Frankfurt Kurnit Klein & Selz

February 14th, 2011

New Class Action Filed Against Groupon and Retailers: Crowd-Sourcing Gone Bad?

Groupon, the site that offers targeted “Daily Deals” to consumers, enjoys daily stories in the press about its success, including a $6 billion offer from Google (which it rejected). Now, though, it may have attracted the wrong kind of attention: a class action lawsuit in California, alleging violations of state and federal gift card laws.

In late January, class action plaintiff Anthony Ferreira filed an action in the district court of Southern California on behalf of himself and other purchasers of "groupons," the vouchers sold by Groupon at a discounted price for its merchant partners’ goods and services (For example, a consumer can buy for $50 a voucher worth $100 to use at her local clothing store). Typically, the consumer must make the purchase within a day of getting the offer by email and, at issue in this lawsuit, she must redeem the voucher at the store by a stated date, usually within a few months.

The action seeks damages and injunctive relief from Groupon, the retailer Nordstrom, and other as-yet-to-be-named retailers. The complaint alleges that the redemption deadlines on the "groupons" are actually illegal expiration dates, violating both California’s strict gift card law (which bans expiration dates on gift cards) and the newly enacted federal "Credit Card Accountability Responsibility and Disclosure Act" (which requires gift cards to be valid for at least five years - and does not preempt stricter state gift card laws, such as California’s)

Although it is too early to know how Groupon will respond, the case will surely address Groupon’s apparent reliance on the exemption for “promotional” gift cards contained in both the state and federal laws. This exemption allows gift cards that are not sold to consumers but that are provided as rewards or incentives for another purchase to expire. As Groupon’s recently updated disclosures highlight, the “groupon” is, in effect, a mash-up of a regular gift card (for the amount actually paid by the consumer) and a promotional gift card (for the additional value received by the consumer): the regular part remains valid for the time required by applicable gift card law and the promotional part expires more quickly. If the consumer does not redeem the voucher by the expiration date (using both its paid and promotional value, e.g., the full $100 in the example above), she will, according to Groupon’s terms, continue to have a credit with the merchant for the amount she paid for the longer period mandated by the gift card laws.

As Groupon’s model becomes increasingly ubiquitous, with other companies selling discount deals in the same manner and retailers flocking to do business with these companies to increase their customer base, the resolution of this case could provide important guidance on gift card laws.

For more information on this lawsuit or any other advertising or marketing law issues, please contact Terri Seligman at (212) 826 5580 or tseligman@fkks.com, or any other member of the Frankfurt Kurnit Advertising Group.

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