The Federal Trade Commission (FTC) has brought its first successful case against a crowdfunded company for unfair and deceptive advertising.
Section 5 of the FTC Act (15 U.S.C. §45) prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.’’ The prohibition applies to all persons and companies. Frankly, most cases the FTC brings for violations of Section 5 of the FTC Act are successful – most defendants do not challenge the FTC or its findings.
An act or practice is unfair where it
- Causes or is likely to cause substantial injury to consumers,
- Cannot be reasonably avoided by consumers, and
- Is not outweighed by countervailing benefits to consumers or to competition.
An act or practice is deceptive where
- A representation, omission, or practice misleads or is likely to mislead the consumer,
- A consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances; and
- The misleading representation, omission, or practice is material.
In Federal Trade Commission vs. Erik Chevalier, Chevalier was also doing business as The Forking Path, Co. According to the FTC’s complaint, Erik Chevalier, also doing business as The Forking Path Co., sought money from consumers to produce a board game called The Doom That Came to Atlantic City that had been created by two prominent board game artists.
According to the FTC’s complaint, Chevalier represented in his Doom campaign on Kickstarter.com that if he raised $35,000, backers would get certain rewards, such as a copy of the game or specially designed pewter game figurines. He raised more than $122,000 from 1,246 backers, most of whom pledged $75 or more in the hopes of getting the highly prized figurines. He represented in a number of updates that he was making progress on the game. But after 14 months, Chevalier announced that he was canceling the project and refunding his backers’ money.
Despite Chevalier’s promises he did not provide the rewards, nor did he provide refunds to his backers. In fact, according to the FTC’s complaint, Chevalier spent most of the money on unrelated personal expenses such as rent, moving himself to Oregon, personal equipment, and licenses for a different project.
What was defined as unfair and deceptive was taking the crowdfunding money and not using the money to give consumers what was expected – pewter game figurines.
Under the settlement order Chevalier is prohibited from making misrepresentations about any crowdfunding campaign and from failing to honor stated refund policies. He is also barred from disclosing or otherwise benefiting from customers’ personal information, and failing to dispose of such information properly. The order imposes a judgment of $111,793.71.
What is fascinating about the case is not that it is based in new media. In all reality, this set of facts could be applied to any basic violation of Section 5 of the FTC Act. A product producer makes a promise to induce consumers to pay, but no product is actually produced or sent to those consumers who paid. The only difference is that this situation was a part of a crowdfunding campaign.