Broken Promises: A Glimpse at the Dark Side of Crowdfunding

By: Jeff Ifrah

The fact is that social media has connected us to each other in ways which seemed unimaginable only a few decades ago.  Take for example the progression of social activism through online fundraising.  Over the course of two short months the ALS Ice Bucket Challenge (“IBC”) went viral with millions of videos being posted by people drenching themselves in ice water in order to spread awareness and raise money for the research and treatment of ALS.  To date, the total amount of donations made to the ALS Association through the IBC is an unprecedented $114 million.  The Association’s FAQs webpage regarding the IBC indicates that this amount is almost five times its annual overall budget.

The ALS Ice Bucket Challenge is also a good example of the online phenomenon of crowdfunding, where numerous individuals and groups pitch in to fund a project, cause or idea.  Simply put, crowdfunding is fundraising through social media.  There are several popular crowdfunding websites, however one of the most well-known sites is Kickstarter.com, which was launched in 2009, and boasts the facilitation of $1 billion in contributions by seven million backers who have so far funded 69,000 “creative projects” through the site.  However, as is common when dealing with new technology, there are often unanticipated legal aspects of such innovation which can be problematic.

Earlier this year, the first crowdfunding consumer protection lawsuit was filed in the state of Washington (State of Washington v. Altius Management, LLC; Edward J. Polchlopek III (No. 14-2-12425-SEA)).  In late 2012, defendant Ed Nash, as he is known, and his company Altius Management, were successfully funded through a Kickstarter campaign to produce a limited-edition playing card game called Asylum.  According to the campaign page, backers exceeded Nash’s goal of raising $15,000, giving more than $25,000 in total for the promise of the card game to be made.  In addition, many of those who funded Nash’s campaign expected certain perks for contributing, referred to by Kickstarter as “rewards,” as was detailed in his campaign’s backer pledge amounts, which included multiple card decks and custom artwork according to varying contribution levels.  However, two years later the card game has not been produced, backers have received no rewards or refunds and there has been no communication from Nash regarding the status of the Asylum project since July 2013.

Each project “creator” who signs up their campaign on Kickstarter is required to agree to the site’s Terms of Use, which includes language stating that the creator must fulfill all rewards promised to backers or issue refunds.  If the creator fails to deliver on both of these fronts, Kickstarter advises them that they may be open to litigation by backers.  Now, the Washington State Attorney General’s Office wants Nash to pay for breaking his promise to these backers under the state’s Consumer Protection Act (“CPA”) [RCW Chapter 19.86].  The filed lawsuit seeks up to $2,000 per violation of the CPA in civil penalties for restitution to the backers, and also includes all state costs and attorneys fees.

With this being the first case of its kind, there is no precedent to see exactly how these proceedings will develop or how this case will affect Kickstarter and other crowdfunding websites.  We suspect it will proceed like many of the other cases we write about in the internet space.  One thing is certain, whether they are made online or in person, people don’t like broken promises.