Ah, the Terms of Service agreement. The lengthy agreements we all click though without a second thought before using a new app, software, or website. Although most of us do not have 250 hours a year to devote to reading these agreements, they contain important terms that have an impact on your use of the service. As website agreement attorneys, we see this on a daily basis.
Kickstarter, the donation-based crowdfunding platform, recently made an important change to its Terms of Service. Specifically, Kickstarter attempted to address the problem of project creators failing to follow through with the project that backers supported. Kickstarter did not mince words in its new Terms of Service, stating:
The creator is solely responsible for fulfilling the promises made in their project. If they’re unable to satisfy the terms of this agreement, they may be subject to legal action by backers.
Kickstarter also provided alternate ways a creator could fulfill its obligations to its backers, including posting an update as to what work has been done, how the funds were used, and what is preventing them from completing the project as planned.
Well, backers probably could have sued a project creator that made promises that were not fulfilled before the new Terms of Service. In fact, it has happened before. But, the new Terms of Service clarify the mutual understanding of the parties. The project creator is under a clear obligation to complete the project and is on notice that legal liability may attach if the project is not completed. However, the lawsuit would still be based on traditional legal grounds of a breach of contract, fraud, or equitable principles.
According to the Terms of Service, no. Kickstarter disclaims any liability and states it does not oversee the performance of any projects. Kickstarter advises users that their use of the platform is at their own risk.
And that is likely the most useful statement of all. Donating to a Kickstarter project with the promise of receiving an award is a risky proposition. The creator may not live up to expectations and the hassle of a lawsuit may not be worth the limited investment into the project. Study the project, ask questions, and back wisely. If you are creating a project, you should ensure that you fully intend and are able to fulfill your promises to backers — both because it is the right thing to do and because legal liability can follow if you do not.
Kickstarter’s Terms of Service revision drew attention to a legal reality that existed long before the platform updated its policies: when a project creator solicits funds with specific promises about what backers will receive, a contractual relationship may be formed. The backer provides consideration in the form of money. The creator provides consideration in the form of a reward or the promise of a completed project. When the creator fails to deliver, the classic elements of a breach of contract claim are potentially satisfied.
Whether a specific Kickstarter campaign creates an enforceable contract depends on the facts: how specific were the promises made? What did the campaign page say? What were the reward tiers and what did they promise? Courts analyzing these disputes look at whether there was offer, acceptance, consideration, and a sufficiently definite promise to perform. A vague campaign promising to “bring this idea to life” stands on different legal ground than a campaign promising delivery of a finished physical product to backers by a specific date.
Beyond breach of contract, backers who believe they were defrauded may have claims for fraud or intentional misrepresentation. A fraud claim requires proof that the creator (1) made a false representation of a material fact; (2) knowing it was false, or with reckless disregard for its truth; (3) intending to induce the backer to rely on the representation; (4) the backer justifiably relied on the representation; and (5) the backer suffered damages as a result.
The challenge in most failed Kickstarter cases is proving intent to defraud. Many project creators genuinely believed they could deliver on their promises and simply ran into unforeseen obstacles — production delays, manufacturer failures, cost overruns, or underestimation of the complexity of the project. A failed project, standing alone, is not fraud. Courts have generally been reluctant to convert breach of contract claims into fraud claims absent clear evidence that the creator never intended to fulfill the promises made.
However, when a creator knowingly overstated their capabilities, misrepresented the stage of development of a product, or fabricated endorsements or partnerships to attract backers, the fraud analysis changes significantly. Several high-profile Kickstarter campaigns have faced FTC scrutiny and civil litigation based on exactly these kinds of misrepresentations.
For individual backers who have lost relatively small amounts — most Kickstarter pledges range from $25 to a few hundred dollars — the practical calculus often weighs against litigation. The cost of retaining counsel and pursuing a breach of contract or fraud claim in court will almost always exceed the amount at stake for an individual backer. Small claims court may be an option for lower-value disputes, but it requires identifying and serving the creator, which can itself be a challenge if the project creator is operating under a business entity or is located in a different state.
Class action litigation is a more practical avenue when a large number of backers have each lost small amounts from the same failed campaign. Several Kickstarter-related class actions have been filed in federal court, alleging breach of contract, fraud, and consumer protection violations on behalf of thousands of backers who collectively lost significant money.
If you are launching a crowdfunding campaign, the legal obligations you undertake are real. Before you publish your campaign, you should:
Whether you are a backer seeking to recover funds from a failed campaign or a creator who needs guidance on structuring your campaign obligations, Revision Legal’s crowdfunding and Internet law attorneys can help. We advise on platform terms of service, crowdfunding legal compliance, and dispute resolution. Contact us at 855-473-8474 or through our website to schedule a consultation.
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