Groupon, Inc. (“Groupon”) has become a popular social media phenomenon and formidable online presence offering consumers goods and services at heavily discounted prices since its inception three years ago.  Groupon offers daily deals for things to do, see, eat and buy in each of its many local markets – for example, $100 worth of spa services for $50 in New York City.  Groupon is a collective action platform; if enough people purchase the Groupon coupon for the offered deal, the deal is “on,” and customers have a limited window of time in which to purchase the offered product or service and redeem the coupon.  Groupon typically splits the proceeds of the deal 50-50 with the merchant.  Groupon further raised its public profile by filing for an initial public offering in June 2011.

Of course, as with any successful and lucrative business model, Groupon has quickly attracted a formidable army of competitors (such as LivingSocial, Travelzoo, and, most recently, Google Offers).  Groupon, however, has also drawn the attention of state regulators.

Connecticut Attorney General George Jepson has become interested in Groupon and its daily deals because of concerns that expiration dates imposed on some of the Groupon discount offers (“Groupons”) sold to Connecticut consumers may violate state law pertaining to gift certificates.  In his July 12, 2011 letter to Groupon, Jepson asked Groupon to provide information about the Groupons, and, in particular, to explain the terms under which Groupons are sold to and redeemed by consumers, how much revenue those sales generate in Connecticut, and how frequently expiration dates are imposed on the sale of goods and services at a discount.  Connecticut law provides that gift certificates must not have expiration dates, and the deal vouchers that Groupon provides to its subscribers may be deemed “gift certificates” under Connecticut law.  Many other states have similar laws prohibiting or limiting gift card expirations.  The Illinois Attorney General is expected to conduct a similar investigation.

In addition, the questions raised by the Connecticut Attorney General regarding the terms under which Groupons are sold to and redeemed by consumers indicate that the Attorney General could be formulating an Unfair and Deceptive Acts and Practices (“UDAP”) case against Groupon.  For example, the Connecticut Attorney General has asked Groupon to identify “the portion of such revenue attributable to such goods and/or services for which ‘Groupons’ discounts expired prior to consumer use (i.e., revenue derived from purchasers who obtained but were unable to use such ‘Groupons’ for discounts on the purchase of goods or services because expiration dates had passed).”  Groupon also received a request for information from Reps. Ed Markey (D-Mass.) and Joe Barton (R-Tex.) on July 21, 2011, regarding Groupon’s privacy policy and data security practices, shortly after Groupon announced its plans to collect more information regarding its users and to share such information with its business partners.

Groupon also has been named as a defendant in a number of class action lawsuits from customers across the United States alleging that Groupon violates consumer protection laws by setting expiration dates and other limits on its daily deals.  Consumers have accused Groupon of violating the Credit Card Accountability Responsibility and Disclosure Act (“CARD Act”) and the Electronic Funds Transfer Act (“EFTA”), 15 U.S.C. § 1693 et seq., which specifically prohibit the sale and issuance of gift certificates with expiration periods of less than five years.  However, Regulation E, 12 C.F.R § 205, issued pursuant to the EFTA, also provides that a “loyalty, award, or promotional gift card” would not be categorized as a gift card or gift certificate for purposes of Regulation E.  An argument could be made that Groupon deal vouchers fall under this Regulation E exclusion.  In the event that the Groupon deal vouchers would qualify as “gift certificates” pursuant to the federal gift card laws and implementing regulations, Groupon would have to consider the minimum five-year expiration date requirement, which could alter its business model, since Groupon deal vouchers typically expire between six and eighteen months after purchase.  Classifying the Groupon deal vouchers as gift certificates could open a Pandora’s box of both federal and state laws to which Groupon would be subject based on its business model.

Groupon has attempted to address these possible legal issues relating to expiration dates by separating the “purchase value” from the “promotional value” in its Groupons.  According to Groupon’s Terms of Sale found in Section 7 of Groupons Terms of Service, each Groupon deal voucher consists of a purchase value (the discounted amount that the customer actually pays in exchange for the goods and services) and a promotional value (the difference in value between the full offer value and the purchase value).  The purchase value does not expire until it is used or refunded.  Conversely, the promotional value expires on the date stated on the Groupon deal voucher unless applicable law prohibits the promotional value from expiring.  Only time will tell whether Groupon’s attempts at complying with these possible gift certificate law issues will be sufficient to satisfy state regulators’ concerns regarding consumer protection or result in the dismissal of the currently pending class actions.