Groupon’s secret

Pub date June 14, 2011
WriterSarah Phelan

A San Francisco-based bus tour operator who relies on the Internet to drum up business has filed a class action suit against Groupon, alleging that the deal-of-the-day website uses false advertising, or bait-and-switch tactics, to get customers to its site.

San Francisco Comprehensive Tours, LLC, which does business as San Francisco Shuttle Tours and Wine Country Tour Shuttle, originally filed suit March 17 in the U.S. District Court, Northern District of California “to stop false and misleading business and advertising acts and practices employed on by Groupon, Inc.”

In essence, the tour company claims that Groupon is dominating Google searches with offerings for discounted local tours — of, say, Alcatraz — that don’t actually exist.

On April 19, SFCT amended its complaint into a class action suit. The amended suit includes “all persons and entities in the United States who purchased Internet ads with Google for the purpose of advertising local tour company business information and whose tour businesses, including the cost of advertising on Google, have been affected by the false advertisements of Groupon which claim to provide discounted offers for tours but actually provide no such offers.”

Attorneys for Groupon have asked for an extension until June 13 to respond to SFCT’s complaint. Representatives for Groupon told the Guardian they can’t comment on the case.

SFCT’s attorneys claim that Groupon is arguing that this shouldn’t be a class action suit because everyone’s complaint is different.

“They’re spamming the Internet with false advertising that affects everyone’s ability to do business, so this is tailor-made for a class action suit,” said SFCT’s attorney Steve Williams of Cotchett, Pitre & McCarthy in Burlingame. “It’s not easy to take on Groupon now that it has gotten so big and can afford top-notch lawyers.” In other words, it could take a group to take on Groupon.

The suit comes as Groupon, which launched in Chicago in 2008 and now claims to have 70 million subscribers as well as annual revenues of $700 million and an estimated worth of $12.7 billion, prepares to go public. Investors are trying to figure out if Groupon has a sustainable business model.

Last December Groupon fueled speculation that it would offer an initial public offering (IPO) when it rejected Google’s jaw-dropping $5 billion-plus takeover bid. Spurned, Google responded by launching Google Deals, a Groupon clone, in Portland, Ore., this June and announcing plans to expand into San Francisco and other U.S. cities later this year.

But as Forbes magazine noted last August, Groupon founder Andrew Mason has “managed to build the fastest-growing company in Web history.” Groupon’s meteoric rise has been attributed to Mason’s decision to combine a familiar concept with a novel idea: customers only get Groupon’s deeply discounted deals if enough customers pay up in advance for the deal that day.



SFCT is accusing Groupon of manipulating ad space that it buys from Google to funnel visitors to its site and collect data about these visitors — while SFCT and other tour companies lose customers and have to spend more money on online advertising.

This isn’t the first time Groupon has been sued since it was launched. But the bulk of those cases revolved around claims that Groupon’s “Daily Deal” gift certificates have illegal expiration dates. By contrast, SFCT’s suit is about Groupon hurting other businesses through manipulating Google’s AdWords program, which is Google’s main advertising program and main source of revenue.

“It’s the means that Groupon uses that is harming legitimate businesses. But they argue that it’s the Internet, it’s all new, and therefore the rules don’t apply,” Williams claimed.

Even though Google has not been sued in this instance, Eric Goldman, an associate professor at Santa Clara University School of Law and director of the school’s High Tech Law Institute, said that much of SCTF’s complaint is as much an indictment of Google’s platform as it is of Groupon’s practices. “Even though Google hasn’t been sued, I wonder if Google has or will make changes to its ad platform in response to the allegations in this complaint,” Goldman said.

Google spokesperson Diana Adair told the Guardian: “Unfortunately, we’re not able to comment.”

Williams claims that Groupon is gaming the algorithm that underpins Google’s AdWords program, which uses a combination of the number of click-throughs to a website, the closeness of an ad’s wording to an Internet user’s search terms, and the amount of money businesses are willing to bid on specific keywords to rank search results on Google.

“Groupon can’t say it’s just an AdWords problem,” Williams said. “It’s a manipulation.”

In its suit, SCTF claims it successfully bid on keywords such as “San Francisco tours,” “Alcatraz tours” and “Napa wine tours” for years. Then, in September 2010, Groupon started bidding on these terms as well — and though it rarely offered any discounted Alcatraz tours, it began to rank high in search results, driving up SFCT’s ad costs.

The suit notes that one time, in response to the keyword “Alcatraz tickets,” Groupon’s ad copy read “Alcatraz tickets — one ridiculously huge coupon a day: Do Alcatraz CA at 50 to 90 percent off.” Groupon’s actual ad that day was for discounted acting lessons.

“But they don’t care because they are trying to direct as many people as they can to their website,” Williams claimed.

Williams said he believes he can show that from the moment Groupon started placing ads for tours it didn’t sell, SFCT has suffered financially. “For someone like the plaintiff who is not about to put out an IPO, the frustration is that Groupon is funneling people into their direct mail campaign to develop huge databases and monitor what people like to buy so Groupon can target those people in future,” he said.

Williams told us he thinks he knows how Groupon will try to defend its strategy. “They’ll probably say that there is nothing wrong with what they are doing because if a business want to attract people to its product, it can talk to them about other products,” he said.

But he doubted they would try to blame it on Google. “Google would say that Groupon is taking advantage of AdWords,” Williams explained.

He sees Groupon’s strategy as a “bait and switch” tactic that’s illegal under the federal Lanham Act and California’s unfair competition and false advertising laws. “If I did this in a newspaper’s classified advertising section, it would be wrong. But the way Groupon looks at it, the normal rules don’t apply because it’s doing this online,” Williams said.



Williams also noted that Groupon hasn’t disclosed all the other lawsuits it’s facing. “They view this as a pesky little thing. But most companies, unless the suits are patently without merit, will err on the side of caution, believing it’s better to disclose than fail to disclose,” he said. “Or maybe they are thinking, ‘Soon we’re going to be making $30 billion, so who cares?'<0x2009>”

Goldman notes that SFCT’s class action adds extra complexity for its lawyers. “Groupon will likely try to prevent the class from forming in addition to attacking the substance of the arguments. This is not a quick-and-easy win for the plaintiffs. In many cases, companies like Groupon decide to settle rather than fight because it’s a costly defense, even if they ultimately win.”

“The starting point of this suit is simple enough, namely that businesses need to tell the truth in advertising,” he said. “The complaint alleges that Groupon wasn’t telling the truth because it says X in its ad but when you get there it says Y, which has nothing to do with X.”

Goldman also predicted that, to the extent that SFCT’s suit is truly about an algorithm problem, it won’t be helpful to Groupon. “But that doesn’t mean the plaintiff will win,” he added, noting that establishing false advertising is tricky.

The plaintiffs will have to establish that their parties are competitive and that their businesses were harmed, Goldman said. He also observed that this particular class action suit points to a broader range of questions about the legitimacy of Groupon’s business practices and problems with Google’s AdWords platform.

Goldman pointed to a lawsuit filed June 7 against Amazon suggesting that Amazon had an algorithmic tool for buying ads and that perhaps the tool had gone awry. In that case, Maxfield, a New York City company that markets and distributes the magnetic desk toys called Buckyballs, alleges that beginning May 5 when people searched online for “Buckyballs,” an ad popped up for Buckyballs at Amazon. But when customers clicked on this ad, they wound up on a website that purports to be a listing for Buckyballs but is actually an ad for Maxfield’s competitors’ products.

Goldman also said there is a growing trend of plaintiff law firms feasting on Internet companies, especially in Silicon Valley. “They are watching for these companies to make a mistake and are pouncing on them. It’s possible that suits are mushrooming into class action suits because someone is looking to get more money,” he said.

But in SFCT’s case, Goldman noted, “the plaintiff’s story makes sense.”