Is Groupon an Option?9 May, 2011 By: Jeffrey Richter, Arthur Yoon
In this age of social media, advertisers may be considering whether “daily deal coupon” websites, such as Groupon and LivingSocial, can work for their direct marketing businesses.
Buyers on Groupon will only receive the “groupon” if a required minimum number of purchasers sign up for the advertised deal. If an advertiser has reached the minimum number of buyers, Groupon will then split the proceeds of the group purchase with the advertiser as its payment.
Daily deal coupon websites essentially are online advertising opportunities. They capture consumer attention through their “daily deals” and promote an advertiser’s business directly to consumers via E-mail. Under Groupon’s current business model, it charges a fee based on the total value of the offer (sometimes 50 percent or more) as a marketing fee. While many advertisers have to absorb the loss of the discount, their strategic goals may be achieved by gaining credibility as a featured daily deal, online exposure and potential repeat buyers.
Although Groupon may be an appealing advertising option, using the website may pose significant legal risk. According to recent news media reports, Groupon has been dealing with a wide array of legal issues with regard to advertisers’ promotions, including claims that Groupon may be violating gift certificate laws by adding expiration dates to its coupons and violating alcoholic beverage laws in daily deals that involve alcoholic drinks.
For example, daily deal coupons that include discounts on alcohol may be a violation of state liquor laws. Advertisers that apply those discounts to the purchase of beer, wine, or liquor risk being cited by regulators for liquor law violations. In these cases, regulators may decide that Groupon, which receives a substantial share of the promotion sales, has been selling alcohol without a license, fine it and perhaps even force it to obtain its own liquor license.
If a regulator determines such a violation has occurred, the advertiser could also face fines or loss of its business or other license. On this point, the California Department of Alcoholic Beverage Control has issued an industry advisory cautioning businesses that involve the operation of Internet websites through which consumers may purchase alcoholic beverages. The advisory reads, in part, “management decisions, pricing decisions, controlling the distribution of funds, and profiting from the sale of alcoholic beverages are considered fundamental privileges of a licensee. As such, if any such decisions are made by non-licensees, or if non-licensees share in the profits from the sale of alcoholic beverages, violations . . . may occur.” (California Department of Alcoholic Beverage Control, Industry Advisory, Unlicensed Third Party Service Providers, dated June 2009)
State alcoholic beverage regulators are not the only government agencies that may find fault with advertisements on Groupon. If an advertiser’s business is regulated at the federal or state level, there are likely legal issues that have to be examined before deciding to participate with Groupon, LivingSocial, or other similar services. The resolution will depend, in part, on where the advertiser is situated and where the promotion is actually offered, since many of the relevant rules are state laws, which vary from state to state.
Common questions that an advertiser should ask include the following: Is the advertiser a holder of a license subject to discounting and advertising regulations? Could the promotion with the daily deal coupon website be considered an illegal fee-splitting or an illegal kickback in exchange for a referral under applicable state law? Is the promotion subject to federal laws in addition to any state laws? At the very least, advertisers should always bear in mind their obligations to comply with advertising and disclosure guidelines promulgated by the Federal Trade Commission (FTC), Food and Drug Administration (FDA) and state attorney general offices.
Jeffrey Richter is a partner and Arthur Yoon is an associate at Los Angeles-based Finestone & Richter. They can be reached at (310) 575-0800, or via E-mail at email@example.com and firstname.lastname@example.org.