White & Case Tech Newsflash
The consumer and retail industry has experienced a rapid growth in the use of new technologies, as both online businesses and brick-and-mortar sellers converge into multi-channel players and compete for customers and for greater market share. Old-world physical retailers continue to reinvent themselves with enhanced online stores and selling platforms as well as new in-store technologies designed to improve the overall customer shopping experience. Physical and digital retail are no longer separate lines of business. A physical presence can supercharge an online one by doubling as an interactive billboard that builds customers trust, according to Shopify Plus. At the same time, consumer goods manufacturers that have traditionally almost exclusively relied on retailers to market their products are increasingly selling directly to consumers via their own online stores or third-party platforms, in competition with their final retail distributors. Meanwhile, some of the major e-tailers are selectively opening physical stores — complete with cutting-edge technology aimed at complementing and enhancing their already powerful online offerings.
This has all led to a rapid approach of the acquisition and implementation of retail technology solutions and a period of fast growth for both new and established tech companies seeking to provide relevant products and services to the consumer goods and retail industry. Over 40% of brands planned to invest in tech to enhance the customer's in-store shopping experiences in 2022, according to Shopify Plus. This trend further accelerated with the pandemic and the fall-out from lock-downs, which forced retailers to find new ways to navigate those challenges and, in many cases, to throw money at the problem in order to achieve quick solutions. With a marked slow-down in the global economy and economic uncertainty ahead, many brick-and-mortar retailers and retail manufacturers are now critically analyzing their technology, rationalizing inefficiencies, eliminating overlapping products and doing everything they can to drive down costs. At the same time, a number of legal issues and risks, which previously may have been glossed over, in the race to beat the competition, are again under the spotlight.
Which new technologies are used in retail?
Before looking at the legal issues behind the relevant technology, it is first worth observing some of the different types of technology products and services available to the industry.
Enhanced shopping apps
At the luxury end of the market, a lot of investment has been channeled into making the customer's in-store shopping experience as immersive and interactive as possible. This has included in-store interactivity via QR codes that provide additional information on products, as well as smartphone apps that, based on historic browsing and purchasing patterns, can make prompts and suggestions to the customer. This might just be a timely in-store message to draw the customer's attention to a particular item, or a real-time prompt to a shop assistant to greet the customer by name. In other cases, it might include a personal shopper experience, with a locker or changing cubicle (perhaps accessed via a code on the customer's smartphone) pre-stocked with clothing and accessory items targeted at the particular customer and ready to try on.
The commerce and technology landscape is in perpetual motion. Brands need to respond in real time just to stay relevant, according to Shopify Plus, Commerce Trends 2023. Apps can also be used to expedite in-store payment, to direct shoppers to the location of items in a show room, and to suggest shopping carts of products based on a previous buying pattern so that indecisive or time-pressured customers can order later online and at their leisure. Gaming apps are also being used to allow shoppers to create their own in-app characters and avatars and to explore the store and gain loyalty points, credits and NFT (non-fungible token) badges in the process.
Augmented reality
Augmented reality (AR) overlays graphics onto a real-world setting and can show consumers what a product would look like without them needing to touch it. This can be done via the customer's own smartphone to show items such as shoes, watches, bags and accessories. AR is also being used to enhance shop window displays, with customers encouraged to stand in set areas of the shop and use their smartphones to view the mannequins on display with different ranges of clothes. To minimize returns, customers need to be confident that what they see online is what shows up at their door. Bringing products to life for customers through AR is becoming a viable option as more consumers globally adopt the technology (Shopify Plus, Commerce Trends 2023).
More advanced options include virtual try-ons (VTOs) or virtual fitting rooms, where customers can scan the relevant item code and the technology will then overlay it onto the customer's body, or even onto their digital twin, without any need for the customer to change or for the shop item to be physically present.
Similar technology is being used in car show rooms, allowing the customer to configure a car how they want it and to see the different specification and pricing options. Furniture, paint and flooring retailers are doing the same to show customers how new products might look in their own homes by overlaying a computer generated image of the product onto photos of the customer's home.
Point-of-sale
The point-of-sale for goods is being revolutionized by smart-technology vending machines, with touchscreen digital selections of a greater range of products and product information than can be accommodated on traditional in-store shelving units. This can include detailed information on the product, ingredients and nutritional values, safety warnings, historic background to the product and cultural references, environmental impact and comparisons to other product lines. This is most suited to products such as cosmetics, perfumes and toiletries but can also be applied to things like health foods, music and gaming discs and cassettes, children's toys and other collectables.
Automatic robot vending machines are also being deployed to provide a barista-style service providing a range of teas, coffees and other beverages and which are a cut above the traditional and often uninspiring vending machines of the past. Large format vending machines for more expensive items, like cosmetics or electronics, are also appearing in high-traffic locations like airport terminals.
Frictionless shopping/smart checkouts
Contactless payment options and self-checkout tills have been around for a while now, but continue to evolve with new options like selecting home-shipping, pick-up later or pick-up at the car park/transport hub, together with payment via apps, digital receipts, gifting options and sometimes the option to pay later in installments. Some shops also give the customer the option to pay a shop assistant on a hand-held contactless payment device from anywhere inside the store, which can be particularly useful during busy periods.
In-store hand-held self-scanning devices for registered customers or self-checkout lines are now commonplace in supermarkets but still require the customer to scan each item individually. New shops allow the customer to enter the store via their app, select their items and then exit without the need to scan, queue up and pay, with all invoicing done automatically via the app.
Facial recognition
The use of facial recognition in shops is starting to gain traction. This has two main purposes. First, as a highly convenient way for a pre-registered customer to shop without even needing to check-in via an app. This option is still in the development phase but will offer huge time-convenience advantages for both retailers and their customers. Secondly, shops are using this technology to detect shoplifters and other people banned from their chain, running the images in real time against their own database of banned persons. Several big chain stores are already rolling out this theft-prevention measure.
Analytics and AI
The valuable data produced from monitoring customer footfall, peak times, flow around the shop and spending patterns is collated with increasing frequency by cameras, motion sensors and other devices and can be matched up with inventory tracking data through QR codes and in-store radio frequency identification (RFID) tagging. This data, once analyzed, provides the retailer with useful insights and information on its own operations, spending patterns of its customers and other trends, and is also a valuable commodity that can be bundled and sold on to interested third parties.
According to McKinsey, early adopters of AI-enabled supply chain management can improve logistics costs by 15%, inventory levels by 35% and service levels by 65%, compared with slower moving competitors. Artificial Intelligence is being used to predict customer behaviors and expectations, to plan stock levels and in some cases to set individualized pricing. Constant price fluctuations are a prevalent feature of the travel and airlines industry and for some other seasonal goods, and are likely to become more widespread for other goods and services as the technology develops.
Operations
The more routine but no less important retail functions are also being automated, such as robot cleaners and nighttime mobile robot security sentries. RFID tags have also become vital to stocktaking as the tags contain product data that can be transmitted to a portable reader, these are used to manage inventory and update stock levels. More retailers are also using automation to run their buy-online, pick-up in-store processes and to prepare a basket of goods for the incoming customer.
Web 3.0 and the metaverse
No analysis of current retail technology would be complete without mentioning the opportunities and challenges arising from Web 3.0 and the metaverse, which is a whole topic in and of itself. Technology is producing new product lines themselves, the most obvious being NFTs, which are unique digital pieces of content such as images and videos that have been tokenized via a secure and decentralized blockchain, and are capable of being bought and sold.
Retail businesses are also expanding into the metaverse in order to promote and protect their logos and brands and to maximize the advertising and selling opportunities in that new developing and immersive virtual world. This also provides additional opportunities to transact in crypto currency and other crypto assets, and also to engage in virtual gaming platforms.
Legal issues and risks
Inevitably, these new technologies come with a host of legal issues and risks that need to be carefully navigated.
Data privacy and cybersecurity
The most obvious challenge is to ensure that any personal data remains protected and that any storage, processing, analysis and transfer of data is done in full compliance with the law. This is more challenging for international businesses operating in multiple jurisdictions and subject to different laws and regulations. Many retailers are increasingly focusing on their own first-party data in order to increase value to their brands, in light of increased privacy restrictions that reduce their ability to share and compare data with co-partners.
Most technology is potentially vulnerable to malware and cyber-attacks. In addition, using technologies such as cloud platforms to store data may bring additional compliance and security considerations. Details of spending patterns could potentially be used to identify individual customer's locations, movements and absences from home. In the hands of criminals, this data could present a potential target list where high value portable items such as jewelry and luxury watches are involved. Customer accounts are also potentially vulnerable to identity theft or other tampering.
Another less spoken about risk area is the potential blurring of work and home life if, for the sake of on-the-go convenience, work-issued devices such as smartphones, tablets and laptops are being used for personal consumer activity. This risks introducing security threats into work systems but depending on the security settings around the relevant apps, also potentially reveals to the employer more information about an employee's whereabouts and spending patterns than the employee would knowingly choose to share.
The data is also potentially accessible by the police and other authorities. In many countries, this will normally first require a warrant or court order to access, but the rules and practical approach will vary from jurisdiction to jurisdiction. It also has implications for proceeds of crime investigations, if a customer under investigation by the authorities is showing a spending pattern greatly in excess of their declared and taxed income. All of these factors may increase the compliance challenges for business looking to make the most of their data.
Discrimination
There has been considerable media pushback against the use of facial recognition technology — mostly on civil rights grounds and due to concerns over state overreach into personal civil liberties. Clearly, there is a balancing act to be had between the interests of law and order and crime prevention versus the protection of individual civil rights.
Some U.S. cities have sought to ban the use of facial recognition in shops, arguing that it is penalizes people who may not have been found guilty of a crime, but are nonetheless effectively being punished for minor transgressions, or based only on suspicion. There have also been reported cases of premises owners using the technology to selectively exclude customers from their commercial entertainment premises, for example, banning any lawyers involved in lawsuits against the company. In contrast, facial recognition technology has been adopted more widely in China, with retailers using it to control access and even offer customers the ability to use the technology to pay for products.
As some new technologies and algorithms are trained on existing datasets, questions of bias and discrimination arise. For example, some AI algorithms have been found to be biased against certain racial or political groups and therefore could be used to improperly discriminate against such populations. There are also concerns that certain technologies (like facial recognition technology) could be intentionally misused for discriminatory purposes like redlining (i.e., where people are excluded simply because they come from low-income neighborhoods or from other purportedly undesired demographics).
There are also issues here around data capture and data sharing. For example, should different and competing store chains be allowed to share images of banned persons among themselves, thus effectively excluding people from a range of different retail organizations?
There are many questions and issues arising from all of this. What are the rights of the individual to obtain a copy of their own images and file, and to understand the rationale behind their exclusion? What are the individual's rights of appeal against a decision to exclude them and how long should a ban last? How long will the information be held, and is it publicly available? Could it eventually be shared, without the person's consent, with law enforcement, mass media agencies, credit lenders and even prospective future employers?
Payments
Payments will be subject to law and regulation in the usual manner, but anything involving payment via crypto currency or other crypto assets gives rise to practical issues connected to pricing of goods and calculation of currency exchange rates (including on returns of goods and on headline discounts during the sales season), together with a lot of considerations around bank transfer and regulatory requirements, anti-money laundering and similar regulations. Crypto exchanges and the promotion of crypto currencies is itself already under increased regulatory scrutiny and a tightening of the rules in most countries.
Separately, where customers are offered the option to pay by installments or on a deferred basis, this is likely to be caught by rules on consumer credit and lending. Buy-now pay-later models, which have proved to be hugely popular, are under greater regulatory scrutiny and this will only increase with time.
Consumer protection, celebrity endorsements and the metaverse
Using new technologies to sell to customers will still require the usual legal formalities around formation of a binding customer contract, disclosure in advance of the terms and conditions (and the reasonableness of those terms), together with the usual consumer protections arising at law for things like the quality of the goods, returns, refunds and so on. Distance selling regulations will also apply in many jurisdictions where the goods are not being acquired in-store. Also, where retailers are using technology to provide gaming options or games of chance, this has the potential to fall within gambling laws and restrictions, including where credits can be won or traded with the retailer or other users.
Celebrity endorsements are under increasing scrutiny and at times even subject to litigation in relation to the promotion of things like tickets for expensive bespoke events and also crypto currencies and NFTs. The expansion of retailers into the metaverse is only likely to increase this level of scrutiny where celebrity endorsements are involved and if it looks like consumers are being misled. Another risk in the metaverse is defamation claims arising from potentially slanderous statements or libelous broadcasts which are made there and to which the existing laws on defamation will apply. This does however give rise to questions of jurisdictions and which governing laws will actually be applicable in any given case, given the global and virtual nature of that new immersive world.
Competition and antitrust
In the case of consumer goods manufacturers directly selling to consumers via their own online stores or third-party platforms, in competition with their final retail distributors, this raises interesting and challenging antitrust issues if the manufacturers and retailers still want to exchange data on matters such as pricing, sales volumes and margins. Again, this is a topic in and of itself and will increase in relevance as these two parts of the industry continue to converge.
Intellectual property rights
The use of new technologies give rise to intellectual property (IP) risks, including concerns around patent, trademark and copyright infringement. The rights of an IP creator or IP owner will vary between jurisdictions, so it is critical that the IP issues raised by new technologies are appropriately vetted under applicable law — particularly if the technology is intended to be deployed on a global basis. An important question will be who owns and/or licenses not only the IP in the new technology, but also the rights in any IP assets that are promulgated by the technology. For example, if an influencer creates a video where their avatar is wearing a fashion brand's logo in the metaverse and then creates an NFT that they sell in an online marketplace, there are multiple levels and types of IP rights at play — including potentially patents, trade secrets, copyrights and trademarks.
Another challenge, in the use of new technologies, is that the laws protecting IP have not evolved as quickly as the technologies that they purport to cover. One example is artificial intelligence or machine learning (AI) algorithms that are capable of producing works of expression (like songs, books or paintings) as well as inventions (like pharmaceutical drug compositions). Although the copyright and patent laws of many countries do not specify that the author of a work or the inventor of an invention be human, the IP offices and courts of different jurisdictions have taken different approaches to this question — with some determining that an AI system can be an author or inventor, and with others rejecting this position.
Inevitably, infringements or misappropriations of IP rights will arise as new technology emerges. This is particularly true when industries unexpectedly converge (like the computing and music industries did in the early 2000s) or where there are new platforms that test the limits of existing laws (like the metaverse). In many cases, the rules of the road are still developing as the jurisprudence tries to harmonize historical legal regimes with wholly new and unexpected technologies. Existing owners of IP will still want to protect their established rights and maximize the value of such rights by leveraging new deployment models and related income streams while guarding against anything that potentially diminishes them.
What does the future hold?
Total retail sales are projected to reach more than $31 trillion in 2025 according to Shopify Plus. New technologies have already moved beyond smartphones to technology that you can wear, usually for digital and personalized health, like smartwatches, health-trackers and heart rate monitors. The next stage is likely to involve AR wearables (like smartglasses) and implantable technology like cochlear implants, which are currently used as enhanced versions of hearing aids, but could be adapted to act as communication service devices that provide services like language and translation assistance, access to reference information and travel guidance. It is not too much of a stretch to see this technology also being adapted and enhanced for use in a retail context, in much the same way as smartphone apps and facial recognition are already being used.
Another interesting, if slightly sci-fi, development in the realm of bio-hacking is the implantation and use of RFID chips under the skin via a surgical procedure in place of ID cards, swipe cards, medical identification records, or even payment cards. Again, the potential uses in a retail context are boundless.
These are just some of the practical and legal questions that are yet to be fully answered as new technologies in the consumer retail industry continue to develop. As these new technologies are deployed, the proper consideration and resolution of an ever-greater range of legal issues and risks will have a critical role to play in this progression. Companies will need to take a global and holistic view here, particularly when considering the global nature of matters such as IP rights and protections, the metaverse, overlapping and sometimes conflicting laws and regulations, the different jurisdictions involved and the overall fast pace of change in the technology and how it is to be utilized.
