Groupon's Lax Legal Line Could Put Retailers At Risk, Researchers Say

Groupon may be headed into treacherous legal territory—and it may be leading retailers into the same trouble. According to two Harvard Business School researchers, Groupon seems to have a very loose attitude when it comes to state laws covering discounts on alcohol, how much sales tax to charge, voucher expiration limits and other voucher-related issues. That situation has already pulled Nordstrom and other retailers in as co-defendants when Groupon has been sued—and it could put retailers at risk on their own from state regulators.

The Harvard researchers focused their attention mainly on Groupon and its customers. For retailers, most of the risk appears to come from failing to treat vouchers correctly at the POS—usually those vouchers are like giftcards, but in some ways they're like coupons. Getting the treatment right is likely to require some under-the-covers work on POS software, which is nobody's idea of a comfortable project. The alternative, though, is to leave it for associates to handle them correctly ad hoc—and that's just asking for trouble.

The researchers—Ben Edelman and Paul Kominers—argued in a paper published this month that Groupon and other online discount voucher services such as LivingSocial and BuyWithMe often fail to handle state (and occasionally federal) laws correctly in seven specific areas: "restrictions on discounts of alcoholic beverages, prohibitions on short voucher expirations, restrictions on disposition of 'abandoned' property, assurance of consumers' right to cash back, the need for correct tax treatment, redemption processes at risk of error and malfeasance, and a voucher service's liability when merchants fall short."

"Voucher services operate in a highly regulated space—discounting food and alcohol, while requiring prepayment and serving as intermediaries between myriad consumers and merchants. With such complexity in such highly regulated fields, voucher services naturally face numerous consumer protection laws—restrictions which complicate certain marketing practices and may disallow others altogether," the researchers wrote. "Taken individually, each problem might be resolvable. But in combination, these problems reveal the striking complexity and substantial legal exposure endemic to the business model voucher sites have chosen."

Fortunately for retailers, most of that complexity falls to the voucher services themselves. For the most part, retailers can get by simply treating those vouchers as either giftcards or coupons, depending on the situation. Unfortunately, although most chains' POS systems can handle both coupons and giftcards, they're not set up for a hybrid like Groupons.

That's why some delicate surgery on POS configuration is likely to be necessary if a chain plans on handling Groupons. And, naturally, which situations require coupon-like treatment and which call for giftcard-style handling will vary from state to state. But here's the retail-related analysis that we extracted from the researchers' paper (always keeping in mind that even though one of the Harvard researchers is a lawyer, you can be pretty sure he's not giving you any free legal advice):

  • Restrictions on discounts for alcoholic beverages: Some states have blanket laws against discounting booze, and a total of 27 states have some type of restrictions on drink discounts. Groupon has already been barred by Massachusetts from offering alcohol deals in that state, and it may face regulatory problems in other states, the researchers said.

    As an IT issue, that's something the POS should catch: If discounting alcohol is illegal, the voucher should be rejected, just as a coupon for beer would be.

    Next: Prohibitions on short voucher expirations.

  • Prohibitions on short voucher expirations: Many states also set specific minimum limits on how long a giftcard is good for. That's the category that prepaid discount vouchers probably fall into, because voucher buyers have already paid Groupon as much as they're going to pay. But Groupon routinely stamps a much shorter expiration date on its vouchers. That has led to a dozen class-action lawsuits filed in six states, most of which named retailers as co-defendants—including Nordstrom, for a Groupon "daily deal" involving Nordstrom Rack stores in November 2010.

    It's up to Groupon to stop printing expiration dates that are lawsuit bait. But retailers may dodge at least part of the problem by treating the vouchers like giftcards at the POS, and assigning an appropriately distant expiration date that matches local giftcard laws.

  • Restrictions on disposition of "abandoned" property: "If a consumer fails to redeem a discount voucher, many states treat the amount of the non-redemption as unclaimed property subject to escheat to the state," the Harvard researchers write. Translation: The money from unused Groupons goes to the state, not the retailer.

    That's usually exactly the same as the way an unused giftcard is treated. Fortunately, because it's unused, it never goes through the POS, and it's a problem for accounting, not IT.

  • Consumers' right to cash back: At least eight states—California, Colorado, Maine, Massachusetts, Montana, Rhode Island, Vermont and Washington—require that a consumer can get cash back when the remaining value of a prepayment falls below a certain level. In cases like that, treating vouchers as if they were giftcards is the way to go.

  • Correct sales-tax treatment: "When a consumer pays in part with a discount voucher, should sales tax be collected on the usual retail price of the consumer's purchase, or on the amount the consumer actually paid? For example, if a consumer redeems a $20-for-$50 voucher on $50 of food, does the consumer pay sales tax on $20 or on $50?" the researchers ask. The answer in many states, it turns out, is $20—although many Groupon retailers apparently calculate the total bill plus sales tax, and then take the discount off that.

    It's a category where the prepaid vouchers should probably be treated like coupons, not giftcards. But it varies state by state, which makes it essential for the sales-tax calculation to be automatic at the POS.

  • Redemption processes at risk of error and malfeasance: "Many merchants simply write down a voucher number or cross off a line on a preprinted list of valid vouchers. These approaches invite errors both accidental and malevolent," the Harvard researchers write.

    That may be a problem at a single store or restaurant, but it's impractical for chains, where there's already a POS code for tracking giftcards by their ID numbers. Unfortunately, it's not as simple as treating prepaid vouchers like giftcards. The vouchers have their own numbers, and dealing with them within existing POS system is likely to require some work.

  • A voucher service's liability when merchants fall short: According to the Harvard researchers, voucher services typically use legal language like Groupon's: "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." The researchers go on to argue that this doesn't actually let Groupon off the hook, but of course it's a retailer whose reputation goes through the grinder if it doesn't live up to the deal.

    Once again, most of the problems can be avoided if retailers treat the vouchers like giftcards—or, for that matter, like coupons. It's not a POS issue, just a matter of keeping the customer satisfied.