Hot Docs: Groupon sued over illegal expiration dates

March 10, 2011

"Dupe-on" logoAnyone who has regularly used the internet over the past few years is familiar with Groupon.

The company boasts different “deals-of-the-day,” which consumers can access by providing basic contact information.

The “deals” are coupons to any variety of local businesses at markedly discounted rates. These rates are achieved through what Groupon calls “collective buying power,” which is, legally speaking, just another name for an assurance contract.

Groupon’s assurance contract model operates in such a way that prevents a deal from “going live” until a certain number of people have committed to it.

This lets Groupon assure its marketing partners a certain volume of business in exchange for a significant portion of the price of the coupon to the consumer (something around 50%).

Additionally, the deals are only available for purchase within a 24-hour period, prompting a sense of urgency in purchasing the coupon.

Based on Groupon’s popularity, it’s not hard to imagine how profitable its business model has been:  Groupon’s coupon sales in 2010 amount to over half a billion dollars.

However, there may be more to this business model than a simple assurance contract system.

A class action complaint filed on March 1, 2011 in the Northern District of Illinois alleges deception as having played a big part in Groupon’s earnings. At the heart of the conflict are expiration dates.  Namely, they are too short.

Hot Doc: Johnson v. Groupon Inc. (N.D. Ill.)

Source: Westlaw News & Insight – National Litigation

The complaint alleges that Groupon’s expiration dates are often not more than a few months after the certificates are issued, whereas both Illinois state law and recently-passed federal regulations mandate a minimum expiration period of five years.

The complaint further alleges that Groupon and its marketing partners have profited greatly from this conduct because many consumers are unable to redeem the certificate before the expiration date.

While the complaint does not substantiate this claim, it is plain to see how this behavior is profitable.

A certain number of purchasers of gift cards and gift certificates will simply forget about it until it’s too late.

The earlier the expiration date, the better the chances are that the certificates will go unredeemed. Accordingly, an expiration date of a few months instead of a few years will lead to many more unredeemed certificates, thus higher profits.

While Groupon itself does not directly profit from this, its marketing partners do, creating a higher demand for Groupon with potential business partners, allowing Groupon to charge such a high fee for the use of its services. It will be interesting to see how this suit proceeds.

If it is successful, it may change the fast-growing company’s future business prospects significantly.

If it is unsuccessful (which, in my opinion, is only really possible if the court finds Groupon’s arbitration clause binding, and such clauses are quickly falling out of favor with courts), the fact remains that Groupon is breaking the law, and cannot continue to do so indefinitely.

Either way, this “expiration date” practice will have to expire.  Then, it’s anyone’s guess on how it will affect Groupon.