Washington State Files First Consumer Protection Lawsuit Against Kickstarter Project That Failed To Deliver
from the don't-kickstart-if-you-don't-plan-to-deliver? dept
I’ve backed a few dozen Kickstarter projects over the years, and there have always been questions about possible fraudulent projects. While I’ve personally found that nearly every project delivers late (often very, very late), I don’t think any of the projects I’ve backed has completely failed to deliver (there are a couple I’m still waiting on, though…). Still, the risk of such a “default” is always a possibility, and that’s always been the case. Backing a product at an early stage always comes with the risk that it may never deliver. Kickstarter itself has tried to do a better job in making people aware of this upfront with its “Kickstarter is not a store” claims.
However, Washington State’s Attorney General has decided to file a consumer protection lawsuit against one project that failed to deliver.
The state’s top lawyer, Bob Ferguson, said Thursday his office has filed the first consumer-protection complaint in the U.S. to target a Kickstarter fraud.
The lawsuit alleges Edward Polchlopek III and his company, Nashville, Tenn-based Altius Management, in 2012 raised more than $25,000 from 810 people in order to print a deck of “retro-horror”-themed cards designed by a Serbian artist.
Among those backers were 31 living in Washington state, according to the suit, which was filed in King County Superior Court.
As the actual filing notes, two years later, nothing has been delivered and no money has been returned. Rather than just seeking the return of the $25,000, the lawsuit asks for $2,000 per each backer, meaning that Altius Management may be on the hook for a potential $1.6 million.
I’m a bit torn about this. As the lawsuit points out, under Kickstarter’s terms and conditions, project creators “are legally bound to fulfill backer rewards if funding is successful.” And going after actual fraud seems like a good thing. But there’s also a risk here. Any project might not get completed for any number of reasons — sometimes beyond a project creators’ control. In fact, we’ve had stories of failed Kickstarter projects.
This is the nature of innovation. An idea is great, but execution is the really challenging part, and almost everyone underestimates the importance of execution. That’s one of the clear risks in both creating and backing a Kickstarter project. While it seems reasonable to go after clear cases of fraud — in which the creator had no intention to ever deliver a product, it gets a lot more complicated in cases where unforeseen circumstances resulted in the project falling apart. Should projects that discover too late that their plans were too ambitious also face the risk of millions of dollars in liability? Such a threat could cast a real chill on the crowdfunding space that has been so important for so many.
So while I think fraud charges may be appropriate in extreme cases, where it can be shown that there was never any real intent to deliver a product, there is a real risk that these could spread to the other kinds of cases, where it was just a botched execution — and that could really do a lot of harm to an important emerging market for creativity and innovation.
Filed Under: bob ferguson, crowdfunding, edward polchlopek, fraud, scams, washington
Companies: altius management, kickstarter
Comments on “Washington State Files First Consumer Protection Lawsuit Against Kickstarter Project That Failed To Deliver”
Unless it can be definitively proven that they never intended to hold up their half of the ‘deal’, I’d think the worst that should happen would be a refund to those that paid into the kickstarter, and even option should only be applied carefully, given that kickstarter is about funding prospective ideas and projects, and sometimes things just don’t work out, something both sides should be aware of beforehand.
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I think if a project creator doesn’t want to be on the hook for refunding for a failed project, they need to make it ultra clear in their pitch, that they are not able to guarantee a final product, and accurately explain issues that could prevent them from it.
Its not fair to pitch as something that will come for sure, if its not a sure thing.
A LOT (every one I have seen?) of Kickstarters are pitching with what seems to be 100% certainty of not only delivering a product, but delivering it on time (which basically never actually happens).
There is a spot in projects to list ‘Risks and challenges’. If you’re project fails or is delayed for a reason that isn’t listed in this section, I feel this mistake is on you. You should have been able to at least have the foresight of knowing where potential issues will crop up.
I think if project creators were more honest with the current place the project is, and what needs to be done, they may get less backers, but in the long run the transparency can only help to legitimize crowd funding.
For example, I have backed a project that was supposed to ship in July. The project pitch makes it seem like the product was fully designed and just needed tweaks. The project has CONSTANTLY been pushed back, and is currently projected for about a year late (july 2015). The current ‘delay’ is completely redesigning the product. No where in the pitch was it mentioned this would need to be done. In fact, it was implied the design was basically already decided on, and manufacturing and tech was what was left.
I don’t feel delays like this are in the spirit of the crowd funding movement. Had they pitched the project in the state it was actually, with a more reasonable time table, I imagine they would have made much less then the $200+k they made.
At the very least, if a project gets delayed for a significant time, for a reason that was never brought up as a possibility, I think a refund should be offered. Maybe they should have the option to reopen the KS for new funding, with revised expectations, to offset the cost of paying refunds to other backers.
The answer to this is the following:
Have crowdfunded contracts come with a clause that says if the project does not meet the deadline, refunds will be given (with interest, maybe? something for the free-market to decide). It’s only a matter of time before all the projects tend to this direction. They have to in order to meet the definition of an “assurance contract”, which is what these projects essentially are. Like refunding tickets for a cancelled gig, for example. Or subscription refunds for a botched cable broadcast that lasts for a month, or an ISP’s service being down that long. Or refunds for people not getting their pre-ordered games for whatever reason. After that’s established, consumer security will be better and the sites will become more mainstream, making the copyright believers more furious at the profits of the indie artists.
Alternatively, for lagging projects, the clause could say “if the date deadline is hit and we are not finished, we will have another “leg” of funding take place to be hit within (say) 30 days – (say) another $10,000. If that is not hit, we will consider the project failed and refund anyone who ever backed the project.” This will be necessary anyway, as naturally the more time you need the more money you need to give your employees. Stretch goals will be gaining a lot of ground in the future as “extensions” to the original assurance contract, so this will fit in nicely with that.
Every single creative project has to go through this, even under copyright. If a film studio invests in a movie and it botches halfway through production, that studio’s money has gone down the toilet whether it likes it or not. That’s part of the risk you have to take.
So of course if companies take that sort of risk nowadays they can take it with crowdfunding no problem in relation to losing money due to having to refund funders.
Now I know what some might be thinking: technically if a film was half-finished and the deadline was hit, or just shitty in general and the deadline was hit, they could in theory release the film as it is and still have “met the conditions” of the contract and be able to run away with the money. However, the film studio in the copyright scenario could have done that too. There is no reason why you can’t release a half-finished film as a DVD on the shelves of retail shops. Everybody is entitled to try it. The problem is this: reputations suffer. In particular those of the film makers AND most importantly, the retail shops of the DVDs.
Which ties into my next crucial point: like it or not, the obvious next move these crowdfunding sites are going to take – HAVE to take – is to get actively involved with the projects themselves. They are going to want to see it beforehand, to make sure it is up to a reasonable standard. Because (say) Kickstarter will know its reputation is on the line. Kickstarter IS essentially a publisher right now, whether they realise it or not.
Because that quality assurance and quality control are going to slowly but surely become mandatory in order to compete in the crowdfunding market. I’ve noticed that people do tend to criticse crowdfunding for its projects not having quality assurance, but that criticism won’t last long.
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And I fear that the cost these artists will encounter for getting Kickstarter’s seal of approval – and even more importantly, Kickstarter’s seal of quality assurance – will be a higher percentage of what Kickstarter takes from the project’s pot. And even the copyrights.
Let us hope the crowdfunding sites do not tend towards some kind of oligopoly where they can fix the prices for those artists… dig in and set up tons of competition, wherever you can.
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While I agree with you for the most part, jameshogg, I take exception to this statement:
Have crowdfunded contracts come with a clause that says if the project does not meet the deadline, refunds will be given (with interest, maybe? something for the free-market to decide).
There is no such thing as a free market or a “free-market.” I’d be interested to see how would-be backers would decide on whether or not refunds would be given with interest and how they would enforce their will. Insurance of some sort to cover the risks may well be in order, but that comes with its own risks.
If would-be entrepreneurs decide to offer refunds with interest, how will that work? A Ponzi scheme? They’ll need to have enough money to cover the interest already banked somewhere.
If Kickstarter is pressured by would-be backers into guaranteeing a win for every project and/or their backers by enforcing a refund-with-interest policy, who the hell is going to be willing to go to them for funding?
There are market forces at work and they should be allowed to work in balance for the common good. Where the demand side has the advantage, suppliers get screwed (this is happening in the jobs market now, and that sure ain’t free!). And where the supply side has the advantage, consumers get screwed (think MAFIAA, telcos, etc.).
When we’re “letting the market decide,” which side of it gets to decide? I don’t think it’s fair to hobble Kickstarter or the entrepreneurs who use it to protect investors from the reality that sometimes projects fail, and not as a result of deliberate fraud.
While all reports of fraud should be carefully investigated, let’s leave Kickstarter as it is. I believe they’ve got the balance right between the market forces.
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Good thoughts, but I don’t think they will take root in a crowdfunding context.
The predominant point of crowdfunding sites is to help people raise money to try something. They could fail. If the project had money to offer refunds when they fail, they wouldn’t need to raise money to fund the project in the first place.
I have funded a dozen+ projects, and each time I know I am giving some artists my cash to see if they can pull it off. Sometimes they just can’t. That’s the risk I willingly take. Thus far most have come through, others are still working on it, wayyy past deadline. (Still waiting on the Dr. Demento and Devo documentaries, but got my zombie playing cards and my Ouya.)
But the ones who are working on these overdue projects are communicating with us; and late or nothing is the risk I took. It’s not about quality control or guarantees or meeting deadlines. It’s about supporting folks with groovy ideas. And apparently vastly more succeed than fail.
The folks in the article apparently stopped communicating with anyone months ago, and haven’t been found. That’s not the spirit of the thing, and hopefully that type of scenario is the extent of where these lawsuits go if there are more.
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I’m afraid I can’t agree with those ideas, and I think it would be the end of crowdfunding efforts if they were forced. Two issues spring immediately to mind.
1. Hofstadter’s law. It’s the reason that so many of these projects go overtime, even if they allow for the project to go overtime.
2. These projects ask for money for a reason, and they aren’t simply holding on to it as a safety net or something. The bulk of the money is well gone before there’s any hint that the project might not hit the release date. So where will the refund money come from?
If you tried to enforce the measures you suggest, I suspect that there would be far fewer crowdfunded efforts. You are essentially greatly increasing their risk – project creators are generally the people taking the greatest risk here, they often literally put their livelihood at stake – to virtually eliminate your risk. Crowdfunding is there precisely so that the creators can reduce their risk somewhat by sharing it with others, backers taking on a small part of the overall risk.
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“Have crowdfunded contracts come with a clause that says if the project does not meet the deadline, refunds will be given”
The problem with this is that it eliminates the reason to use kickstarter. It means, in essence, that you can’t really use the funds you’ve raised as you’ll need to set aside a reserve large enough to cover repayment should everything go belly up. If you’re contributing to (or even straight-up investing in) a startup, you’re voluntarily taking a risk. Necessarily so. Kickstarter should be no different.
Of course, there is also such a thing as fraud (which is different than a venture failing). You should always be able to sue for fraud.
Let’s be happy about one thing: The state is not going after Kickstarter! They’re actually going after the company at fault. Considering how common it is to go after the larger and more collectable, but incorrect, target, I find this refreshing.
Maybe the police will stop blaming Craigslist for prostitution and the MPAA will stop blaming Google for piracy.
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“MPAA will stop blaming Google for piracy.”
more likely they’ll add yahoo, Bing and Bacon to that list
not a search engine or ISP named Bacon even. the kind from pigs
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Bacon has been responsible for a lot of things…
If the state ends up winning, the only reasonable way for project starters to protect themselves will be to incorporate. Otherwise, the risk of personal losses is too high. A decision in favor of the government could kill crowdfunding for natural persons.
The issue here is that if the transaction looks and smells like a sale, the court is going to rule that it was a sale.
Nobody made you model your stretch goals. You can raise all the funds you like so long as you don’t promise to deliver merchandise in exchange. Once you’ve raised your vig, there’s nothing keeping you from giving all your backers a sweet deal on the product that their cash enabled you to develop.
But if you say “give me x moneys and I give you y stuffs”, you are selling things. The fact that you don’t actually have the things yet is not germane to the fact of the liability. You can’t even say “sorry, I blew it, here’s all the money back” – you’re still liable for the costs other parties are put to, though in practice the difference is so small that it ain’t gonna make it to a court. (Maybe if you’re kickstarting hundred million dollar yachts.)
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I wish they’d hurry up about it when it comes to software, so the US could get with the program. In the rest of the world, EULAs are understood to be exactly what they are: leonine contracts that aren’t worth the paper they’re printed on. The sale of a copy of a program is the sale of a copy of a program, and right of first sale applies, which means you can’t apply stupid restrictions to it.
In most of the world, that’s true. But here in the US, it’s still up in the air.
Kickstarter
I have always viewed Kickstarter projects are high risk/reward projects. Some will make a lot of money but others will fail miserably. With latter, the investment is gone. I understand Kickstarter tries to police the quality of the initial offerings so that there is a reasonable chance of success.
I would be very wary of fraud charges with Kickstarter, not saying never file charges. The issue is the risky nature of these projects and many honorable people will fail. Too aggressive on fraud charges; you are punishing taking reasonable risks and failure not criminal activity.
matter of time
When Kickstarter unofficially officially decided to sit back and do nothing themselves in matters of blatant fraud, it was only a matter of time until the government stepped in.
Speaking as a backer of a promising looking project that turned out to be a complete scam (not just a case of “things happen”), I’m surprised there hasn’t been action along these lines sooner and I wish this lawsuit applied to my backing.
Don’t get me wrong, I have no doubt that this will end up being a chilling effect in the future if it goes through. But the ones at fault for not stepping up and nipping the real problem in the bud from the very beginning are Kickstarter themselves. If you don’t want the government doing it, show some spine and start self-regulating before it becomes necessary.
I’m reminded of the sad tale of Super Retro Squad. A spiritual successor to Super Mario Crossover, it was supposed to be greater than the original while also being free of copyright entanglements. But Exploding Rabbit got in over its head, having not even enough experience to realize that the members of a development team ought to be paid regularly, and I’m not sure how successful the game would have been upon completion anyway since the classic gaming mascots were the whole reason anyone cared about the original.
The game burned through all of its Kickstarter funding and ended up put on indefinite hold, and though the development process was a parade of errors, I’m not sure I’d go so far as to want to see the law come down on everyone involved. But then again, I wasn’t a backer since the game’s original cast didn’t inspire confidence. (Two German miners named Manni and Lanzo who have to save the princess of the Asparagus Kingdom? Really?)
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Yes, this is a problem that goes way beyond kickstarter. I see it frequently in the software world: people, often experienced coders who have no real experience with the business side of things, dramatically underestimate the cost of software development and that leads directly to failure.
several factoids not in evidence...
from the report i read somewhere – soylent news?- there are a couple details that make this more reasonable than might appear:
1. they basically ‘promised’ anyone who contributed a certain amount (9$ and over, i think), would get a deck of cards…
2. it was 2 years or more, and no cards…
3. NOT like -as posters there said- it was a NEW high tech thing that hadn’t been developed and experienced unknown unknowns and unforeseeable delays: it was a GRAPHIC (already done) for a set of playing cards to be printed conventionally… (i seem to recall they specifically mentioned the ‘bicycle’ card company doing the printing…)
4. the founders did NOT respond to any inquiries by kickstartees, and have effectively disappeared with no updates, no ‘hold on, we’re almost there!’, no nothing…
THAT was one of the points people were making: IF the kickstarter keeps their kickstartees apprised of what is going on -EVEN IF LATE- they understand and are patient…
all they’ve gotten is …
Re: several factoids not in evidence...
Yeah, I can understand Mike’s concern about potentially chilling others doing crowd funding, but this one looks like a flat-out fraud. Failing to do a bog-standard printing job in 2 years, and apparently it’s now been over a year since the last update of any kind seems fishy as hell.
So I’m not at all surprised to see them getting sued.
Re: several factoids not in evidence...
I don’t know if it was “just a printing job” since you need a full set of things to print rather than the subset used for the Kickstarter.
But it would appear from some reports that the artist has not been paid either.
You made a mistake on this when complaining.
BACKER rewards (the tiered rewards) MUST BE FULFILLED regardless of whether the project is.
You have made a promise to fulfill backer obligations (the kickstarter pledge rewards) and are legally bound to do so. The delivery of the product itself however may or may not happen.
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Exactly.
If a KS says: “everyone who contributes $X gets a Y”, then the project has made a legally binding promise, even if Y requires the completed project, and the budget came up short.
But if the project says: “if we succeed in making Y with the KS funds raised, everyone who contributed $X will get one”, the promise is contingent. If a good-faith effort comes up short, nothing is owed.
Moral of the story, only promise what the project can deliver in a worst-case scenario.
between the cracks
One problem with Kickstarter is that it’s not well defined as to exactly what it is and where it fits in the legal system. Is Kickstarter …
A.) Some kind of retail merchant?
B.) Some kind of (unregulated) venture capital investment vehicle?
C.) Some kind of (unregulated) charity or non-profit?
Each of those three choices is generally regulated in some way by a distinct government agency, yet many people who lay their money down seem to believe that Kickstarter might be any of them. Or all of them. Or even none of them.
So when things go wrong, who can people turn to for dispute resolution?
And let’s face it, any system like Kickstarter will sooner or later attract scam artists. Both kinds — the kind that operate outside as well as (just barely) inside the law. As well as products that are simply outrageously expensive for what they are (and I’m glad that Techdirt is starting to point that out).
Although Kickstarter is a great idea, the potential for abuse is enormous. What’s to keep some johnny-come-lately from promising an exciting new product and raising a great deal of money, only to end up pocketing most of the cash and shipping a cheap, shoddy product that comes nowhere near expectations? Nothing, of course, as late-night TV and comic book mail-order ads have been doing for decades.
Re: between the cracks
Option B) isn’t legal and isn’t what any of the crowd-funding platforms do or allow.
All equity offers fall under federal securities law.
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“Option B) isn’t legal and isn’t what any of the crowd-funding platforms do or allow. All equity offers fall under federal securities law.”
So do “junk” bonds, I believe, fall under SEC regulation — although these are not considered “equity” in any sense — though they probably could be described (in a loose sense) as “some kind of venture capital investment vehicle.”
Although no “equity” is technically ever offered (nor presumably does any even exist) in Kickstarter, a person’s “payment”/”investment”/”donation” can indeed have profit potential — or at least the illusion of it.
Since early payees often get the product at a sizable discount, there is the implied potential of early adopters selling for a profit.
Also, people who give money to any project involving a disproportionately large capital outlay (high fixed cost/marginal cost ratio) such as software or audio/video media, are in a non-technical sense “investing” in its outcome, since the more money raised, the better the product that eventually ships. “So tell all your friends” — and essentially “profit” from their donations.
Who goes after all the politicians who fail to deliver?
A couple of minor points...
Seems as though everyone is jumping the gun – why not wait until there is or isn’t evidence of fraud? All I see are questions which need answering before an intelligent analysis of “what this all means” can be made. If it IS fraud, throw the book at the bastards and fine them into oblivion for sabotaging a GOOD thing. two cents.
Other thing which caught my eye was the phrase, “…where it was just a botched execution…” Was this intentional phrasing? After the events last week? Did it seem like a good idea at the time? I admire it’s usage. Bold and brave. Tests the audience for knowledge of recent current events. Helps critical thinking about TWO issues. My hat tips in your direction.
The inovators are the ones that suffer, they will have to present something more substantial giving details of their goals and aims with as much detail as they can, they will probably have to research and give solid numbers and the methods they plan to manufacture and distribute, and in this day and age, in video form wont hurt……….this, above, is’nt a bad thing, its a bump in the road to improving……backers will become more wary, were inovators will have to step up their game to compensate, a proven method, a sort of standard will emerge, were logic steps will be identified and then imitated by others……this, the afformentioned “road to improvement”…….getting govrnment involved might sound beneficial in these cases, even to me, but i cant help but think it also opens the floodgates for government to force control, through laws, regulations and policy……….in a world were we have to many, and a pitiful amount of good ones…….ill go as far as to say some are just mind boggeling, to figure out what good comes of it to the people, but benefiting the few, either a group or corp or a gov, never the people…….its scary how many of these
are being made these days it seems
You had one job
I don’t get how they could mess up something so simple. All they have to do is give a twenty five thousand dollar commission to the artist who would probably gladly take it.
So kickstarter is about getting investors without the investors getting any return on their risk?
I seriously doubt Altius Management, frauds or not, would have $1.6 million dollars to pay out if they needed a measly $25,000 to start the project. (That’s about half of the median annual income in the US or 1.6% of the amount of the lawsuit) At least, not unless they are already a wealthy group doing Kickstarter projects just to rip people off.
So even if the lawsuit is justified here, the amount of the damages demand is almost as unreasonably excessive as a RIAA lawsuit.
Ah, the beginning of the end for Kickstarter and all it has brought us. To all you dolts who think Kickstarter people should be giving refunds I think you should be banned from the internet. If you’re too stupid to understand the risks of giving people money on an unproven concept via Kickstarter then you have no business being on the internet in the first place, and you certainly shouldn’t be trusted with money… yours or anyone else’s. Why? Because it’s people like you that will seek out someone like the Washington State’s Attorney General (who can suck it and die) and sue people because you didn’t get your fucking playing cards. It’s a risk, people. Grow up and stop looking to daddy government to fight your battles and keep your life safe and risk free. Assholes.