Groupon Is Becoming A Lawsuit Magnet

Groupon

Last year, Forbes called Groupon “The Fastest Growing Company Ever.” Revenue isn’t the only thing that is mounting fast at the daily-deals site. Groupon was sued seven times in federal court in March alone, after being involved in eight lawsuits all of last year. The latest lawsuit accuses Groupon of false advertising.

The suit, filed last week by a company called San Francisco Comprehensive Tours, alleges the ads Groupon buys through Google’s AdWords program are misleading. S.F. Comprehensive Tours bids on terms like “San Francisco Tours” and “Napa Tours” through Google’s AdWords program, and has been doing so since 2005. Advertisers in AdWords are given the most favorable positions via an “instant auction” process that Google (NSDQ: GOOG) created. And while money counts-as the lawsuit notes-it isn’t the only factor.

The tour company has been participating in AdWords since 2005, and until fall 2010-when Groupon started advertising on its favorite terms-the company’s experience with AdWords was “satisfactory and profitable,” with its ads “consistently displayed in one of the top 3-4 spots.”

The company claims its costs started to skyrocket when Groupon started bidding, though it doesn’t say by how much. The company claims that Groupon is breaking false-advertising laws, because by bidding on terms like “San Francisco Tours” and “Alcatraz Tours” it was implying it had such tours to offer.

Of course, Groupon is a daily-deal service with one local deal per day, and that’s almost always not a tour. Groupon runs ad copy with phrases like: “It’s like San Francisco at 90% off.” The tour company says those ads are effective in getting people to click through even though Groupon isn’t offering tours at 90% off. By getting people to click through frequently, Groupon’s ads are seen as more efficient and effective by Google-which raises the price for good ad placement by other companies, like S.F. Comprehensive Tours, even more.

The lawsuit also notes that some of the URLs in Groupon’s ads simply didn’t work. For example, consumers who typed in “Alcatraz Tours” got a page saying “Oops! That page doesn’t exist.” Of course, it seems like one could file that under “ineffective advertising” rather than “false advertising”-and that seems like a general problem with this lawsuit. For example, is just saying to consumers “Do Napa at 50-90% off” really a specific promise that you will offer them a tour? It seems like Groupon just wants to get the attention of particular shoppers for a moment, like any advertiser would.

In any case, Groupon is growing very rapidly, and if it keeps up its large ad spending, this lawsuit is a reminder that it will be unsettling to the online advertising habits of some established players. Last year, AdAge reported that Groupon’s chief competitor LivingSocial spent $2.3 million on Google advertising in a single month, so it’s certainly possible Groupon is spending that much or more.

We reached out to Groupon for a comment and will update the story if we hear back.

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