Last week, Kickstarter released an updated terms of use that highlighted a streamlined version of what we already knew: As a creator, you have an obligation to send backers their rewards. They list a series of steps a creator must do if they have difficulty fulfilling that obligation.

However, this announcement overshadowed a potentially more impacting update from the Federal Trade Commission (FTC) (thanks to backer Peter Sciretta for the heads up about this). It has to do with any online seller’s obligation to ship goods in a timely manner.

I asked Kickstarter about the FTC’s ruling, but all they would say is, “Kickstarter cannot provide any legal advice in regards to project.” So I turned to recent guest writer and lawyer Zachary Strebeck for the following entry:

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Jamey asked me for a comment on the FTC’s Mail or Telephone Order Merchandise Rule (MTOMR) and the implications for Kickstarter creators. In my research, I found a lot of places where spurned Kickstarter backers linked to it as evidence that their still-unfulfilled Kickstarter reward was in violation. However, I’m not entirely sure whether this rule is as scary as it looks when it comes to fulfilling these backer rewards.

What is the rule?

Basically, the FTC rule mandates that when a customer orders a product, the product should be available for shipping within either 30 days or by a time that the seller has a “reasonable basis” for believing they can ship. A reasonable basis means that the reason for thinking that it can ship by a certain date would satisfy the average “reasonable and prudent” businessperson, and is one that the seller believes to be true in good faith.

If that shipping date can’t be met, the seller must send a notice containing particular information and allowing the buyer the option to cancel. If the seller believes that they will never be able to meet their shipping obligation, they must cancel and refund the order.

There’s more to the rule, so you should check out this FTC guide for more comprehensive info.

Does it apply to Kickstarter?

This is the big question. I don’t have a clear answer, as there don’t appear to have been any actions against Kickstarter project creators by the FTC. As such, this is only speculation, and nothing in this post should be relied upon as legal advice (please, if you think you could be in violation, get a lawyer).

The FTC says that the rule “applies to applies to most goods a customer orders from the seller by mail, telephone, fax, or on the Internet.” This has been recently clarified and amended by the FTC (prior to this, it was unclear whether or not the rule applied to Internet sales).

So it certainly applies to purchases made over the Internet, but do we categorize the Kickstarter pledge-reward setup as a buyer-seller purchase? Or is it more akin to a donation pledge, with the reward being promised in consideration of that donation, but not “purchased,” per se. I could see it both ways, it it seems that Kickstarter goes out of their way to avoid language that denotes a purchase or an investment. See Kickstarter’s new Terms of Service – the wording is set up so as to put a gap between the pledge and the fulfillment, in my opinion.

Whether or not the donation and the end-product are attenuated enough to get around being categorized as a “purchase” is a question for the FTC. I will be reaching out to them for more info or an opinion on the subject.

Regarding the time of delivery, we have this piece from the Kickstarter Terms of Service:

“The Estimated Delivery Date is the creator’s estimate. The date listed on each reward is the creator’s estimate of when they will provide the reward — not a guarantee to fulfill by that date. The schedule may change as the creator works on the project.”

This estimated date is one that could fit under the “reasonable basis” definition above. If the FTC sees this transaction as a purchase under the MTOMR, then the estimated delivery date of the reward could be the date that the violation kicks in if no notification of delay is given.

I apologize for being kind of wishy-washy in this part of the post, but I really don’t know. I see a strong case for the Kickstarter transaction being covered under this rule, but a technical reading of the statute and the Kickstarter ToS could conceivably remove it from the ambit of the Rule. I certainly wouldn’t want to be the first project creator to find out, though.

Can I get sued by a backer under this rule?

As I said before, I’ve seen backers bring up the MTOMR in comments after a reward hasn’t shipped on time. However, the backer doesn’t actually sue a creator under this rule. That’s up to the FTC themselves.

A backer CAN file a complaint with the FTC, though. This may point the FTC in the direction of that particular project.

Just to clarify, a backer who does not receive their reward does seem to have a separate cause of action under contract law, unrelated to the MTOMR. I’ve written about this in a post on Ind13.com, if you’d like to check it out.

What happens if I am in violation?

When a Kickstarter project creator violates the notice and refund option requirements, generally all is not lost. They’re probably not going to come and slap the cuffs on you (if ever) for violating the MTOMR. The infringement process generally involves a cease and desist-type letter, warning that the FTC believes that there has been a violation.

If the seller doesn’t contest these violations, they can work out a settlement agreement with the government. This may entail paying some money if consumers have been aggrieved, or a promise to change how things are done.

If the seller contests these allegations, the dispute will go before an administrative judge in a kind of trial. The judge’s decision can be appealed, but if they lose, failure to follow the order can result in even greater fines.

How do I stay in compliance?

Well, I would first encourage anyone who is running a Kickstarter campaign to read over the FTC’s brochure for businesses concerning the rule. Next, I would encourage them to follow the advice I gave in my last post here: make sure you’ve got everything planned out before starting your project. Do as much work pre-project as you can, so that the estimated date is as close to the actual shipping date as possible.

Of course, problems usually crop up. In these situations, it is often a good idea to be open with backers. Most often, backers are reasonable people who understand that there can be hitches in the development process. When there is slippage in the ship date, be sure to update backers with a note that explains the basis for the delay and contains the required info (see the brochure from the FTC). Technically, the MTOMR does not require an explanation if there is a definite delayed ship date, but that doesn’t make it good practice to keep backers in the dark.

It may be prudent to build in the cost of possible refunds into your Kickstarter, as these may happen and should be respected under the FTC rule (assuming, of course, that it applies to this type of transaction). Realistically, however, backers will probably not be clamoring for refunds after a reasonable delay. They backed because they want the product to be created, after all.

Above all, respect your backers. They’re the ones who made the project happen. Even though they’re not “investors” in the legal sense, they are “invested” in the project. Take advantage of that. Ask for their assistance, their advice, whatever it takes to get them involved and understand the delay.

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Thanks so much for sharing your insights here, Zachary! Even though the answers aren’t definitive, I think this is an important word of caution to Kickstarter creators. Feel free to post any thoughts or questions in the comments.