Understanding Marketplace Business Model – Legal Challenges – Insights by Udemy’s Eren Bali

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In June, I attended Echelon, Asia’s largest technology conference featuring 50+ global speakers, investors, startups, entrepreneurs, and prominent tech corporations.

Originally published here.

I got a chance to listen to Udemy’s Co-Founder and chairman, Eren Bali, who spoke about building a marketplace business.

What I really liked about the presentation was the way he dissected the marketplace business model while discussing best practices about designing the business. It was quite similar to how a lawyer analyzes various legal issues during a business transaction.

While explaining various components of a marketplace business model, Eren discussed that to start the business, the main goal is to connect demand and supply, which means acquiring more and more users to connect them with the supply side.

Other subsequent components of marketplace business include discovery, pricing, payment, user experience and support.

An important approach explained by Eren was to categorize all components as centralized or decentralized. In other words, if marketplace intends to control any component, it can be called centralized while if it is left to the supply side, it can be categorized as decentralized. For examples, companies like Uber tend to embody the marketplace as completely centralized wherein Uber manages almost everything except driving, whereas companies like Airbnb, ebay, craiglist etc. embody marketplaces as decentralized, wherein the supply side manages most of the stuff.

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His presentation and video are embedded below for more details.

Click her to watch the video

Legal Challenges

While managing a marketplace business, business owners have to consider and manage certain important legal concerns, some of which are discussed below:

Legal Liabilities

When you walk into a physical store to buy a product and question the store-owner in case of any defect in the product or issue related to electronic payment, a similar problem can also arise while buying a product from an online marketplace. In digital space, third-party vendors usually sell their products through marketplaces that are not owned by them, and consequently, the legal liabilities are also divided among marketplace owners and such vendors. Exactly who is liable for what and whether the liabilities are civil and / or criminal in nature, this will depend upon exact nature of transaction, issue faced by the end user, local laws, and other related factors.

For example, if there is a payment related issue, mostly the liability will lie with the marketplace as they are the ones who facilitate the transactions between buyers and sellers by providing a payment gateway. Similarly, faulty product will become liability of the vendor. In any case, liabilities will be a combination of basic contract law (between buyer and seller, buyer and marketplace business owner, seller and marketplace business owner), consumer laws (basic rights of buyers), data protection laws (mostly with the marketplace business owner), cyber laws, criminal law (mostly with both seller and marketplace in case of infringement of intellectual property rights like patents, trademarks, copyrights, designs, by selling of counterfeiting products by sellers through marketplace), and the like. Similar analysis can be applied while providing services through marketplace business, such as Uber, AirBnb etc.

Accordingly, it is advisable for marketplace business owners to have,

(i) appropriate terms and conditions mentioned on their websites that are in line with domestic and international laws,

(ii) appropriate contracts with external vendors (sellers) to ensure a smooth transaction with the buyer and prevent transactions pertaining to fake (counterfeit) goods that can result in intellectual property (IP) infringement. This is just an illustrative list of legal measures and based on exact marketplace business model, the exact legal requirements can be quite detailed.

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