On this episode of the Ultimate Legal Breakdown, Nasir and Matt go in depth with the subscription box business. They discuss where subscription box companies have gone wrong(4:30), the importance of a specifically tailored terms and conditions(6:30), how to structure return policies (11:45), product liability concerns (14:45),the offensive and defensive side of intellectual property (19:00), forming partnerships (23:30), when to form multiple entities (31:45), and rules and logistics for shipping (34:00).
Full Podcast Transcript
NASIR: Welcome to Legally Sound Smart Business!
My name is Nasir Pasha.
MATT: And I’m Matt Staub, and we’re two business attorneys with Pasha Law.
NASIR: Yeah, welcome to the podcast today. We are doing our ultimate legal breakdown of the subscription box business.
MATT: Yeah, looking forward to this one. it’s a pretty fun topic because subscription boxes can offer many different things. I’m sure that most listeners have probably either ordered their own subscription box or maybe have their own business.
NASIR: You’re saying most people either have their subscription box business? Most people have subscribed to one, at least. I mean, some people are addicted to it.
MATT: Well, it’s nice.
NASIR: And they can be addicting.
MATT: And we’ll get into why that’s the case.
Just for those of your that aren’t aware, subscription boxes, it’s a pretty simple concept – at least the service aspect of it. Basically, you pay an amount and it’s typically every month but every month you get a delivery to your doorstep and it contains a boxful of items. It can be anything. I mean, I think the ones that people might be most familiar with might be a Blue Apron food service or Nature Box, Dollar Shave Club.
NASIR: Dollar Shave. Loot Crate seems popular, too.
MATT: The general concept is you pay this monthly amount and, every month, you get a box of different items and most of them are themed to, like I said, some sort of concept behind it – whether it be food, whether it be some sort of artistic thing. At this point, it’s a pretty booming industry. It can be anything few and far between – and I believe, when we checked here – 5-billion-dollar industry, 2,000 different services, according to My Subscription Addiction which is my go-to for subscription box statistics.
NASIR: And it’s growing!
I mean, 3,000 percent as far as online visits for subscription companies people are interested in the last three years, people are interested in this stuff and it seems like there’s basically two types of these businesses – the ones that curate products that they basically pick a theme – like, you said, the Blue Apron where they just kind of put together food that might be good for this particular recipe; some of them actually create their own product and it may be a different product every month. Somehow, they are actually the creators of it. So, it’s two types of categories there.
MATT: Right, and we’re going to get into this later but, obviously, if you have the ladder there – the one where you’re creating your own product that you’re delivering out, you might have a little bit less to worry about from a legal stand. Well, I guess I shouldn’t say that.
NASIR: Less than more.
NASIR: It’s a different type of liability.
MATT: Let’s get into some of these big issues here for these businesses. I think it all kind of starts where a lot of businesses do – with the underlying contract. In this case, the terms and conditions for these services. You know, I’ve ordered my own subscription boxes. I’ve kind of looked around it. Some others, just to see what’s out there. Surprisingly, a pretty wide array of terms and conditions, terms of service, whatever you want to call it that are out there. Some of them are very well-detailed, some of them are…
MATT: Yeah, I was going to put it nicer than that but, yeah.
NASIR: No, they are horrible. We have a few subscription box clients. In fact, it was probably our first one where we actually did a survey of all the other subscription box services in their terms and conditions. We found that most of them just copied and pasted from each other. Unfortunately, the one that kept being duplicated is one of the worst examples. Granted, it was also the easiest one, too. That’s probably why it got copied and pasted and obviously not written by a lawyer, unfortunately.
MATT: Yeah, I guess that’s the first thing to keep in mind here. Even if your subscription business is similar to one you’re looking at, this is not a copy and paste situation because, you know, it is going to be specific things pertaining to your specific subscription. And so, we’ll get into some of the key pieces here. You know, let’s talk about a quick example. I know this is one that you’ve subscribed to – the Julep makeup-related subscription box.
NASIR: I don’t know. I signed up for the free offer and I thought it was just something small and then I just got caught up into a long-term subscription. I look at my credit card and they’ve charged me 18 times in the last year and a half.
MATT: They call it negative option marketing or negative option subscriptions. I call it automatic renewals. I guess it’s however you want to approach it. Basically, what you just said is people can sign up for this free trial period but what they didn’t realize is they have to physically opt out of these ongoing services. Like you just said – and I don’t know whether you actually did it or not – people just weren’t aware of it and they look at their credit card. The people that do look at their credit card bill and found out, “Oh, I’m actually getting charged for this, I thought it was a free trial. What’s going on here?” This is a big component to any sort of reoccurring business, reoccurring payment model which all of these subscription-based businesses are for the most part.
NASIR: Yeah, and this is kind of an old scam, if you will, but it’s become more popular because of these subscription box businesses. It’s kind of come into play again because, in the past, again, like I said, I remember when you tried to get your free credit report, for example – that’s a classic one.
Somehow, to get your credit report, you put in your credit card information. And then, in the very, very fine print, they would charge you a monthly fee and you wouldn’t notice until later. It was nominal. It could have been, like $10.00 a month. But, of course, you do that across many different people, it adds up.
And so, in this case, with Julep Beauty, they ended up having to pay 3 million. I believe it was some kind of settlement. Yeah, they will pay 3 million to the attorney general of Washington because the attorney general of Washington – that’s where the company was based – basically sued them for deceptive negative option marketing tactics.
Let’s talk about the law here. You have the FTC from a federal basis and then you have all fifty states addresses in some way how consumer interact with these auto-renewal policies to a certain extent. California is probably the best one to look at it from mostly subscription boxes, these businesses, you don’t just offer services or products in one state. You’re usually countrywide. California has a statute which basically says that, if you have a signup and there’s an auto-renewal and you’re charging the credit card every month, then it has to be clear and conspicuous. And then, even credit card companies now have different policies and so forth that you have to disclose this to your customers.
The era of negative option marketing is pretty much dead. So, if you have a business model that is depending upon people forgetting to terminate your service, it’s probably not the best idea.
MATT: Yeah, and particularly with these actual physical boxes. You mentioned free credit report. It’s very easy if you signed up to forget about it. It’s not like they’re sending you your credit report in the mail every month. With this, you would at least become more aware of a package that’s being sent to you every month and be like, “Oh, I actually do need to cancel that,” which kind of brings us to our next point here.
You know, you said “clear and conspicuous” – the cancelation policy is going to play into this as well and it has to be very clear and conspicuous on how people can cancel this ongoing reoccurring billing because there’s been a huge wave – I think there’s actually been multiple waves of class action lawsuits because, you know, the item we just discussed and then the issue of the cancellation policy not being clear, being hard to cancel as well. It’s really twofold in that sense.
NASIR: Even companies that are so-called legitimate – you know, I would consider legitimate, not that this other Julep company is not legitimate; I’m just saying the ones that are trying to actually provide a good service fall into this trap, too. I believe Spotify was part of a class action that related to this and I’m not sure necessarily they ended up violating the law in that respect but it’s something very easy to fall into. And so, mostly, subscription box businesses do have auto-renewals. It’s part of the business model when someone signs up and they get charged every month. And so, making sure that the signup process is clear, your terms and conditions are clear, the termination, the cancellation process is very clear and compliant with the law is a little bit of a moving target because we’ve already seen just late last year of new laws being passed in this regard.
MATT: Just to mention, a couple of the companies involved here, you know, this is just a handful – Blue Apron which we’ve already talked about; Sirius XM Radio; Birchbox – another one of the big ones; Lifelock.
NASIR: That’s a big one.
MATT: AAA; Blizzard Entertainment which I guess is World of Warcraft. Yeah, I mean, it’s not like it’s a bunch of small operations that just don’t know the law or are trying to scam people. I mean, these are, I assume, companies like Blue Apron and the like aren’t trying to scam customers and getting them to try to lock in. They’re just trying to feed people.
What else in the terms and conditions do you want to make sure you have covered?
MATT: It kind of leads into some other things too but I think the way that you present the terms and conditions is also important. We didn’t really go into detail on that but most people or most of these businesses are going to be set up, obviously, online and people are going to go to their website and maybe they have multiple options or maybe they just have one, they’re going to select whichever option they want. And then, at some point, they’re going to have to come across the terms and conditions. So, it’s a matter of where those terms and conditions are at, how the customer is signifying acceptance and agreeing to these terms and conditions, and then it does get even a little bit thicker, particularly in California, just with where some of these notices we’ve been talking about, where they’re even located or how close they are to the spot where the customer would show acceptance to the terms and conditions.
NASIR: It’s not as simple as just putting up a form and checkbox anymore. Even proof that they even signed it or agreed. That might be your process of signups but, if you get into a legal dispute, how are you going to prove that they agreed to that? In other words, what evidence are you going to be able to show? That has to do with the technological solution by actually recording that information, when they signed up, what version of the terms and conditions to sign up. It’s a good point. It’s a lot more complicated than it used to be, I think.
MATT: Definitely. You know, we’re just talking about the actual logistics of the terms and conditions itself. Going back to the substance of it, you know, one thing that you’re going to encounter if you’re one of these businesses is a return policy.
NASIR: And having one and maybe your return policy is you don’t allow any returns and that may be fine. But it’s what we’ve talked about in the past with any kind of contracts, right? it’s about creating expectations between the parties and dealing with issues that may or may not come up. Return policy is pretty standard and there’s a bunch of other issues.
One of the other ones that come to mind is limitation of liability because, when you are shipping products to them, whether the products get lost, who pays for that, whether the products themselves somehow injure the party and limiting yourself in that respect can relate to terms that you put into your terms and conditions.
MATT: Kind of blending those last two points together, if you do allows returns for refunds for damaged goods, et cetera, and the shipping aspect of it, what about the situation? How is the customer going to send those items back to you? Is that already paid? What’s the logistics of that? Where does risk of loss shift to? Like I said – no pun intended here – it can really open up a box of issues. That’s not even a saying. I don’t why I even said that.
There’s just a lot of considerations and I think the way to go is to sit down and kind of map out every stage of your operations and kind of legal spot the different issues that can pop up and then, in your terms and conditions, have a section for each one of those different points of operation, addressing what the rules are.
NASIR: What can go wrong?
MATT: Yeah. You need to plan for the worst and you need to outline that.
You might have mentioned this but, really, there’s the terms and conditions that are written down – I’m talking about for like a return policy, for example. And then, there’s customer service. Even when you’re in the right and you’ve covered yourself as a business, there’s still customer service because, as people can see, one bad review can result in a lot of bad publicity and people start questioning things. Maybe you get cancellations. If it’s something that’s avoidable, you might want to consider that, too – even if you’ve drafted a terms and conditions that protects you.
NASIR: Reality is a good attorney will take your terms and conditions and hand-in-hand relate it to your customer service. In other words, there shouldn’t be such a detachment between your philosophy and how you treat your customers and your terms and conditions. It can have some nice overlay and not go crazy with some of the terms that maybe you would otherwise see in some other agreements.
MATT: Exactly. Well, I think we’re still going to talk about terms and conditions – at least kind of what’s in those – but we’re going to talk some broader areas here.
NASIR: Yeah, we talked about limitation of liability in your terms and conditions. That’s kind of an interesting topic because and I’m talking about both the businesses that create their own products or even curate products has issues if the product itself may somehow injure the consumer and injury can come in different ways. If it’s something perishable or consumable and somehow it causes food poisoning or what-have-you or if you just have a product that is defective and somehow injures somebody – whether it’s an exploding battery or just something that is inherently dangerous or if it’s a toy that is for babies but is not appropriate because of lead paint or something to that effect.
Generally, the law is such that both the manufacturer – in that case, it could be the ones that are actually making the products – but even the distributers and resellers and sellers of products could also be strictly liable for any kind of defects in these products.
Just think about that for a moment. You had nothing to do with making this product. But if there’s a defect in that product and it’s in your box and it injures somebody, you could be liable. I say “could be” because there are limitations to it.
For example, LootCrate.com which curate goods. They just throw a bunch of stuff in there. I have no idea what’s in there. I’ve never been a patron. But not too recently or not too long ago, they had a recall of a product – Marvel Thanos Infinity Gauntlet oven mitts – which sounds awesome, by the way.
MATT: It looks pretty cool.
NASIR: Is there a picture? I just have a bunch of… you know how, often, when they do these recalls, it’s just like very plain.
MATT: It’s a cool design.
NASIR: I’ll have to find it. Oh, here, I see it. Okay. It looks like a comic-based – I don’t even know how to explain it.
MATT: It looks like a robot hand or something. You’re the person for this stuff. I don’t know.
NASIR: I don’t know about this one.
Anyway, they issued a recall and, apparently, the thermal protection – because, obviously, it’s an oven mitt – apparently, it’s thermal protection didn’t actually fulfil its purpose so it did a recall. Oftentimes, recalls can be issued by federal agencies but a lot of companies do it voluntarily. I very much doubt that Loot Crate themselves manufactured this product but perhaps they had something to do with it or maybe the manufacturer asked them to do so. You have to be cognizant about that.
Recalls are expensive, by the way. There’s someone that has to pay for that. And so, oftentimes, you can get the right insurance that may actually cover these recalls.
MATT: Or if it’s set up correctly, they would have been protected. They’re kind of the middleman in this situation. They could have protected themselves with an agreement from the vendor that they got t from.
NASIR: We’ll talk about that later with relationships with your sellers.
Even in some states like Texas actually, in certain cases, you actually may have to be indemnified by the manufacturers, especially if it’s a foreign defendant – I’m sorry, if it’s not a foreign defendant, you actually can be indemnified by the manufacturer. For example, in Texas, if it’s a foreign defendant – like, you know, you have some product that you imported from Europe and it causes some kind of damage, Texas law will actually allow the plaintiff – the consumer – to sue the reseller instead of the manufacturer for what the manufacturer may have caused. There’s different reasons for that and I don’t know if we need to discuss that in detail – the policy decisions behind that – but the idea is that don’t think that just because you didn’t create the product that you’re not liable for it.
MATT: It’s a good point. You can buy all these products from different vendors throw them in a box, and be protected. You have this shield around you of nonliability. But the specific glove I think this is a good lead into the next thing for these companies – the subscription box businesses – to think about. It’s intellectual property. In this case, this is a Marvel Thanos Infinity Gauntlet oven mitt. Obviously, Marvel is the one who made this. I’m assuming; I guess I shouldn’t say “obviously.”
NASIR: Well, they at least put their name on it.
NASIR: Actually, it says it’s manufactured in China. I guess that doesn’t give us much more information.
MATT: So, Loot Crate – the one who took the item, put it in the box and mailed it to the consumer – they don’t own that intellectual property. What I’ll assume – again, I’m making a lot of assumptions – what I’ll assume is they had the right to basically take this items and other items and there’s no sort of infringement issues in doing this resale or basically advertising or displaying the photo even on their website.
NASIR: Yeah, because that’s the main issue. This is a very generalized statement but anything you buy, you can resell. If you want to open up your – at a lawn sale, what am I thinking of?
MATT: Lemonade stand.
NASIR: Not a lemonade stand.
MATT: Concessions stand?
NASIR: No, like garage sale. Like, if you want to resell your stuff – besides, maybe needing a seller’s permit or something like that – you don’t need the permission of the manufacturer to resell that item – even if it’s for a profit. But the problem is, when you start advertising the products that you’re curated, then, all of a sudden, you’re getting into trademark infringement. If you look at Loot Crate and their past crates, they advertise like crazy. They talk about, “We have Hulk memorabilia in here and we have The Fifth Element.” I’m just looking at it now. “Warcraft, Dragon Ball Z.” You know, they can’t do that without getting kind of permission for these licensed items. Even they themselves I think are unique items. They made a deal with these resellers in order for them to allow us of this trademark. And so, even though you may be curating and you may be able to sell this stuff, you’ve got to be very careful with how you present it and I think that’s why a lot of these crates do these kinds of secret boxes. You don’t actually know what’s in it until you actually receive it, right?
MATT: Yeah, some of them definitely do. Loot Crate, I’m not sure. I haven’t bought one either. I’m trying to see right now.
NASIR: I think you don’t know what’s coming until you get it.
MATT: Yeah, I think you’re right because I’m looking at it. I clicked on one of the ones that says, “Here’s previous items.” I would assume that’s probably the case then – it’s kind of as a secrecy. That’s one issue to think about in terms of going on and advertising anything.
This is an interesting situation. What about the idea of you’re doing the curation and you buy a bunch of products and it has a certain label on it or something that you’re not sure whether you can resell or not – you just mentioned you can resell most things – but what if that’s the case? Obviously, you can’t just put that in a box and turn it around and sell it.
NASIR: I know that’s a softball question because we’ve gone through that with a client before.
Yeah, it’s basically white labeling. You have a product and you want to put your own branding on it and so forth. That could be a huge problem if you don’t get the right permissions, right? Thinking very simply, if you buy s a Snickers bar and then, all of a sudden, put your own branding on top of it and sell it as your own candy bar, Snickers isn’t going to like that too much. That would definitely be a problem.
MATT: I would not suggest that route, if you’re looking to start a subscription box business, I would avoid that plan.
NASIR: Yeah, choose Milky Way. It’s much better.
MATT: One other IP item I want to talk about is when can all these companies expect the patent lawsuit to come down on them for some guy that claimed he has a patent for subscription box businesses from forty years ago.
NASIR: You’re right. Other than those two issues, obviously, the regular trademarking of your business name perhaps and logos and so forth as typical with any business you may want to consider. But those are pretty much the main intellectual property issues in the subscription box business.
MATT: Sure. There’s even descriptions now for – I forget the class number but whatever class it is, there’s descriptions for basically subscription-based services offering blank – whatever they’re selling. And so, you know the industry has really made it is when it starts having these specific descriptions for the trademarks.
NASIR: We talked about working with other manufacturers. And so, dealing with other vendors and partnerships – whether it’s within your own company or other vendors outside – is a pretty important part of any business but especially in the subscription box business. A lot of times, they end up being startups so you often have the common partnership issues that you would have in any kind of startup. I’ll let you take that section but I do want to just touch on the suppliers and manufacturers that, just like I’m sure Loot Crate may have done and other subscription boxes, getting a contract with these resellers or I should say these manufacturers or wholesalers even – is actually pretty important when it comes to warranties. For example, any time you buy a product, there’s usually a manufacturer’s warranty. But that manufacturer warranty may not be extended to the consumer if the reseller is not an authorized reseller. A lot of times these warranties are only if you buy from authorized dealers or from the manufacturer themselves.
And so, making sure that those warranties continue its path needs to be authorized, that means you may need to make a deal with the manufacturer. Or you may have to have your own warranty if that’s important to you.
Second, we talked about the trademark aspect then also indemnification, for example, we just talked about the products liability creating a deal where, if you buy a product and you tell them, “Look, you’re going to indemnify me if your product kills somebody, right?” and putting that into your agreement is important. A lot of these companies, that’s semi-standard language when it comes to most items.
MATT: Another thing too that might go overlooked kind of along those lines is – and maybe this is a reason some of these companies do have these unknown or secret box contents – if you don’t have a strong relationship with these vendors and suppliers, et cetera, you know, you need to have that because you don’t want a situation where you’re not getting the things that you need on time to assemble the box and ship it out to the consumers because the customers pay, as we’ve documented, they pay probably the same time every single month and they’re expecting delivery that same time. If things are late getting to you, it’s obviously going to be late getting to the end customer. So, that’s why I said it goes overlooked because it’s something that you might not necessarily think about but it’s very important because these suppliers are going to have more leverage than you may think. I don’t know if leverage is the right word but it’s important to have that and make sure they’re on time as well.
NASIR: It’s a huge point. We’ve had experiences where clients have had troubles with their suppliers and it creates a PR problem. It creates potential liability issues and people are wanting to get refunds if they don’t get it on time and having those deadlines.
MATT: I think the key with that is, as long as you’re not selling something that’s perishable, you just need to be operating a month or two ahead of the game just so because those things are going to happen. I mean, there’s going to be problems in the supply. So, obviously, if you’re more like a Blue Apron, I guess you have to have fall back ways to get the different ingredients you need and that’s a much quicker turnaround time from when you ship it out. But for other businesses, it’s just built into that lag time because you’re most likely going to need it at some point.
NASIR: Especially when you get successful quick. I mean, that’s really when the issue comes up.
MATT: Yeah, because the fulfilment is going to take over. Yeah, if you really start spiking it, let’s say you go on Shark Tank, your website is probably going to crash that night and you’re going to have a ton of orders to fulfil. Then, you’ve got a problem if you haven’t really planned this out in advance.
NASIR: There is a tendency that these subscription box businesses have this kind of startup tech feel. I mean, even though it’s not classically a tech company, I don’t want to say brick-and-mortar to it but there is some actual things, goods being sold. But I tell you, whether it’s a subscription box business or another business, when it comes to infighting between partners, it’ll kill a business every time, especially if it’s in early stages. Besh Box company is a good example, right?
MATT: Right. Just before we get in that real quick, you’re exactly right. It has seemed to take on this startup mentality because we’ve seen it firsthand. We’ve had a lot of different companies reach out to us with these different ideas so you can tel. if you think about it, it kind of makes sense.
NASIR: Good and bad ideas.
MATT: I mean, we won’t mention any specifics, obviously, but some of them are not great ideas.
Yeah. So, Besh Box, this is a little bit confusing because there’s a bunch of different entities in play here.
NASIR: Which we should talk about, too.
MATT: Yeah, we’ll get to that as well but there’s Chef John Besh is kind of the key piece to all this. He has his restaurant groups but he also started this subscription component of it where basically I think it was once a month for $55.00 – not necessarily cheap. You would get his artistic chef creation of food and based on his knowledge of the culinary arts. And so, it was his company or his restaurant group with this other entity that was just the subscription component with it and they kind of worked in a partnership with this other company which essentially was the operating component of all this. Basically, I kind of look at it as sort of the fulfilment aspect but it was more than that, too. I think they took sales and, really, everything other than the idea – really, just the idea behind the chef and his ingredients and things like that.
NASIR: Everyone pretty much knows the story because they’ve heard it a hundred times. There were internal disagreements between two of the partners. I think each put in roughly $150,000 each or so – which is a modest investment. I’m sorry $250,000 each. I think the total capital was $500,000. Because they couldn’t really resolve anything, it basically killed the business. They had to separate.
MATT: One of the things that the operating component was being accused of was supposedly they were supposed to contribute half a million and didn’t do that which I guess would make sense seeing how the whole concept is this chef is going to bring his culinary magic to the table. That was a no pun intended again. But, yeah, like you were saying, you have these two different groups coming together hopefully to make this nice hybrid subscription box and there’s problems that come with it. I don’t really blame them either. The chef’s work is really what’s presented and it’s their name right there. If they thought something, there was an issue or something was kind of going wrong here, I don’t blame them for kind of backing out of this if that was what happened. I mean, they’re also saying – let’s see – there’s a couple of hundred thousand in refunds that need to be sent to and I think they even said they were going to try to fulfil basically give those customers the money they thought they deserved or deliver the boxes – whichever – even if they don’t have the obligation to do so which was the case here because one was supposed to contribute the money and the entity who was supposed to contribute the money supposedly didn’t – the operating component, sorry.
NASIR: That was three or four years ago. Who knows if they relaunched in another way? But it goes to show. We’ve done many other episodes, articles on partnership agreements, company agreements. Maybe we can link a couple in the show notes here but, most of the time, the main issue when it comes to that is getting really early and sitting down with your partners and specifying the terms between you guys. Usually, when there’s a problem, it’s because of something that you didn’t originally anticipate, didn’t originally discuss, and then something comes up – like, you need more capital. “Where are we going to get it? How are we going to split it?” and so forth. That’s an important issue.
MATT: Yeah, particularly in this example but the subscription box business in general does kind of lead things open to have these various entities each play a piece which seems to be the case here. If I had to guess, we had the operating component which is the one the chef was battling with. We had the chef’s restaurant group which has probably been around for a while. And then, they kind of spun off another entity just to be solely the chef’s subscription box component of his work.
I like the idea of having one entity – if you can swing it – have one entity be the operating component. Maybe the other one being involved with maybe the inventory or what-have-you. You can really set it up a bunch of different ways but I do like that concept and this model does kind of allow for businesses to set up different entities.
NASIR: Yeah, and there’s a lot of advantages for it. You can have different ownership structures in each. You can have different control and management structures in each. It’s also about splitting up liability.
In the whole scheme of things, there are also maybe some tax reasons why you may want to do that as well. Of course, people in California are probably thinking, like, having more than one entity is not necessarily the first thing on their mind because of the franchise fees and so forth and some other states are like that. But even that, when it comes to operating in the state of California or whether you qualify for doing business there, you can possibly work with some of the rulings over there and have your operating entity being the one that’s registered there and possibly some of your passive entities registered elsewhere. It kind of depends upon the rules and there are a lot of details to that but the point is it’s sometimes doable. But, yeah, I agree and that’s probably what happened here why there’s multiple entities involved.
MATT: Okay. This is a nice tie-in as well. One of the reasons you might want to do that is you have to, again, kind of go back to your map that you’ve drawn on the different operation points here and look at each segment of the operations and see where the possible liability could be. One of them – I think maybe one of the biggest ones or maybe the biggest one – is the shipping and delivery component of it. In this case, they might have gone through a third-party carrier. Who knows what they actually went through? But there’s a lot of issues that come into play with this for these subscription box businesses and it can be anything from, you know, there’s federal and state regulations, particularly if you’re important products from outside the United States or I guess if you have customers internationally as well. You know, there’s issues with importation and how that works, who the end customer is going to be. Are you importing to yourself? Is the customer buying a box from overseas? Et cetera. And then, just the delivery logistics as well. For a lot of them, it doesn’t matter. If you buy a Loot Crate, it’s a thing of maybe some articles of clothing, some toys, et cetera. It gets delivered to your doorstep. You don’t have to worry about it. But what about something like Blue Apron or one of the other perishable food boxes? You know, you have to put a lot more thought into that on the operational side and on the business side for your customers. For those of you who aren’t aware of Blue Apron, what they deliver is all the ingredients to make roughly three meals a week or whatever you order but all the ingredients to make X amount of meals. And so, you’re talking things like spices which don’t really go bad but also vegetables, meat which obviously can go bad. You really need to think about how this delivery mechanism or this delivery component is going to work because, you know, you’re going to run into plenty of dissatisfied customers if you can’t get that piece down.
NASIR: Also, when you’re shipping across state lines, depending upon what you are actually shipping, you may actually have to think about some federal regulations as well. Forget about food. What if it’s alcohol or cannabis, for example?
MATT: Well, alcohol is tough. I kind of look at it in three different areas. You have wine which I think is the easiest to ship; and then beer actually probably; and then you have hard alcohol which is pretty difficult and there’s a whole slew of regulations. I mean, wine is actually a little bit more accepted and you’re going to have to use a third-party carrier – not USPS but a FedEx or something to that effect to do it. There’s a whole thing of rules you have to follow and disclosures and notices. With alcohol, I believe you most likely have to have the end customer sign off on it – you know, sign for it when the package gets delivered to your house.
You mentioned cannabis as well. There’s different items that can cause a lot more problems for you.
NASIR: Even with, for example, marijuana, even if you’re within a state that it’s legalized, even shipping within the state – because you may be using federal post office or US postal service – that’s an issue. Of course, any kind of shipper will want to know if you’re shipping those kinds of materials and going through their processes as well.
MATT: Yeah, exactly.
NASIR: That’s pretty much our breakdown of subscription box business. I mean, there’s always going to be other issues but, from our experience, those are the main ones. I mean, we’ve talked about everything from your subscription terms and conditions to product liability, intellectual property that’s specific to subscription box businesses, and, of course, the partnerships that you have – both with vendors and within yourselves and, of course, Matt wrapped up nicely with the shipping and delivery aspect of it.
MATT: Yeah, I mean, if people are interested, we’ve set up a monthly subscription box that each month will deliver the legal aspects that we talked about but one different component. So, it’s a pretty nice thing they can sign up for.
NASIR: Our podcast basically?
MATT: No, it’s actually printed on paper – it’s just transcription and read it.
NASIR: Yeah, we send it through the mail.
NASIR: Very good.
Well, thanks for joining us! We’re looking forward to our next episode where we cover some other business and give the ultimate legal breakdown for it.
As always, keep it sound and keep it smart