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

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  1. icon
    jameshogg (profile), 5 May 2014 @ 2:40pm

    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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