Key Legal Considerations and Points to Consult a Lawyer in D2C Business

D2C (Direct to Consumer), a business model that consistently handles the planning, manufacturing, and sales of products such as supplements, health foods, and cosmetics, continues to expand its market size. This growth is due to the ability of developers to directly absorb consumer demands and sell highly unique products without intermediaries, supported by the development of SNS marketing and other factors.

However, due to its nature of “consistently handling corporate planning, manufacturing, and sales,” D2C is a business model that should be advanced while protecting legal points and preventing risks at each process. In particular, the importance of compliance maintenance has been increasing more and more in recent years due to amendments to the Japanese Civil Code (民法) and the Japanese Pharmaceuticals and Medical Devices Act (薬機法).

In this article, we will summarize and explain the key legal issues that are particularly important for companies to conduct D2C business.

Contracts Related to Manufacturing and Sales

The Need for Contract Preparation

When planning and manufacturing a product and initiating its sales, it is necessary to establish various contractual relationships, such as sales agency contracts, related to manufacturing and sales.

There are Two Types of Sales Agency Contracts

For instance, in the case of sales agency contracts, there are two types of so-called “sales agents”:

• Sales agents who only act as agents for contract conclusion, with the sale of the product occurring directly between the D2C company, as the consignor, and the customer. This is known as the “brokerage type” sales agent.
• Sales agents who enter into a purchase contract with the D2C company, as the consignor, for the D2C company’s products, and then sell those purchased products to the customer. This is known as the “buy-sell type” sales agent.

These are the two types.

https://monolith.law/corporate/agency-contract-lawyer[ja]

Contracts Related to Sales and Public Relations

Establishing Contracts Related to Internet and Web Sales

In D2C (Direct to Consumer) marketing, it is common to use advertising and public relations methods that can directly reach potential customers, such as internet advertising and SNS marketing.

Therefore, at the start of sales, it is necessary to establish contracts related to internet and web sales, such as internet advertising agency contracts and SNS operation agency contracts.

Internet Advertising Agency Contract

For example, in an internet advertising agency contract, in addition to clauses related to the content of work, payment of advertising fees, and payment of rewards to the agency, clauses related to reporting and disclosure of account information can be considered as key negotiation points. Internet advertising, compared to old media such as TV and newspapers, makes it easy to measure the effectiveness of advertising using actual numbers. By properly establishing contractual relationships, it is possible to avoid situations where important numbers are not disclosed or sufficient effect measurement cannot be performed.

https://monolith.law/corporate/explanation-of-internet-advertising-agency-contract[ja]

SNS Operation Agency Contract

Also, in SNS operation agency contracts, D2C companies entrust the operation of their SNS accounts to companies with marketing expertise. However, as mentioned later, products such as supplements, health foods, and cosmetics are subject to strict advertising regulations. In preparation for situations such as violations of the Pharmaceutical and Medical Device Act, it is important to clearly define the location of responsibility and the range of compensation in the contract in advance.

https://monolith.law/corporate/sns-operation-agency-consignment-contract[ja]

Terms of Use to be Established at the Start of Sales

With the revision of the Civil Code, the treatment of terms of use, which was not always clear under the law, has now been explicitly stipulated as “standard terms and conditions”. The importance of properly establishing terms of use, presenting them clearly to customers, and obtaining their consent has increased more than ever before.

What is particularly important is that the rules for unilateral changes to the terms of use have been clarified. Generally, terms of use are:

1. Agreed upon at the time of user registration, based on the version of the terms of use published at that time
2. Include provisions such as “If the terms of use are updated, you are deemed to have agreed to the new version of the terms of use (under certain conditions)”
3. When the terms of use are updated, the new version of the terms of use is published in an appropriate manner

It is important to always effectively obtain the consent of all customers in relation to the latest terms of use. For example, if a customer problem that was not initially anticipated occurs, and a clause to prevent such problems in the future is added, if the above flow is not followed, a situation may arise where “the new clause is valid in relation to customers who registered after that, but not in relation to customers who have already registered”.

The old Civil Code was not always clear about what conditions needed to be met for such version upgrades to be valid, but the revised Civil Code has provisions on this point as well. It can be said that it has become important to properly create and operate terms of use that comply with the revised Civil Code.

https://monolith.law/corporate/civil-code-revision-cloud-service[ja]

Points to Note Regarding Regular Purchases and Initial Discounts

While it depends on individual cases, there are unique legal issues when offering initial discounts in a subscription-based regular purchase business.

In D2C, it is not uncommon to introduce a subscription-based regular purchase system to extend the LTV (Life Time Value) of users acquired through advertising expenses and other means, and to lower the hurdle for initial purchases, a discount system limited to the first purchase is often established. However, this initial discount is particularly regulated under the ‘Japanese Act on Specified Commercial Transactions’ in terms of ‘display of sales conditions’, and if you do not devise cancellation conditions in accordance with these legal regulations, explicitness regarding the possibility of returns, and site composition, there is a risk of being judged illegal.

https://monolith.law/corporate/supplement-lawyer-first-discount[ja]

Regulations on Advertising and Promotional Language

The Risk of D2C Companies Being Penalized for Legal Violations by Influencers

Finally, the most crucial point in operating a D2C business is its relationship with advertising regulations.

This regulation is important when:

• D2C companies conduct advertising activities themselves, for example, using their own LP or SNS accounts
• D2C companies have advertising done through advertising agencies, influencers, etc.

In either case, D2C companies can be held responsible. In fact, in July of Reiwa 2 (2020), an incident occurred where a D2C company was penalized for posting an article-style advertisement about a health food product, which was judged to be a violation of the Japanese Pharmaceutical Affairs Law. The penalty was not only imposed on the advertiser and the advertising agency but also on the D2C company.

Penalty System under the Revised Pharmaceutical Affairs Law

Furthermore, special attention should be paid when dealing with products subject to the Japanese Pharmaceutical Affairs Law.

Under the revised Pharmaceutical Affairs Law, which is scheduled to be enforced in August of Reiwa 3 (2021), a penalty of up to 4.5% of the total sales of the violating product for up to three years will be imposed if the prohibition of “false and exaggerated advertising” under the Pharmaceutical Affairs Law is violated. This means that for a product with an annual sales of 1 billion yen, the penalty could be as high as 135 million yen. This is a significant amendment, as the maximum fine was previously 2 million yen.

Advertising regulations include:

• Laws that always apply when conducting EC and online shopping
• Laws that set different regulations for each product genre, such as quasi-drugs, cosmetics and health foods, supplements, food-related, etc.

These exist.

https://monolith.law/corporate/supplement-advertisement[ja]

https://monolith.law/corporate/cosmetics-healthy-food-advertisement[ja]

Guideline Development and Sampling Checks

It is common for D2C companies to conduct marketing by updating, for example, the content of their own LP and the instructions for posts by influencers, according to customer needs. To operate while complying with the strict regulations mentioned above, it is important to:

1. Develop guidelines that can be operated at the staff level and update them as needed
2. Conduct a legal check before publishing, as much as possible, on LPs, etc. that will actually be published
3. Conduct sampling checks on the content of posts by influencers, at least periodically (and establish a system for doing so)

These are important considerations.

Summary

As such, Direct-to-Consumer (D2C) has business merits due to its consistent handling of “planning, manufacturing, and sales”. However, it is a business model that also requires the D2C company itself to consistently handle various legal issues such as proper contractual relationships, terms of use, sales model construction, and advertising operations in each process.

Requesting support in each process from a lawyer with know-how and experience in such businesses can be important in terms of:

• Being able to properly establish contractual relationships due to their experience and know-how.
• Being able to quickly perform legal checks on advertisements due to their experience and know-how, without compromising the speed of the D2C business.

This can be said to be important both in terms of content and speed.

At Monolith Law Office, we provide various support for D2C companies, from the creation and review of various contracts to a one-stop service that handles the entire process of sampling checks for advertisements (listing posts by influencers who form the parent set, random extraction, legal checks, delivery of reports, etc.).