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Understanding Your Kickstarter Liabilities

by Dan Rogers on 03/09/15 06:47:00 pm   Expert Blogs   Featured Blogs

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The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

When video game icon Peter Molyneux launched a 2012 Kickstarter campaign, fans around the world devotedly supported his vision of connecting up to fifty million players in a massive, god-game universe the size of Jupiter. [1] So convincing was the promotion that 17,184 people paid Molyneux’s studio, 22cans, over $850,000 [2] for a game expected nine months later.

Now a year and a half behind schedule and just 52% complete, Molyneux’s GODUS game world seems to be wobbling on its digital axis. [3] Its development staffing has changed considerably, and at least one insider believes that key game features are in question. [4] Fans are angry and bloggers are beginning to mumble the word lawsuit[5]

Truth be told, the legal issues surrounding failed Kickstarter projects are largely untested waters, but if recent lawsuits are any indication, then those venturing into this crowdfunding sea may be subjecting themselves to more risk than they realize.

Over the last six years, eight million people have spent more than $1.6 billion on Kickstarter, funding everything from children’s books to feature length films to potato salad. [6] Unfortunately, Kickstarter’s Terms of Service only broadly explain the complex legal relationship created between backers and campaign creators.

KICKSTARTER REWARDS

For example, Kickstarter uses the word reward to mean the goods and services backers receive after paying money to a campaign, leaving us to speculate whether T-shirts and video games and other tangible goods and services are incidental or integral to the transaction. While Kickstarter explains, albeit briefly, that their service is not a traditional storefront for people to sell currently-available goods and that the agreement between a campaigner and backer is contractual, they fail to disclose in detail that the sale of future goods, including those being pitched in Kickstarter campaigns, is wrapped in binding and enforceable law. [7]

“Kickstarter is not a store. People aren't buying things that already exist — they're helping to create new things.”

Few would argue that a farmer who sells wheat still growing in his fields has a legal obligation to deliver the ripened crop to his buyer when ready. In the same way, a software developer promising to deliver a finished product is under a similar obligation. Telling your buyer that you didn’t realize how much work it would take or deciding to develop something else mid-season hardly relieves you of your duty under the law.

KICKSTARTER PLEDGES

Kickstarter transactions are further clouded by the word pledge, which is used to describe the money backers spend on a project, leaving people to wonder, among other things, if the money is a tax-deductible donation.

In all likelihood, it’s not a donation at all. [8] First, Kickstarter doesn't allow donation-based rewards, [9] and second, IRS regulations allow only qualified non-profit organizations and registered charities to accept tax-deductible donations. From a legal perspective, donations are what you put in the offering plate at your local church, synagogue, or mosque; not what you give to Kickstarter campaigns.

GIFTS

On the other hand, Kickstarter backers may lawfully contribute gifts to a campaign, although it's left up to the campaignerbacker, and the IRS to figure out what percentage of a pledge is intended as a gift and what percentage is spent in anticipation of a Kickstarter reward. And that’s not an easy task.

Beyond deductions, a creator may be able to classify certain funds raised on Kickstarter as a nontaxable gift, and not income. [10]

U.S. tax law defines a gift as a transfer made out of affection, respect, admiration, charity, or like impulses, but the controlling factor is the giver’s intention. [11] Applying this to Kickstarter, regardless of what a campaigner thinks, it’s the backer's intention that matters.

DETERMINING GIFTS AND PURCHASES

In some cases, identifying a backer’s intention is straightforward. Consider that the lowest level GODUS reward is heartfelt thanks and access to exclusive backer forums. Here, one can form a reasonable argument that neither item has an ascertainable fair market value; that the backer's primary intention was to give a gift.

On the other hand, a pledge of £15 obligates Molyneux's studio to deliver one digital copy of GODUS, in addition to their heartfelt thanks. A popular digital game download site—Steam—currently offers GODUS for $19.99, so a £15 pledge is roughly equivalent to the real-world purchase price of the game. Here, it's hard to imagine that the buyer's intention is anything but to purchase a product.

BACKERS ARE NOT INVESTORS

Investor is another word people should avoid using when talking about Kickstarter campaigns. Backers are not investors because there is no assumption of risk and no chance of a monetary yield.

Back in 2012, when Palmer Luckey raised $2.4 million through Kickstarter to fund his Oculus VR headset, the backers who invested in his campaign didn’t see a nickel of the $2 billion he later received when Facebook purchased his company. Instead, those 9,522 early investors received the benefit of their contractual bargain: posters, T-shirts, and early headset prototypes.

Kickstarter agrees that there is no investment opportunity in a project:

We’re all in favor of charity and investment, but they’re not permitted on Kickstarter.” [12]

So, lest you think otherwise, no one is investing in a Kickstarter campaign by contributing money. [13] [14]

DANGEROUS WORDS

The problem is that when Kickstarter's participants assume that backers are investing or donating, and when they describe their products as rewards and money spent toward them as pledges or donations, they fail to recognize the contractual nature of the relationship. Peter Molyneux, for example, recently answered an interviewer’s question as to whether GODUS backers deserved a refund by saying “No. Because they didn’t buy a product.” [15]

RPS: “… do you not think after this much time that people … deserve their money back – isn’t that just basic business?”

Peter Molyneux: “No. Because they didn’t buy a product.”Rockpapershotgun.com interview (2/13/15).

Alarming as his answer may sound to someone who contributed to the GODUS project expecting to receive a copy of the game, it illustrates how wide a communication chasm can grow between campaigners and backers.

KICKSTARTER LIABILITIES

The legal implications of reward-based crowdfunding are more serious than one might think. For example, failure to deliver contracted goods and services can result in not only private civil suits but in government actions as well.

GOVERNMENT ACTION

A year prior to the GODUS campaign kickoff, Edward Polchlepe and his Nashville, company, Altius Management, raised $25,146 from 810 Kickstarter backers, promising to deliver a deck of horror themed playing cards and other merchandise. [16] Two years after Altius's promised delivery, not a single backer had received what they had paid for, and thirty-one of them happened to live in Washington State. [17]

Consumers need to be aware that crowdfunding is not without risk,”Robert Ferguson, Washington State Attorney General

In response, in May 2014, Washington’s Attorney General filed a first-ever Kickstarter consumer lawsuit, alleging misrepresentation, failure to deliver rewards, and failure to deliver refunds. The State of Washington is seeking repayment (restitution) and fines of up to $2,000 per backer. [18] If successful, damages could exceed $1.6 million, far more than the $25,146 that Altius received through its Kickstarter campaign.

CONSUMER ACTION

Similarly, at least one consumer lawsuit has been filed after a Kickstarter campaigner failed to deliver promised goods. In 2011, Seth Quest and his partner raised $35,004 from Kickstarter backers, promising to deliver an innovative iPad stand called Hanfree. Quest underestimated the manufacturing complexities and failed to deliver the product as promised. Hundreds of Kickstarter backers were frustrated, and Arizona insurance attorney Neil Singh did something more: he sued for breach of contract when Quest failed to return his money. [19] Quest ended up filing for bankruptcy and claims the experience ruined his reputation. [20]

MISSING THE TARGET

It wouldn't be surprising for a backer to sue a campaigner for delivering non-comforming goods either. In the case of software and video games, and while not a Kickstarter related matter, a recent suit against Sony provides some insight.

Around the time that Molyneux kicked off his GODUS campaign, Sony launched the PS4 game console in the United States. Anxious to demonstrate its advanced technical capabilities, they promoted a game named Killzone, claiming never-before, high-resolution graphics.

Killzone Shadow Fall is a visual stunner on PS4, rendering a smorgasbord of reflections, dynamic lighting, and billowing smoke at a razor-sharp 1080p native resolution (1920 x 1080). [21]

Shortly after the game’s launch, however, an article in Eurogamer.net revealed that Killzone was not delivering native 1080p graphics in multiplayer mode as  claimed, but was instead using a technical process called interpolation, which, in a puritanical sense, is considered graphical cheating among game enthusiasts.

In the single-player mode, the game runs at full 1080p with an unlocked frame-rate... but it’s a different story altogether with multiplayer. Here Guerrilla Games has opted for a 960x1080 [i.e., exactly half of 1080p’s resolution of 1,920 by 1,080] frame-buffer, in pursuit of a 60fps refresh. Eurogamer.com 

In response, Killzone purchaser Douglas Ladore filed a California class-action lawsuit, seeing over $5 million, claiming negligent misrepresentation, false advertisement, unfair competition, fraud, and inducement. [22] In December 2014, the California Northern District Court determined that the suit, Ladore v. Sony, could proceed. [23]

While the viability of Ladore’s lawsuit is beyond the scope of this article, its mere existence demonstrates that failing to deliver promised features can subject a promoter, including Kickstarter campaigners, to an array of legal troubles.

PUFFERY

The language that a Kickstarter campaigner chooses to use in their campaign is critical because it is tantamount to advertising communications. While a certain degree of exaggeration is afforded under the law—a legal term called puffery—where specific promises are made and not met, in addition to whatever actions the government decides to bring, campaigners may be opening themselves up to consumer suits for breach of contract, false advertising, and fraudulent or negligent inducement, to name just a few claims.

The 'puffing' rule amounts to a seller's privilege to lie his head off, so long as he says nothing specific, on the theory that no reasonable man would believe him, or that no reasonable man would be influenced by such talk. William Lloyd Prosser.

In the case of GODUS, one might conclude that failing to provide a multiplayer universe the size of Jupiter is mere puffery; whereas failing to provide the game's highly touted multiplayer mode altogether could open the door to a host of legal problems.

CONSUMERS AND INDUSTRY PROFESSIONALS

With Peter Molyneux and GODUS, part of the problem may be history. For years, Molyneux has pitched his game ideas to publishers who are well equipped to determine the limitations of technology and who can readily discern between reality and wishful thinking. Repeatedly, they place informed bets, knowing that a percentage of their projects will fall miserably. They also create contractual provisions to mitigate their risk.

What we’re really trying to do here is foolishly, ridiculously ambitious….Peter Molyneux, Game Beat GDC Interview

But the enthusiastic and hopeful language used behind closed doors with game publishers and industry insiders might be inappropriate where consumers are concerned. When dealing with consumers, there is a far greater risk that courts will view one man's puffery as intentional or negligent misrepresentation.

I’m not aware of a single lie, actually. I’m aware of me saying things and because of circumstances often outside of our control those things don’t come to pass, but I don’t think that’s called lying, is it? Rockpapershotgun.com interview (2/13/15) [24]

NO SHELTER IN A STORM

Kickstarter recently updated its Terms of Use, providing its clearest language yet when describing the contractual relationship that exists between campaigners andbackers:

When a creator posts a project on Kickstarter, they’re inviting other people to form a contract with them. Anyone who backs a project is accepting the creator’s offer, and forming that contract.” [25]

But don't look to Kickstarter to play referee if a dispute arises. If a campaign ends in a lawsuit, Kickstarter’s Terms of Use make their impunity quite clear:

“Kickstarter isn’t liable for any damages or losses related to your use of the Services. We don’t become involved in disputes between users, or between users and any third party relating to the use of the Services.... You’re solely responsible for any resulting damage or loss to any party.” [26]

SUMMARY

Peter Molyneux hasn't been sued and there's no indication that he will be. At the same time, his campaign, his admitted lofty promises, and the consumer heat rising up around him gives others a chance to consider their own Kickstarter efforts.

Kickstarter provides a unique opportunity to match those who dream big with people willing to pay in advance or give a small gift for the same. At the same time,campaigners should be mindful, before taking money from people who may rely on their words, that it’s legally and morally prudent to deliver what you promise.

ABOUT THE AUTHOR

Dan Rogers is licensed to practice law in the state of California, including the Eastern Federal District Court. He has advised and negotiated with interactive game publishers, developers, and technology companies around the world on matters of video game licensing, intellectual property, software development, and contractual law. 

www.yosemiteip.com. @rogersdanlee.

Source: http://www.yosemiteip.com/blog/2015/3/9/understanding-your-kickstarter-legal-liabilities

Other articles by Dan Rogers are available at http://dlr-law.com/writings--pubs.html.

DISCLAIMER

This article is provided for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.

CITATIONS

[1] “god games” are video games that employ artificial intelligence, where players command numerous characters, which they influence through god-like actions, such as changing the climate, geography, and other game settings.

[2] The GODUS Kickstarter campaign concluded on December 20, 2012, receiving £526,563 (British Pounds). At the time, the exchange rate was approximately 1 GBP = 1.6272 USD, providing approximately $850,000 if converted to US dollars.

[3] See Rockpapershotgun.com interview with Peter Molyneux 2/15/15. “We are committed to Godus, we are recruiting people to go on to Godus, I have never moved that percentage beyond 52% where it is now. http://www.rockpapershotgun.com/2015/02/13/peter-molyneux-interview-godus-reputation-kickstarter/.

[4] Id. See http://www.gamepolitics.com/2015/02/10/peter-molyneux-takes-heat-godus#.VO5hBVPF_Ws.

[5] See http://godus.boards.net/thread/237/dear-mobile-version-caught-fire; http://www.rockpapershotgun.com/2015/02/10/22cans-confirm-godus-team-shrinkage-admit-mistakes/; http://www.rockpapershotgun.com/2015/02/11/loss-of-faith-will-godus-ever-have-a-god-of-gods/; http://www.reddit.com/r/Games/comments/2vbnn8/oh_godus_what_the_hells_going_on/.

[6] See https://www.kickstarter.com/hello (last visited 2/6/15).

[7] Whether software is considered a good and therefore subject to the UCC is subject to some debate, depending on whether the software is part of a service or not. Notwithstanding this fluidity, video game software has been held goods for purposes of determining breach of contract.

[8] Kickstarter allow tax-exempt organizations to offer their projects, in which case the pledge could be considered a donation. https://www.kickstarter.com/help/faq/backer+questions#faq_41773 provides the following language: “Is my Pledge Tax Deductible? In general, no. However, some US projects started by or with a 501(c)(3) organization may offer tax deductions. If so, this will be touted on the project page. If you have questions about tax deductions, please contact the project creator directly via the "Contact me" button on the project page.”

[9] See Kickstarter rules above. https://www.kickstarter.com/rules.

[10] See https://www.kickstarter.com/help/taxes.

[11] See 26 U.S. Code § 102(a) (the United States Tax Code) provides us a general rule that gross income does not include the value of the property acquired by gift, bequest, devise, or inheritance. Furthermore, in Commissioner v. Duberstein, the Supreme Court refused to create a standard test because the conclusion of what constituted a "gift" under I.R.C. § 22(b)(3) required consideration of the factual circumstances surrounding the transfer, in particular, the transferor's intent. In determining whether the giving of an automobile was, in fact, a gift subject to statutory law, the Court held the following: “A gift in the statutory sense, on the other hand, proceeds from a "detached and disinterested generosity. And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention." "What controls is the intention with which payment, however voluntary, has been made." Commissioner v. Duberstein, 363 U.S. 278, 285-286, 80 S. Ct. 1190, 1197, 4 L. Ed. 2d 1218, 1225, 1960 U.S. LEXIS 2030, 14-15, 60-2 U.S. Tax Cas. (CCH) P9515, 5 A.F.T.R.2d (RIA) 1626 (U.S. 1960).

[12] See https://www.kickstarter.com/hello (last visited 2/6/15).

[13] Both Federal and State laws govern securities, which include the sale of stocks, equity, and future profits. See Kickstarter rules, supra. : “We’re all in favor of charityand investment, but they’re not permitted on Kickstarter. Projects can’t promise todonate funds raised to a charity or cause, and they can’t offer financial incentives like equity or repayment. We also can’t allow any of these prohibited things.” (Emphasis added.)

[14] To be clear, Internet-based crowdfunding investments may soon be possible, but not through Kickstarter. In 2012, President Obama signed into law the Federal Jumpstart Our Business Startups Act, paving the way for small businesses to generate up to $1 million by selling stocks and future profits. Unfortunately, three years later, we’re still waiting for the final regulations to surface from the labyrinth of the SEC. Until then, only accredited investors can participate in these Internet-based crowdfunding ventures.

[15] See http://www.rockpapershotgun.com/2015/02/13/peter-molyneux-interview-godus-reputation-kickstarter/ (Emphasis added).

[16] See the Washington v. Altius complaint, alleging that Altius received its funding on October 31, 2012. The complaint also states that, as of April 1, 2014, consumers still had not received their rewards.

[17] See http://www.seattletimes.com/business/ag-sues-kickstarter-project-that-didnrsquot-deliver/.

[18] Alleged violations are cited under of the Washington State’s Consumer Protection Act (specifically RCW 19.86.080).

[19] http://www.inc.com/eric-markowitz/when-kickstarter-investors-want-their-money-back.html.

[20] http://www.huffingtonpost.com/2013/01/15/failed-kickstarter-project-seth-quest-hanfree-ipad_n_2479798.html.

[21] http://www.officialplaystationmagazine.co.uk /2013/06/26/killzone-shadow-fall-how-ps4s- new-tech-is-changing-the-fps/ (July 14, 2014).

[22] See http://www.eurogamer.net/articles/digitalfoundry-2014-in-theory-1080p30-or-720p60 (July 14, 2014). Ladore's claims included Violations of Cal. Civ. Code §§ 1750, et seq.; Violations of Cal. Bus. & Prof. Code §§ 17200, et seq.;
 Violations of Cal. Bus. & Prof. Code §§ 17500, et seq.; Breach of Express Warranties;
 Fraud in the Inducement;
 Negligent Misrepresentation; and Unjust Enrichment.

[23] See http://www.courthousenews.com/2014/12/16/class-action-over-sonys-killzone-game-advances.htm.

[24] http://www.rockpapershotgun.com/2015/02/13/peter-molyneux-interview-godus-reputation-kickstarter/.

[25] Kickstarter Terms of Use, Section 6 (https://www.kickstarter.com/terms-of-use) (last visited 2/6/15).

[26] Kickstarter Terms of Use, supra, Section 4.


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