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

Written by Frank Hayes
June 29th, 2011

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.

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