Drone Seller Legal Issues (Laws, Tips, Mistakes, etc.)

drone-seller-legal-issues
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So you decided you want to sell drones. Now you are probably wondering if there are any legal liability issues that you should be aware of so you can try to get out in front of those problems NOW and prevent them.

Do any of these statements accurately reflect you now?

  • What type of things should I put into a contract with my customers?
  • How should I structure my business? 
  • What types of tax issues apply to my business?
  • What insurance should I purchase?

If you asked any of these questions, this article is perfect for you. 

I used to be a commercial pilot and flight instructor, but now I’m an aviation attorney who focuses only on unmanned aircraft law. I will take my years of experience in dealing with manufacturers, distributors, and sellers and put that into this article to provide you valuable insight so you can operate your business safely, legally, and profitably. Drone sellers—whether manufacturers, distributors, or retailers—are subject to a wide array of potential liabilities. Understanding the intricacies of these legal exposures is crucial for businesses engaged in drone commerce.  Please remember that this list is not designed to be exhaustive; I’m just bringing to light the significant issues.


Product Liability

Drone manufacturers can get sued if the drone they sold causes some damage and/or injury. We all know that, but many are not aware that the seller can also get pulled into that lawsuit.  A personal injury attorney is going to name all of the people involved in the sale of the drone as a defendant. If you are a drone distributor or a seller under a distributor, you do have some risk in being named in a lawsuit. Don’t believe me?  Consider Align Corp. Ltd. v. Allister Mark Boustred, 421 P. 3d 163 – Colo: Supreme Court 2017

Boustred, a Colorado resident, purchased a replacement main rotor holder for his radio-controlled helicopter from a retailer in Fort Collins, Colorado. The main rotor holder was allegedly manufactured by Petitioner Align Corporation Limited (“Align”), a Taiwanese corporation, and distributed by Respondent Horizon Hobby, Inc. (“Horizon”), a Delaware-based corporation. Align has no physical presence in the United States, but it contracts with U.S.-based distributors to sell its products to retailers who, in turn, sell them to consumers. At the time of the incident at issue here, Align sold its products throughout the United States through four U.S.-based distributors, including Horizon.

Boustred installed the main rotor holder to his helicopter and was injured in Colorado when the blades held by the main rotor holder released and struck him in the eye. He filed claims of strict liability and negligence against both Align and Horizon in Colorado.

Selling a drone that ends up hurting someone can get you into a lawsuit.

Drone sellers may face product liability under tort law, specifically within the framework of strict liability and negligence-based liability. Product liability encompasses injuries or damages caused by defects in the product, including design defects, manufacturing defects, and marketing defects (often termed “failure to warn”). Under the Restatement (Third) of Torts, “a product is defective when, at the time of sale or distribution, it contains a manufacturing defect, is defective in design or is defective because of inadequate instructions or warnings.”  Let’s unpack these 3 things.

Design Defects

A product “contains a design defect when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the reasonable alternative design renders the product not reasonably safe.”

Manufacturing Defects

A product “contains a manufacturing defect when the product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product.”

Drone components such as batteries, propellers, software, and control systems may have latent defects that cause failure in flight. If a specific drone unit malfunctions because of a manufacturing defect and causes an injury, the seller can face strict liability.

Marketing Defects (Failure to Warn)

A product “is defective because of inadequate instructions or warnings when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings by the seller or other distributor, or a predecessor in the commercial chain of distribution and the omission of the instructions or warnings renders the product not reasonably safe.”

For instance, if a drone is prone to losing signal in urban environments, failure to include this warning may constitute a failure to warn claim. Sellers must ensure that the products come with adequate warnings and instructions or risk liability under this doctrine.

Some of the manuals I’ve seen over the years have been horrible. Broken English and just completely unintelligible instructions. Are you checking for this or just selling anything?


Negligence

Instruction

If you are providing flight instruction for customers as well as your own salespeople, there is a narrow novel theory of negligence called negligent instruction. There is insurance that covers negligent instruction claims. For these types of claims, you should consider if it’s an issue for you. Some states don’t even recognize this claim. This is beneficial because a plaintiff will have difficulty recovering in those states. A seller might want to have a choice of law provision in the contract picking this state’s law.

Operation

Are you doing demo flights for customers? Are you providing training to customers? You definitely want to consider insurance for 3rd party bodily injury and property damage. See my article on drone insurance.

Maintenance

If you are repairing the drones, I highly suggest you get insurance covering negligent maintenance.


Federal Laws

Title 18 Criminal Laws

Is everyone flying in your operation legal?

Do you know it is a felony to fly as a pilot without proper approvals?

Did you know that hiring a person to fly as an illegal pilot can land you in very hot water when they are not legal? 49 USC 46306(b) says, “a person shall be fined under title 18, imprisoned for not more than 3 years, or both, if the person— . . . (8)knowingly and willfully employs for service or uses in any capacity as an airman an individual who does not have an airman’s certificate authorizing the individual to serve in that capacity[.]” Yes, you read that correctly. The company can get popped with a felony charge for hiring an illegal pilot.

On top of that, this can damage your reputation. One well-known large real estate brokerage company’s name even made its way into FAA prosecutorial documents due to the wannabe pilot’s flying the drone illegally for real estate listings. Proverbs 22:1 provides clarity: “A good name is to be chosen rather than great riches, and favor is better than silver or gold.”

There are other problems as well. Check out my article on Big Risks with Hiring Illegal Drone Pilots https://jrupprechtlaw.com/illegal-drone-pilots-and-risks-with-hiring-them/

Section 2203.

Section 2203 Safety Statement. Section 2203 of the FAA Extension, Safety, and Security Act of 2016 (Public Law 114-190) requires a manufacturer of a small (under 55 pound) unmanned aircraft shall make available to the owner at the time of delivery of the small unmanned aircraft the safety statement. Read my article on Section 2203.

Federal Aviation Regulations

If you are demo flying, flight instructing, doing testing after repairs, doing research and development, you better have your act together. The Federal Aviation Regulations apply to the operation of drones in the United States Airspace.  There are a whole host of regulations that apply. Most demo flying, flight instruction, and testing can be done under Part 107 with no problems.   When you go 55 pounds and heavier, it gets much trickier. You may need an exemption. I have a whole article on 55-pound and heavier flying.  The big gotcha right now with 55-pound and heavier exemptions prohibiting the flight instruction of non-employees. This is a mega problem for many in the drone industry. I believe I have a solution! I’m filing petitions for exemption so my clients can provide their customers/students with flight experience.   I have an entire article on exemptions to facilitate flight experience.

Another issue is drone sellers will need a registered drone to do demos. Resellers can obtain a dealer tag registration that allows the dealer to have a registration number they can tape onto a drone, do a quick test flight with the customer, and then peel it off. They don’t have to get to the headache of registering the drone. To make this legal, the dealer needs two approvals but it can be done. If you need help with this, contact me.

Export Controls

Did you know that some drones and drone-related tech are export-controlled? While many people think they cannot get into trouble by not exporting, manufacturers and sellers can easily get into trouble by selling controlled items to the wrong person inside the United States. This can result in large civil fines and maybe even prison. Before you sell anything, you should identify what things you are selling are export-controlled.  If you are selling drones, you should have a technology control plan. Here is a huge article I have on export controls for unmanned aircraft.  Bard College’s Center for the Study of the Drone published an article detailing multiple prosecutions under ITAR.

Selling Unlicensed Equipment

If you are selling anything that transmits radio signals, you should definitely check if the product has an FCC license. FCC has fined multiple drone sellers for selling unlicensed radio transmitters.

Tax Law

Sellers try and play games and make certain pilots subcontractors.  Here is the problem with that, if you do that, there is a chance you could get in trouble if the IRS later determines that your pilots are employees.  You’ll then owe back taxes, interest, etc.  There is so much control you need to exercise over your pilots to be in compliance with your exemption or waiver. You risk running afoul the FAA in lacking control over the pilots and also running afoul of the IRS in not paying your employer taxes for your employees.


State Laws

Unlicensed Practice of Law

Many well-meaning entrepreneurs run into the drone space to help others by selling drones, forming an organization, providing services, providing training, etc. One of the areas pilots and operators in the drone industry struggle with is the law. There are all sorts of statutes and regulations that result in lost sales of drones and frustrated people who abandon any plans of flying drones. The well-meaning entrepreneur believes the natural conclusion is for them to remove these barriers by starting a consulting business or providing some type of service to help educate people on the law, help them navigate the law, and file paperwork for them.  These actions present some serious legal problems that many are not aware of which could lead to criminal charges (a 3rd-degree felony in Florida), class action lawsuits, insurance denials, and a ruined reputation. In this article, we’ll discuss what is the unlicensed practice of law, some examples from the drone industry, and what are the legal consequences of violating this law.  If you are filing petitions for exemption for clients, you should read my article on the unlicensed practice of law in the drone industry.


Leasing Drones

I occasionally get asked if there is some type of way customers can lease a piece of equipment temporarily from the seller. There are some issues here that need to be addressed.

What happens if they stiff you? It will be a pain to get the equipment and drone back. Lost time and maybe money in hiring an attorney to collect on a judgment. This means you need to screen the client and figure out their creditworthiness. Can you potentially obtain a large piece of machinery or farm equipment as collateral? There are steps you must take here to carefully protect your interests in that collateral. I would find an attorney in your state who focuses on secured transactions to help with this.

Sales tax. Many states require sales tax on equipment rentals. Who is going to pay this? How are you calculating this? Do you have an accountant who will take care of this? What happens if you do this in multiple states? Now you have to do sales tax in multiple states. You might also have issues with the lease of aircraft. Contact a CPA or tax attorney in your state that focuses on aviation tax-related issues. Aircraft have weird tax issues.

You should find out if they can legally fly or not. “49 USC 46306(b) also says it is illegal for a person who “(5)owns an aircraft eligible for registration under section 44102 of this title and knowingly and willfully operates, attempts to operate, or allows another person to operate the aircraft when—” the aircraft is not registered. Read my article on 5 Big Risks with Hiring Illegal Drone Pilots. https://jrupprechtlaw.com/illegal-drone-pilots-and-risks-with-hiring-them/

The drone must be registered to fly. Is it registered to you or your business? Do you need to set up a separate LLC to hold those aircraft away from your main business? What happens if the drone crashes into someone? Who is the plaintiff going to sue?

Consider outsourcing. There are numerous equipment rental companies out there that will go out, purchase a piece of property, and lease it to a customer for a monthly amount. Search around. Search for something like equipment financing. You could devise a deal with one of them to receive a commission or percentage of the revenue. They can handle all of the other headaches. You focus on selling drones.


Agency Related

If you are using agents to sell drones in your operation, I highly suggest you have a written agreement with them, explaining exactly what they can and CANNOT do.

Can they provide a warranty?

Can they change the price?

Can they provide a money-back guarantee?

The worst case scenario is this person running their mouth, or putting something in an email, offering pricing, warranty, or guarantees way beyond what you can do. You could maybe even end up in litigation where the potential customer tries to enforce the terms of the deal and now you are having to deal with all of that mess.

I would highly suggest you get an attorney in your state to draft an agent contract that outlines what can and cannot be done or said by the agent.

Baked into that agreement, you should have some language requiring the agent to screen the potential customer for potential export-related issues. (Remember the previous drone export control article). I would suggest you work with an export attorney to have a list of questions that your salesmen can use for every customer to quickly screen for issues so you all don’t have an export violation.

Regarding referral agreements, I would HIGHLY suggest you ensure it is all in writing. And before you ever send anyone any money, always always always get from them the W9.

You should come up with a checklist of things to onboard sellers. They sign a referral agreement and agent agreement, and you obtain a W9.


Business Ownership Related

If you are selling ownership in your business, I highly suggest getting a business attorney involved, as this area is heavily regulated.  If a manufacturer is asking you to buy in, I highly suggest you get a business attorney to advise you on this. There have been fraudsters that have been in this area:

  • United States v. Porrata ” Porrata led a scheme to induce people to invest in Halberd Corporation, a publicly traded corporation whose shares traded on the over-the-counter exchange under the ticker symbol HALB.  The proceeding took place before United States Chief District Judge Dora L. Irizarry. Bridget M. Rohde, Acting United States Attorney for the Eastern District of New York, and William F. Sweeney, Jr., Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office (FBI), announced the sentence. According to public filings, from March 2010 to September 2013, Porrata directed press releases to be issued with false information to induce people to invest in Halberd, a company that purportedly produced aerial drones but, in fact, existed primarily on paper.  Among other things, Porrata caused press releases to be issued about Halberd opening a sales and marketing office, owning a mass production facility and submitting a bid for a government contract.  Contrary to these representations, this information was false and it caused unsuspecting victims to invest in Halberd and also caused the company’s stock price to be artificially inflated.  Porrata and his co-conspirators sold their own shares of the company at the inflated price and caused investor losses of more than $1 million.”
  • City of San Francisco v. Lily – The district attorney for San Francisco is suing the company Lily for false advertising and unfair business practices.

If you have people involved in your business, make sure everyone has their roles clearly established via a written agreement. If your business becomes successful, you could have issues.

In Justice Laub v. Nicholas Horbaczewski et al, Laub alleges that Horbaczewski breached a contract. “Plaintiffs commenced this contract action on August 22, 2017. (Dkt. No. 1.) The operative Third Amended Complaint (“TAC”), alleges that Plaintiffs Justice Laub and Daniel Kanes (“Plaintiffs’) were promised a two-thirds equity interest in Defendant Drone Racing League, Inc. (“DRL”) and recognition as DRL co-founders based on alleged agreements and representations, verbal and written, between Plaintiffs and Defendant Horbaczewski (“Horbaczewski”).” https://casetext.com/case/laub-v-horbaczewski 


Breach of Contract

In the Prioria Robotics v. Condor Aerial lawsuit, Condor ordered from Prioria a drone to demo for customers and a drone to sell. It is alleged in Condor’s counterclaim that Prioria didn’t deliver the drones within 30 days of the order (according to the terms of sale) which resulted in the rescheduling of various demonstrations with potential customers, including the FBI, the CIA, NASA, and 12 law enforcement agencies due to the delays and because of this, was a breach of contract.


Commercial Misrepresentation and Fraudulent Claims

Sellers can also face liability for commercial misrepresentation or fraud if they make false or misleading claims about the drones they sell. The legal theory of fraudulent misrepresentation is based on false statements that induce buyers to act to their detriment. This typically will get thrown in 


Mistakes

In summary, here are some of the most common mistakes I see:

  • Not getting things in writing with the customers, your employees, your agents, the manufacturer, etc.  Seriously, doing Quickbooks check out experience only is asking for a bunch of trouble.
  • Not doing due diligence to see if the drone they are selling is safe.
  • Not doing due diligence on whether the manuals sufficiently warn the customer.
  • Not checking out your agents/salesmen. Not having an agency agreement saying what they can and CANNOT do.
  • Not having insurance.
  • Not having legal counsel for various areas. I’m a drone attorney. I’m not an expert in many of these areas. You should work with me to help you find a good business and export attorney to help you with these issues.

Solutions

  • Contract
    • You might want to have others indemnify you. You also should be VERY cautious about signing any contract that has an indemnification agreement in it. Read my article on indemnification agreements. 
    • Consider doing business in a state and/or having a certain state’s laws govern that is friendly to manufacturers and sellers. Not all states are equal.
    • Consider shifting as many liabilities to other parties such as the manufacturer and the customer. Work with a good contract attorney on this.
    • Force majeur clauses. If you have a contract clause with the manufacturer or the customer, consider having a good force majeure clause that protects you. Read my article on force majeur clauses. A good contract attorney and drone working with you can help mitigate this.
    • When drafting your contractual terms, consider putting in terms that are very favorable to you but attempt to perform better.  This allows you to have some wiggle room. Work with a contract attorney to draft good terms.
  • Unlicensed Practice of Law
    • Send clients to an attorney who is licensed and insured. The reason for the insurance is if the attorney botches things up, the customer can go after that insurance policy and be less likely to come after you.
    • Make sure the attorney you are sending them to is actually licensed and doesn’t have any disciplinary history.  Most state bars have a searchable directory that will state this information. Here is mine. https://www.floridabar.org/directories/find-mbr/profile/?num=109249 
  • Negligent Flight Instruction
    • Consider insurance
    • Consider the choice of law provision i an cotnract that select a state that does not recognize this claim.
  • Product Liability.
    • Requiring indemnification clauses in their contracts with the manufacturer. If you are a reseller under a distributor, you might want the distributor and the manufacturer to both indemnify you, but my guess is they might not do this.  
    • Consider purchasing product liability insurance. Contact https://flightlineassurance.com/
    • If you are a distributor, consider if the manufacturer has limitations on where you can sell. Sell only in alignment with any restrictions.
    • Consider selling drones only in certain states.
    • Working with a drone attorney and products liability attorney.

Conclusion

The legal liabilities faced by drone sellers are multifaceted. I highly suggest you work with a good drone attorney who can help you assemble a team of attorneys (aviation, contract, export, business, etc.) and a good insurance professional to mitigate the risks you are exposed to.