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FMG Law Blog Line

When Kickstarters Stall: Liability for Failed Project Funding

Posted on: September 16th, 2015

 By: Wayne S. Melnick

By now, most people are familiar with the concept of crowd funding. Sites like Kickstarter, Indiegogo, and Gofundme exist to allow people to alternative sources of funding that prior to the internet were simply unavailable.

In a nutshell, crowdfunding sites allow people to describe a project they are seeking funding to pursue, and post as much or as little information about how far the project has proceeded to date, while allowing people to pledge monetary amounts to fund the project in return for getting different levels of “rewards” related to the project.

Normally, if the project does not meet its funding goal, then the pledge is discarded and nothing happens. If the project meets its funding pledge goal, the contributors’ credit cards are charged and the money pledged goes to the project developer (with a cut to the funding site) to bring the project to fruition.

In theory and practice, this is a great idea. But what happens when a project successfully funds, but is never completed?

In 2014, the Washington State Attorney General filed a first-of-its-kind lawsuit against the creators of one such failed project. In that case, the Washington AG’s office sought to recover the pledged funds of people who backed the never completed “Asylum Playing Cards” game funded via a Kickstarter campaign in 2012. The AG’s office alleged the project creators took consumer money and failed to deliver the promised playing cards and other rewards to these project backers.

Recently, a Washington State Court ruled against the project creators and ordered that $54,851 be paid in civil fines, fees, and restitution back to the backers of the crowdfunding campaign. Specifically, the court ordered the project creators to pay to pay their 31 backers in Washington a total of $668 in restitution, as well as $23,183 in legal fees and  $31,000 (one thousand dollars for each Washingtong-pledge not met) in civil penalties for violating the state Consumer Protection Act.

The ramifications of this decision are not yet know. The complexities of personal jurisdiction were not even contemplated by the court because the AG’s office sought only to recover the pledges of Washington citizens. Even then, insurers and attorneys should take heed of this decision and crowdfunding is a multi-million dollar business and is only expected to grow. The potential liability for not only these sites, but the project creators who fail to deliver on their funded projects raise interesting questions related to the potential insurance coverage available for claims related to funded projects that are never delivered or completed.

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