What Does a Court Case Have to Say About Crowd-funding
I. Intro
The state of Washington’s Attorney General recently filed a Consumer Protection civil suit regarding the failure for a project owner to deliver on a Kickstarter project. The potential for the court system to step in and define boundaries of acceptable behavior in producing and delivering a crowd-funded project could potentially shape the landscape for future project creators. The Washington Attorney General’s complaint gives ideas of potential parameters over timeline and deliverables. However, several questions will remain open until the court makes a decision in the matter. The complaint does allow an examination as to what one state assumes is egregious behavior under consumer protection laws and how this information can be useful for future project creators when they plan their projects.
The lawsuit is being brought by the Washington Attorney General (“AG”), under Washington’s Consumer Protection Act (Revised Code of Washington 19.86), and is currently before a Washington State court. The case is not being brought under a Federal law or currently being held before a Federal court. Any decision would be applicable to the state of Washington and only used by other states as non-precedential guidance to the extent that the other state’s Consumer Protection Laws are similar. It would need to be examined how closely Washington’s current consumer protection laws are to those of other states. Other states may be more lenient or even more strict when considering deceptive or fraudulent behavior towards the residents of their state.
The lawsuit is being brought against both Altius Management LLC and Edward J. Polclopek (also known as Ed Nash). The complaint alleges that Ed Nash as President of Altius Management controlled the policies, activities, and practices of Altius. The project page shows Altius Management as the project creator; however the Kickstarter project bio does state that the Serbian artist for the project is teaming with Ed Nash in connecting and fulfilling the project. The complaint against the defendants (Altius Management and Ed Nash (Polclopek)) claims of misrepresentation, failure to deliver, and failure to refund.
The complaint states that there were 810 backers of the Asylum project and out of that number 31 were residents of the State of Washington. It is unclear from the filing if Washington’s AG is only attempting to sue on behalf of the 31 Washington resident’s or all backers of the project. Given that the AG is asking for refund, coverage of attorney costs and punitive costs of $2,000 per violation the total being asked is highly impacted based on if the total number of violations being addressed are 31 or 810 (i.e., punitive fine of $62,000 if just the Washington state residents or a punitive fine of $1,620,000 if brought on behalf of all 810 backers).
Briefly, the project launched Sept. 25, 2012 and ran through Oct. 31, 2012.[1] The project listed an estimated delivery date of December 2012, raised $25,146, with a goal of only $15,000, and was for the creation of a deck of playing cards with unique art/design as described in the project description.[2] Additionally the project offered add-ons and potential stretch goals during the course of the funding period.[3] The last Kickstarter update was July 13, 2013.[4] The latest comment from the creator of the project on the comments section appears to be March 11, 2013 and references sending out surveys regarding the project.[5] It appears that there are no backers who received the fulfilled project rewards or a refund.
II. Crowd-funding as Commerce
A foundational topic is the question: “Is crowd-funding commerce?” The language of Kickstarter attempts to portray something other than commerce. Kickstarter describes itself as “a new way to fund creative projects,”[6] “[b]acking a project is more than just giving someone money,”[7] and “help bring creative projects to life.”[8] The language utilized is not the sale of goods and services but of gifting or potentially patronage. There are projects that make no offer of providing anything to backers or that offer to make the project’s end-result freely available to the public and not just the backers. However, the vast majority of projects on Kickstarter are based on the concept of the project creator providing a reward to the backer for contributing to the project. In fact there are those who use the term “rewards-based crowd-funding” to separate Kickstarter and similar platforms from the “equity-based crowd-funding” that was created by the JOBS Act, as rewards and receiving something in exchange for the contribution is so integral to this form of crowd-funding.
The reward is important in the case being brought by the Attorney General of Washington because Washington law defines “trade” and “commerce” to “include the sale of assets or services, and any commerce directly or indirectly affecting the people of the state of Washington.”[9] (emphasis added) Given that the plain-English definition of commerce is the exchange of goods and commodities,[10] the Washington definition clearly seems broad enough to capture the promised reward by a Kickstarter project creator in exchange for the money provided by the backer. Again, this is how Washington has defined trade and commerce, each state’s consumer protection law may handle that definition differently. So an open question would be, is reward based crowd-funding covered by consumer protection laws of all fifty states?[11]
III. Delivery Date Calculation
The misrepresentation and failure to deliver claims tie very closely to the timeline of the project itself. The complaint uses as a primary fact that the defendants represented that rewards would be delivered in December 2012. In Kickstarter, the estimated delivery date is provided in the pledge description portion of the project page. The current version of Kickstarter does not allow pledge descriptions to be edited once it is set and the reward level made available.[12] The complaint does not bring in any other evidence regarding a date of delivery.
On comments on the project page it appears that the project creator provided information of a change in delivery date. Any such revised delivery date is not taken into account in the complaint. Without further information, project creators should be on notice that the originally posted estimated delivery date is what a consumer protection agency is looking at to determine if consumers have been deceived. While updates and statements of changes of schedule may alter the outcome of this case, at this point in the filing it is the original estimated delivery date that is being used as the primary date for delivery.
Based on the current facts the delivery date can be examined two ways.
i) failure to deliver in 16 months and a failure of any communication in 9 months is sufficient under consumer protection laws to assume that a project has failed to deliver and will not deliver.
Or alternatively,
ii) that when a project promises to deliver in two months (i.e. the Asylum card Kickstarter project funded in October 2012 and had an estimated delivery of December 2012) and that over 5 times that amount of time has passed with no delivery that it will be presumed that the project will not deliver.
Currently it is unclear if the AG is examining the amount of time one way or another in asserting that the project has failed to deliver. Crowd-funding project creators should prefer the latter reasoning, as such a calculation allows projects with a lengthy time for delivery to have greater leeway with slippage of the project.
IV. Rewards
The complaint also provides insight into what is owed to a Kickstarter backer under the law, once a backer has backed the project and been charged the amount pledged. The complaint refers to the Kickstarter Terms of Service to show the project creator is “legally bound to fulfill backer rewards if funding is successful.” The complaint goes on to state, “…a stretch goal increases the rewards for backers, thus inducing people to either increase their pledges or pledge for the first time.” This viewpoint indicates that currently the AG is arguing that stretch goals, and presumably add-ons and exclusives, are considered part of the rewards of the project. This would mean under the Kickstarter Terms of Service that there is a legal agreement to provide all items promised to the backers.
This should be looked at very closely by project creators who have at times viewed stretch goals as something they have more flexibility and lee-way with in delivery. If the lawsuit succeeds, a project creator will be accountable for all items promised in the project, not just the “original” goal. For project creators this would mean that care and diligent planning should go into what is promised as stretch goals, add-ons, and exclusives. Additionally, if the stretch goals are as much a portion of the reward as the original project goal then delivery of the original and failure to deliver stretch goals, extreme tardiness in delivery of stretch goals, or stretch goals not matching what was promised during the funding period could be perceived as a violation of the Kickstarter Terms of Service and/or fraud or misrepresentation under consumer protection laws.
V. Refunds
The complaint also brings as a cause of action for failure by the Defendant to refund money to the backers. This failure to provide refunds is mentioned in two separate scenarios:
- A failure to provide a refund when requested by a backer when the reward was not delivered in a “timely manner;” and
- Failing to offer refunds to backers, whether a refund was requested or note, when the rewards were not delivered in a “reasonable timeframe.”
If liability is found for a failure to provide refunds as described above, this would create two different clocks that project creators need to be aware of. A “timely” countdown and a “reasonable” countdown. Neither of these are defined in the complaint filed, although will likely be argued if the case goes to trial.
We can presume that the attorney general is determining that a reasonable timeframe is something less than that which went by in the Asylum card project. A timely timeframe would be some increment even less than that of the reasonable timeframe. This means that for a project creator once the estimated time of delivery has passed there may be a limited amount of time that the creator can claim that they are working on the project and not owe any refund. Once a sufficient amount of time has passed that delivery would be considered untimely the project creator would be expected under the consumer protection laws to provide a refund upon request. When even more time has passed and delivery has been unreasonably delayed the creator may be expected to provide a refund to anyone owed a reward whether the refund has been requested or not.
This would be a major shift from the current viewpoint, at least on Kickstarter, where project creators have operated under the belief that Kickstarter’s Terms of Service provides the governing language regarding refunds. That is as currently understood, a refund was not due from the project creator until the time that the project creator stated that they would not be delivering rewards to the backers and that the project had failed. If the court determines that that the “timely” and “reasonable” timelines for delivery are applicable to protect consumers then the terms of service would not govern.
Crowd-funding project creators should be on notice that the crowd-funding platform’s terms of service may not be the final word on what obligations are due to project backers. One cannot contract around regulations that are considered basic consumer protections.
VI. International Creators and Domestic Proxies
For individuals or organizations who are standing-in for project creators who are outside of the U.S., the individual listed as the owner of the project will be the entity held responsible under consumer protection laws. Individuals or companies who stand in proxy for an international project creator may want to take this level of risk into account in establishing a relationship with an individual outside the U.S.
VII. Conculsion
At this stage there is only the filed complaint, as the matter progresses evidence will come to light and potentially a final court ruling. However looking at the complaint provides insight into how a consumer protection agency will examine crowd-funding and to what extent consumer protection laws may shift or create risks for crowd-funding project creators. Going forward how a reward-based crowd-funding project estimates deliverables, determines what to offer as rewards, and processes refunds should take the potential impact of consumer protection laws into consideration.
VII. Takeaways
- Failure to deliver may expose a project creator to punitive damages.
- There may be an outer limit of time where a project is presumed to have failed; independent of the creator making any statement that the project is still being worked on or not.
- Stretch goals, and possibly add-ons and exclusives, should be considered required parts of delivery of the project to the same level as the originally promised project goal.
- Project creators may be held to provide a refund to a backer upon request if delivery of rewards is not “timely.”
- Project creators may be held to provide refunds to all backers whether the refund was requested or not if delivery of rewards is not performed in a “reasonable” time.
[1] See www.kicktraq.com/projects/213177064/asylum-playing-cards/
[2] https://www.Kickstarter.com/projects/213177064/asylum-playing-cards
[3] https://www.Kickstarter.com/projects/213177064/asylum-playing-cards
[4] https://www.Kickstarter.com/projects/213177064/asylum-playing-cards
[5] https://www.Kickstarter.com/projects/213177064/asylum-playing-cards/comments
[6] https://www.Kickstarter.com/hello
[7] https://www.Kickstarter.com/hello
[8] https://www.Kickstarter.com/hello
[9] RCW 19.86.010
[10] http://dictionary.reference.com/browse/commerce?s=t
[11] An analysis of the definition of trade/commerce under each state’s consumer protection law was not done for this article.
[12] Note: An open question would be what impact would a project creator’s ability to update and modify the estimated date of delivery have?