March 09, 2017

What Exactly Can You Say in a Crowdfunding Campaign?

Let’s say you see an online video advertising a new product that catches your eye. Say it’s for a 3-D printer. The video you see is part of a crowdfunding campaign and displays a prototype of the printer, describes its features, and states that the expected delivery date is in six months. The video asks for your financial backing and further states that if you back the product now, you will be one of the first customers to receive it once development is finished. You think, “Why not?”, and pay a few hundred dollars, backing the project with the hopes of receiving your high-quality 3-D printer. Six months go by and nothing. After a year, you finally receive your 3-D printer. However, the quality of the 3-D printing is not nearly as good as the quality shown in the promotional video… Have you been misled? Or were the risks regarding the delivery date and the quality of the printing simply part of the bargain when you backed an unlaunched product?

Once a novel concept, crowdfunding has become a mainstream method to raise money for product development and entrepreneurial ventures. A highly successful crowdfunding campaign may consist of little more than a creative idea, a video depicting an undeveloped product, and a fount of hype. With these assets in hand, a project initiator can generate millions of dollars — if not tens of millions of dollars — in consumer pre-orders for a yet-to-be-developed product that is essentially still in its inception stage

With many crowdfunding campaigns, the project initiator does not yet have a fully-realized product capable of being mass produced. In fact, that is often the reason the initiator is seeking money—i.e. so that he/she can use that money to develop and manufacture the product. In order to generate such crowdfunding revenue, the project initiator must necessarily advertise the undeveloped product, describing its anticipated features and its expected delivery date. Given these circumstances, the following question has arisen: At what point do representations about undeveloped products cross the line from lawful predictive statements to false advertisements?

Recognizing the possibility of misleading consumers, Kickstarter advises project initiators to “provide backers with a realistic sense of where the project stands — including what’s been accomplished so far, and what work remains to be done.” Kickstarter also warns initiators that “photorealistic renderings that someone might mistake for a finished product are prohibited.” Kickstarter additionally requires that “[p]rojects that involve the development of physical products must feature explicit demos of working prototypes. While you can run a project focused on the creation of a prototype, you can't offer the product that is under development as a reward.”

“At what point do representations about undeveloped products cross the line from lawful predictive statements to false advertisements?”

The few enforcement lawsuits that have arisen to date concerning crowdfunding have focused on misappropriation of the raised money. On June 11, 2015, the FTC announced that it had entered into a consent order against a failed Kickstarter project, marking the first time the agency had pursued a consumer protection action regarding crowdfunding activity. In that particular case, a year after the Kickstarter campaign launched, the project initiator cancelled the project altogether, stating that the raised money had been exhausted on development of the board game. The FTC alleged that the project initiator had misused the money for personal expenses despite purporting to use the money to develop the game. Similarly, in 2014, the Washington State Attorney General announced a lawsuit against the initiator of a Kickstarter campaign for themed playing cards, alleging that the initiator had misappropriated the raised money and failed to deliver the product.

The above-noted cases reflect allegations of outright theft and/or embezzlement. But what happens when a campaign’s representations fall into a grayer area? Specifically, what happens when an initiator makes a statement about a product that it is actually developing, but which misrepresents the anticipated quality-level, features, or delivery date for that product?

On January 12, 2017, the San Francisco District Attorney, on behalf of the State of California, sued Lily Robotics for making false statements in Lily’s crowdfunding video. Lily’s video promoted a drone and camera, which users could throw into the air, allowing the product to subsequently follow and video-record the user. The District Attorney complained that Lily’s crowdfunding video falsely conveyed: a) that the drone footage was shot with a Lily camera, when it was shot with a different, higher-resolution camera, b) that Lily had a fully functional drone prototype, when it did not have one, and c) that initial products would be shipped in May 2016, when in fact, the release of the product was continually delayed, and no product ever shipped. The District Attorney sought and obtained the severe remedy of a temporary restraining order freezing all of Lily’s funds, and the action is pending as of the publication of this article.

How did Lily Robotics cross the false advertising line? Or did it? The District Attorney determined that Lily’s statements and depictions of its unreleased product exceeded protected forward-looking statements and moved into the realm of false advertisements. What the Lily Robotics suit does not make clear is at what point does the depiction of an anticipated product, which has not yet been developed, or which has only been developed as a prototype, become likely to mislead a consumer?

There is sparse authority on how false advertising laws apply to statements about unreleased products. State and federal false advertising laws are similar in that they prohibit statements that are likely to mislead consumers. However, courts throughout the country have also found that predictions as to future events are ordinarily non-actionable expressions of opinion. See, e.g., PhotoMedex, Inc. v. Irwin, 601 F.3d 919, 931 (9th Cir. 2010); Eastman Chem. Co. v. Plastipure, Inc., 775 F.3d 230, 235 (5th Cir. 2014). Even so, this exception for predictive statements will not apply if the speaker knew its statement was false or if the speaker lacked a good faith belief in the truth of its statement. See id. As such, one standard for evaluating the falsity of statements about undeveloped products appears to be whether the project initiator had a good faith belief that its statements would come to fruition through the product development process.

To further explore these questions, one needs to consider the context of the statements and the expectation of the consumers. If a consumer understands that statements are referring only to a hypothetical product, the consumer should not be misled by those statements. See, e.g., Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir. 1997). In fact, the crowdfunding website Kickstarter describes this theoretical aspect of its platform, at least to some degree. Specifically, Kickstarter warns consumers, “When you back a project, you’re helping to create something new — not ordering something that already exists. There’s a chance something could happen that prevents the creator from being able to finish the project as promised.” Based on these statements, Kickstarter’s meaning is unclear: Is it stating that all campaigns for undeveloped products will necessarily contain non-actionable representations of future events? Or is Kickstarter stating that while every such campaign will have inherent uncertainty, a consumer can still rely on unambiguous factual representations? Assuming the latter, the question in the Lily Robotics case—and all similar cases—would become whether consumers had an expectation that the drone camera that shot the footage shown in the Lily Robotics video would be the same or comparable to the camera in the anticipated Lily Robotics drone?

At this time, the answers to these questions remain murky. And while the Lily Robotics suit may present an extreme instance of misleading representations in crowdfunding campaigns, numerous examples of more ambiguous representations are easy to find. This article looks at some other examples of crowdfunding representations and explores whether those statements are likely to mislead consumers. Please note that this article does not purport to make a finding that any of the described examples constitute false advertising.

Pebble Smart Watch: One of the most successful Kickstarter crowdfunding campaigns was for the Pebble e-paper smart watch. In April 2012, Pebble Technology Corporation launched a Kickstarter campaign to raise funds to finish developing and manufacture the Pebble smart watch. The Pebble Kickstarter campaign turned into one of the most successful crowdfunding campaigns of all time, and Pebble raised over $10 million.

The crowdfunding video showed an actual Pebble watch and stated that it “worked perfectly” with Apple iPhones and Android smart phones, could be used to download apps from the Pebble App Store, and was just about to be produced. Pebble’s Kickstarter campaign noted an estimated delivery date of September 2012.

In actuality, Pebble encountered significant manufacturing difficulties, and it didn’t begin shipping its watches until January 2013. Moreover, at that time, Pebble was still waiting for Apple’s approval of the Pebble application for the App Store and the Pebble Android app featuring the Pebble App Store would not be available for download from Google Play until March 2014.

The question arises: Were Pebble’s crowdfunding representations protected predictive statements or false statements if Pebble knew its watch would not be ready as advertised? Under the San Francisco District Attorney’s logic, if Pebble knew that its watch would not be ready for mass distribution by the published date, including approval of the advertised applications, any such representation was improper.

Godus: In November 2012, Peter Molyneux of 22Cans initiated a Kickstarter campaign for a god-perspective video game. The Kickstarter video displayed a prototype of the game, which had supposedly been developed in less than two weeks. The video showed gameplay in which the user, who acts as a god of a fantasy land, develops a community of worshippers. Those worshippers, once developed, may eventually engage in warfare with other tribes who worship an alternategod, played by a different Godus user. The Kickstarter campaign raised over $600,000 in a couple of months and represented that the expected release date of the game was January 2013.

More than two years later, 22Cans finally released the game in Early Access. The game did not have a multiplayer mode and lacked other features shown in the prototype, namely the ability to engage in battles with other tribes. While the crowdfunding video for Godus showed these features in action, the video also expressly stated that the depiction was a prototype. So, was Godus’s disclaimer that the video shown was a prototype sufficient to avoid misleading consumers, assuming that 22Cans sincerely believed that it could transform the prototype into a mass-produceable functioning product in the represented time span? If so, is the difference between Godus’s campaign and the Lily Robotics drone campaign the fact that Godus expressly disclosed that the displayed product was only a prototype?

Zano: The Zano, a small drone with an integrated camera, launched its Kickstarter campaign in November 2014, raising over $2 million. The Zano Kickstarter video had numerous shots of the Zano drone in operation as well as video footage ostensibly taken from a Zano drone while in operation. The Kickstarter video described a range of technology embedded in the Zano device and said that the Zano would be “gesture-based; you point your phone in a direction, and Zano goes there.”

Early reviews of the Zano product revealed that it failed to live up to the depictions in the crowdfunding video. The BBC reported, “I got the first demonstration of the drone and it was not impressive, staying airborne for only a few minutes, colliding with walls, and delivering very poor video.” Less than a year later, the company collapsed, failing to deliver products to a majority of backers. While there were many loud complaints about the demise of Zano, few such complaints sounded in false advertising — i.e. few accused the company of intentionally and inaccurately portraying the device in the Kickstarter video. Under the logic of the San Francisco District Attorney however, if the Zano drone prototype did not have the capabilities reflected in its crowdfunding video, Zano misled consumers in violation of the law.

Pono Music Player: Neil Young launched a Kickstarter campaign in March 2014 for a portable digital music player named Pono. The Kickstarter campaign claimed that the PonoMusic Store and the PonoPlayer would deliver music so stunningly clear that it would be the next best thing to hearing it in the recording studio, and further, that everyone who had “heard PonoMusic will tell you that the difference is surprising and dramatic.” The Kickstarter campaign, which eventually raise over $6 million, went on to explain that PonoMusic was encoded at much higher rates than even the CD-quality digital standard, and thus Pono resulted in a superior audio experience.

However, when the PonoMusic device was released, computer and music critics commonly agreed that the quality of music was no better than with a conventional digital music player, such as an iPhone. Gizmodo explained that the CD-quality sampling rate, which Pono exceeded, was actually the maximum that a human being could differentiate. The Gizmodo article referred to a 2007 study among “serious listeners,” which showed no ability to differentiate between higher and lower level encoding of music.

Given this study, were Pono’s representations about the quality of its recordings and the resulting superior audio experience demonstrably false? Or were these statements the sort of puffery that would be acceptable in both conventional advertising and advertising for unreleased products?

Line-Us: In January 2017, a Kickstarter campaign was launched for Line-Us. Line-Us is a small robotic arm that draws with a pen on paper based on what a user draws or displays on a computer or mobile device. The Line-Us Kickstarter video shows the device drawing a variety of images using a pen or pencil. The video also shows the device using a small paintbrush with little containers of paint

As a proviso, please note that there is no indication of any user complaints about the Line-Us project at the time of this article; rather, Line-Us was arbitrarily selected to test the contours of false advertising law regarding an unlaunched product. As discussed above, the Kickstarter video shows the Line-Us prototype in action and sets an expected delivery date of October 2017. In the “Comments” section on Kickstarter, Line-Us reveals that the specifications for the final product are not yet known. In particular, Line-Us states, “[w]e haven’t picked the exact servo that we will use for the production yet as we’re still testing, but the prototypes used a 9g digital servo.” A servo is a small, mass-produced motor used in small-scale robots and radio controlled vehicles. In response to this statement, a consumer asked, “don't you think that servo motors will affect the painting quality”? As an answer, Line-Us stated, “yes, the choice of motor does affect the quality of the drawings. We’ve looked at quite a few different servos, and will continue to do so as well as seeing what we can do in software to get the best performance from them.”

How is the Line-Us depiction of a prototype and uncertainty about its components different from Lily Robotics’ depiction and uncertainty? How is the quality of the servos in the Line-Us robot different than the quality of the camera in the Lily drone? Does the difference lie with the project initiator’s intent—i.e. did Lily Robotics intend to mislead consumers about the camera, whereas Line-Us was honest about the uncertainty of its product? The answers to these intriguing questions are yet unknown.

In summary, the intersection of false advertising laws and crowdfunding representations remains unclear. How are the predictive statements made by Lily Robotics different from those made by Line-Us? It’s all too easy to look at a crowdfunding campaign in retrospect, after an initiator has failed to realize a product, and then complain that the predictive statements were inaccurate. It’s much more difficult to look at a current crowdfunding campaign, where all of the aspects of the final product have not yet been determined, and identify what statements are potentially misleading and what statements are protected representations about future results. Yet, it is still crucial that the crowdfunder engage in this analysis and take steps to avoid misleading consumers.

Thus, any crowdfunder should include as many disclaimers and disclosures as commercially reasonable to avoid any claim that its representations were knowingly inaccurate. There is a risk, however, that in attempting to avoid accusations of false advertising, that such disclaimers may negatively affect the crowdfunding campaign, either by distracting from the spontaneity of the video or by causing concern, uncertainty, and apprehension among potential backers. Moreover, the nature and quantity of these disclosures remain ambiguous, as does their effectiveness in shielding crowdfunders from accusations of false advertising. The question remains if Lily Robotics’s video would have been acceptable if it had expressly stated that the drones were prototypes using a third-party camera, which would not necessarily reflect the quality of the final developed version of theLily Robotics camera? At this time, the answer is uncertain.

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    This entry was posted on Thursday, March 09, 2017 and is filed under Resources & Self-Education, Internet Law News.

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