Group Buying’s Big. Now, Cue the Lawyers.

Posted on by Brian Quinton

03-01-11-judge-w220-h220.jpgI don’t mean to sound cynical about the legal profession, but it sure seems that once a segment has blown up, as social buying has done over the last year-plus, a flood of class-action and patent-infringement lawsuits are as predictable as toadstools after a spring rain. And sure enough, here come the fungi.

Specifically, both segment leader Groupon and current second-place finisher LivingSocial have been hit with potential class-action suits based on pretty much the same allegation: that they violate federal laws and statutes in various states regulating the expiration dates on purchased gift certificates.

[Update: On the day I posted this item, Groupon got hit with another potential class-action lawsuit in a Federal court in Chicago, where the company and I both make our homes. The basis for this new suit is similar to those below: in this case, that Groupon violated the act prohibiting expiration of gift cards in under five years. I have not yet seen the actual filing, but accounts of the complaint suggest that the buyer wants the full-value offer– a half hour of whirlyball play for up to 10 people– to be honored, not just a refund of the $55 he paid for the deal in August 2010.]

A class action suit filed in U.S. District Court in California by a San Diego resident claims that Groupon violates the Credit Card Accountability Responsibility and Disclosure Act and the Electronic Funds Transfer Act by applying expiration dates to what is basically a gift certificate. The suit also charges that Groupon’s “Daily Deal’ format creates a sense of urgency about purchases that leads buyers to overlook the small print concerning how long they have to redeem their deals—“often just a few months”, as the complaint alleges.

Thing is, federal law prohibits the sale of gift cards that expire within five years of being issued; and a number of states either limit a marketer’s power to impose expiration rules on gift cards or deny them that power outright.

Meanwhile two Seattle residents are seeking class-action status for a suit in U.S. District Court in Seattle against LivingSocial, claiming that the social-buying company violates consumer protection measures.

The main question seems to be whether the deals offered by social-buying companies such as these two constitute actual gift cards—or some kind of hybrid gift card/ promotional coupong that requires new law-making.

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See, both the Groupon and Living Social sites contain FAQ pages that address the issue of what happens to deals consumers hold beyond their expiration dates. For example, here’s what the Groupon page says:

“While the expiration date on the Voucher dictates the last date that you can use your Voucher at Merchant for the promotional offer stated on the Groupon,applicable law may provide that the Merchant is responsible for honoring the cash value that you paid for your Voucher for a period of time beyond the expiration date stated on the Voucher. In other words, you should be allowed to redeem the cash value (or purchase price) of your Voucher up until the greater of: (1) the Voucher’s expiration date; or (2) the minimum length of time allowed by applicable law for a Voucher to expire.”

In other other words, if you paid $25 for a $50 Groupon coupon at a local tattoo parlor and then held that coupon past the stated expiration date, Groupon is notifying you that you may be able to get back the paid portion of the deal—your $25—even after that date has passed, if your state prohibits short-term limits on gift cards.

Did you get that from the FAQ? Because the California and Washington lawsuit allege that lots of consumers don’t, leaving the social-buying companies and their merchant clients sitting on the revenue from a lot of unredeemed deals—what the gift-card industry refers to as “breakage”.

Groupon has actually been sued before on this same basis, in an action brought last April, and in fact attempted to defend itself by countersuing with its own class action on behalf of happy Groupon users. The company even went so far as to ask them to sign up online to take part in the case. But the result won’t be helpful in determining the outcome of this case: the parties settled.

The LivingSocial suit goes a bit further, alleging that the company also violates Washington state gift card law by requiring that the entire value of the deal needs to be spent in a single visit or the consumer loses the remaining portion of the offer. According to the complaint, Washington law requires that gift-card purchases that don’t use the full face value of the card must let users get the remainder back, although not necessarily in cash.

Meanwhile, one of the social-buying also-rans is suing two of the others for patent infringement, but with an insider twist. Earlier this month Kashless, a company that plays parent to group-buying platform Tippr, brought a civil lawsuit in King County WA against both BuywithMe.com and DealOn, two other social-coupon contenders.

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