How to Avoid Potential Legal Pitfalls with the Daily Deal Business Model

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The “daily deal” business model, which is most closely associated with industry leaders Groupon and LivingSocial, offers a unique means for businesses to attract customers, while generating revenue for the deal site proprietors themselves. The appeal of such a model is as basic as it is compelling: consumers are more easily attracted to retail establishments by the enticement of discounts, special offers and other promotions, than with more mundane, perk-free advertising.

However, certain state and federal laws may apply to the discount offers, and any business utilizing such marketing tools could incur substantial legal liability if it violates applicable law. In order to better avoid the potential legal pitfalls associated with this marketing approach, it is essential to first understand how it works and which laws may apply.

Generally speaking, this marketing method involves a “daily deal” website providing its subscribers with exclusive discounts and other promotions as made available by retailers in those subscribers’ local communities, or on a nationwide basis. Interested subscribers can purchase the applicable discount offer for a fee paid to the “daily deal” website. For example, an offer of $50-off a meal at a local restaurant may be made available to subscribers for a $10 fee. As per the terms of their marketing relationship, the “daily deal” website operator shares the $10 purchase price paid by the subscriber with the subject local restaurant.

Problems arise, however, due to the fact that many, if not all, of these special discount offers expire after a certain amount of time. Because consumers must pay a fee for these “daily deals,” these offers may be considered gift certificates, and therefore fall under the purview of certain state and federal laws regulating such products – in particular, the Credit Card Accountability, Responsibility and Disclosure Act (“CARD Act”).

The CARD Act, and its state law counterparts, requires that all gift certificates clearly and conspicuously disclose any expiration period. More importantly, these laws require that the expiration date for gift certificates must be at least five years from the date of purchase.

While Groupon, LivingSocial and their competitors maintain that the discount offers in question are coupons, not gift certificates, and thus are not regulated by laws applicable to gift certificates, attorneys general in multiple states (e.g. Connecticut and Illinois) have begun to scrutinize this business model to determine the nature of the offers. In addition, multiple class action lawsuits have been filed alleging violation of the CARD Act and corresponding state law.

Consequently, some “daily deal” website operators have sought to avoid liability by recently offering subscribers a full refund of the purchase price paid for the applicable discount offer should that offer expire. While this is a recommended step, and should be taken at a minimum, it does not guarantee immunity from regulatory action and/or litigation. In order to best limit liability, “daily deal” website operators should choose one of two approaches (in addition to adding standard disclaimers where offers are limited, such as “while supplies last” and “at participating stores only).

First, discount offers could be made available to subscribers without a fee, with the applicable retail establishment providing the “daily deal” website operator with payment based on some other formula. Alternatively, each discount offer that is made available to subscribers for a fee could have an expiration date of no less than five years.

Please note that this is only a brief overview of some of the legal issues surrounding “daily deal” promotions. Remember to obtain guidance from a licensed and experienced legal professional prior to employing such marketing tools.

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