that the director was aware of almost all of the contravening conduct of Ozdirect and was in some way directly or indirectly party to the contraventions.
Ozdirect's conduct demonstrated flagrant and extreme examples of bad online selling practice and it is not surprising that multiple contraventions of the TPA were found. It should also be noted that Ozdirect and its director did not appear, participate or give evidence in the final hearing of the case. However, the case demonstrates that the practice of drop shipping is on the ACCC's radar and serves as a reminder to online sellers of the potential pitfalls involved in drop shipping and, more generally, to ensure that promises to customers can be honoured.
1. Australian Competition and Consumer Commission v Ozdirect Online Brands Pty Ltd and Paul Albright  FCA 1604.
2. In the Ozdirect case, the provisions considered included section 52(1) which provides a "corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive" and section 58 which provides a "corporation shall not, in trade or commerce, accept payment or other consideration for goods...where, at the time of the acceptance...(b) there are reasonable grounds, of which the corporation is aware or ought reasonably to be aware, for believing that the corporation will not be able to supply the goods...within the period specified by the corporation or, if no period is specified, within a reasonable time".
3. Australian Competition and Consumer Commission, Australia's competition regulator.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.