Sunday, June 19, 2011

"Just when I thought I was out... they pull me back in." -- another Groupon post (merchant relations edition)

I keep meaning to move on from this subject, but Groupon keeps giving us new reasons to suspect that they aren't that interested in the interests of their merchant partners.

For the latest nail in this coffin, Felix Salmon sends us to this extraordinary post by Benjamin Edelman and Paul Kominers:

Voucher services typically seek to cast themselves as mere marketing vendors that are not responsible for the conduct of the corresponding merchants. For example, Groupon’s Terms of Sale claim that “The Merchant, not Groupon, is the seller of the Voucher and the goods and services and is solely responsible for redeeming any Voucher you purchase.” On this view, a voucher service avoids liability for merchants’ shortfalls.

But a voucher service is the merchant of record for the charge to the customer’s credit card. As the entity officially responsible for charging the consumer, the voucher service thus faces increased responsibility to see that the consumer receives what was promised. Furthermore, the voucher service, not the merchant, writes the promotional text touting the merchant’s offering. As Rakesh Agrawal points out, Groupon’s financial disclosures even count the entirety of the consumer’s purchase price as revenue to Groupon. In this context, a consumer naturally looks to a voucher service for assistance if a merchant fails to perform. We think it is probably an unfair and deceptive practice, under the FTC Act and state equivalents, for voucher vendors to attempt to disclaim liability in such circumstances.

More generally, we are struck by Groupon’s attempts to push all responsibility to merchants. On every relevant question — discounting alcohol, honoring expiration dates, providing cashback — Groupon’s historic contract and current Merchant Terms of Service claim merchants are responsible. In our view, this approach invites confusion and non-compliance. Voucher services are far better positioned than merchants to determine what the legal system requires: Voucher services can research regulations centrally, once for each state in which they operate, then notify affiliated merchants of applicable requirements. In contrast, Groupon’s current approach asks each individual merchant to conduct its own research. If merchants actually conducted such research, it would be duplicative and potentially wasteful — thousands of small businesses re-researching the same questions. But in fact merchants typically ignore the questions, rationally concluding that these questions are too difficult for them to address on their own. Thus, by pushing merchants do to the work individually, voucher services virtually assure that the work is not done at all.

Importantly, the legal and regulatory questions flagged in this article are questions that arise distinctively in the context of discount vouchers: a merchant would never confront such questions were it not for discount vouchers. Having created the transactions giving rise to this regulatory complexity, we think discount voucher services should be expected to achieve compliance.

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