Are Groupon’s Lawsuits A Burden?

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Groupon is facing an ugly brew of consumer, employee and intellectual property lawsuits. This messy legal landscape is yet another wild card for those trying to read Groupon’s tea leaves ahead of the company’s long-awaited IPO this week.

All growing companies attract lawsuits sooner or later as enemies and opportunists smell money — Facebook, for instance, was sued in federal court more than a dozen times in October alone. Lawsuits, which are often dismissed, can seem like just another part of playing in the corporate big leagues. But in Groupon’s case it is surprising to see such a young company so tangled in litigation.

You can get a window into Groupon’s legal exposure by looking at what it had to say in a disclosure filed with the Securities and Exchange Commission:

The Company currently is involved in several disputes or regulatory inquiries, including suits by its customers (individually or as class actions) alleging, among other things, violation of the Credit Card Accountability, Responsibility and Disclosure Act and state laws governing gift cards, stored value cards and coupons, violations of unclaimed and abandoned property laws and violations of privacy laws. The number of these disputes and inquiries is increasing.

Federal dockets show that most of the “suits by its customers” are tied to Groupon’s former practice of issuing gift certificates that expired a few months later. Plaintiffs filed separate lawsuits in about a dozen states, and the litigation has since been put into a court process that consolidates large or complex cases. Suits of this scale often produce settlements in the tens of millions of dollars.

Groupon is also a defendant in a class action that accuses it and others of privacy violations related to Apple’s iPad. Others suing Groupon include California merchants who accuse it of using bait-and-switch advertising, and a thousand Chicago employees who say it shortchanged them on overtime. The company is also caught up in half a dozen “patent troll” cases – a form of lawsuit plaguing the tech industry that involves shell companies that buy patents and then sue for exorbitant amounts in unfriendly jurisdictions.

But does any of this matter to Groupon’s financial future? It is hard to say definitively as litigation outcomes are uncertain and because accounting rules do not require companies to record contingent losses. This means that a firm facing a $20 million lawsuit does not have to record a loss on its balance sheet until there is a verdict or a settlement (even if the firm expects to lose).

In the case of Groupon, which has already set aside a $5 million legal reserve, the significance of the lawsuits depends on your view of the company. If you are a daily-deal bull who believes that new high-price partnerships will rocket the company into a new growth phase, the lawsuits will seem like a growing pain that can be smoothed away as revenues pour in.

If you are a skeptic who believes Groupon is not a tech company and that its growth has screeched to a halt, the lawsuits could take a significant bite out of Groupon’s dwindling cash reserve at a time when it is still struggling to become profitable.

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Jess A

The reason the lawsuits will accelerate on all fronts is that all of its business practices that end in lawsuits — from not paying employees, to bait and switch business practices, to accounting schemas, are still going on — ie strike “former” in this “former practice of issuing gift certificates that expired a few months later”

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