Groupon's secret

Are misleading online ads the secret to Groupon's success? And is Google implicated?

A lawsuit alleges that Groupon uses illegal bait-and-switch tactics to hook new customers.

A San Francisco-based bus tour operator who relies on the Internet to drum up business has filed a class action suit against Groupon, alleging that the deal-of-the-day website uses false advertising, or bait-and-switch tactics, to get customers to its site.

San Francisco Comprehensive Tours, LLC, which does business as San Francisco Shuttle Tours and Wine Country Tour Shuttle, originally filed suit March 17 in the U.S. District Court, Northern District of California "to stop false and misleading business and advertising acts and practices employed on by Groupon, Inc."

In essence, the tour company claims that Groupon is dominating Google searches with offerings for discounted local tours — of, say, Alcatraz — that don't actually exist.

On April 19, SFCT amended its complaint into a class action suit. The amended suit includes "all persons and entities in the United States who purchased Internet ads with Google for the purpose of advertising local tour company business information and whose tour businesses, including the cost of advertising on Google, have been affected by the false advertisements of Groupon which claim to provide discounted offers for tours but actually provide no such offers."

Attorneys for Groupon have asked for an extension until June 13 to respond to SFCT's complaint. Representatives for Groupon told the Guardian they can't comment on the case.

SFCT's attorneys claim that Groupon is arguing that this shouldn't be a class action suit because everyone's complaint is different.

"They're spamming the Internet with false advertising that affects everyone's ability to do business, so this is tailor-made for a class action suit," said SFCT's attorney Steve Williams of Cotchett, Pitre & McCarthy in Burlingame. "It's not easy to take on Groupon now that it has gotten so big and can afford top-notch lawyers." In other words, it could take a group to take on Groupon.

The suit comes as Groupon, which launched in Chicago in 2008 and now claims to have 70 million subscribers as well as annual revenues of $700 million and an estimated worth of $12.7 billion, prepares to go public. Investors are trying to figure out if Groupon has a sustainable business model.

Last December Groupon fueled speculation that it would offer an initial public offering (IPO) when it rejected Google's jaw-dropping $5 billion-plus takeover bid. Spurned, Google responded by launching Google Deals, a Groupon clone, in Portland, Ore., this June and announcing plans to expand into San Francisco and other U.S. cities later this year.

But as Forbes magazine noted last August, Groupon founder Andrew Mason has "managed to build the fastest-growing company in Web history." Groupon's meteoric rise has been attributed to Mason's decision to combine a familiar concept with a novel idea: customers only get Groupon's deeply discounted deals if enough customers pay up in advance for the deal that day.



SFCT is accusing Groupon of manipulating ad space that it buys from Google to funnel visitors to its site and collect data about these visitors — while SFCT and other tour companies lose customers and have to spend more money on online advertising.

This isn't the first time Groupon has been sued since it was launched. But the bulk of those cases revolved around claims that Groupon's "Daily Deal" gift certificates have illegal expiration dates. By contrast, SFCT's suit is about Groupon hurting other businesses through manipulating Google's AdWords program, which is Google's main advertising program and main source of revenue.

"It's the means that Groupon uses that is harming legitimate businesses. But they argue that it's the Internet, it's all new, and therefore the rules don't apply," Williams claimed.