What Do You Owe Your Backers on Kickstarter?

The first consumer protection lawsuit involving a Kickstarter campaign was just filed in Washington state. While things don’t look good for the project creator in that case, I often see speculation about the exact legal obligations owed to backers in a successfully funded project on Kickstarter.

This confusion starts with the Kickstarter terms of service. The terms were mostly written to protect Kickstarter and define their role, or lack of one, in the relationship between project creators and backers. However, there are two main requirements that the terms impose on project creators:

Those two clauses, one of which is based on the very squishy legal standard of good faith, define the main legal obligation to backers. In the case of a project that fails completely, this provides a decent level of protection for backers. The more interesting question, legally, is what happens when a project delivers, but it isn’t what backers expected?

This gets complicated because of two issues, the lack of other terms that help interpret these clauses, and how rewards are often structured.

The first issue gets into a few legal concepts. I will try to keep it simple.

Most contracts try to define the exact scope of what they promise. That is the whole point of the contract. However, real life is messy and people make a lot of promises outside of the contract that cause problems later on. To avoid this most contracts have what is called an integration or merger clause. This clause says that only the words on the page are actually promised. It is basically a reminder that everything the two parties talked about beforehand is not actually promised unless it is in the contract in writing. This makes it easier if there is a dispute later because a court only has to look at the contract to see the terms. Neither party can bring up an earlier email or conversation as a basis for a dispute because the contract specifically excludes all previous agreements.

The Kickstarter terms of service have an integration clause. It also doesn’t apply to the relationship between project creators and backers, only between those two parties and Kickstarter itself.

Lawyers reading this may now be thinking, and having painful law school flashbacks, about the parol evidence rule. Integration clauses are used almost universally to avoid this issue.

Without that integration clause a court must determine if there is an integrated agreement and whether it is only partially or totally integrated. This gets into an even more complicated legal analysis that I will avoid here, but it is worth noting that the choice of law clause in the terms of service probably doesn’t apply to the relationship between project creators and backers, so the analysis will change depending on where the parties are located.

For the sake of continuing this with minimal legalese, I believe it is reasonable to assume that no integrated agreement would be found.

This means that in a dispute between project creators and backers, almost any communication between them can be considered when trying to interpret the contract.

This leads to the second issue of how rewards are structured.

Project creators often make a copy of the project goal one of the rewards. This makes a lot of sense for a crowdfunding campaign, since backers usually care more about the goal than t-shirts or other rewards that are associated with it. This is only a problem because it makes the reward less well defined. This can be especially problematic in a creative project like a video game.

Because of the integration issue discussed earlier, the entire project page becomes part of the contract. Additionally, project creators may post updates and comments or send messages to backers through Kickstarter. All of these might now be used to interpret the contract. Even worse blogs, tweets and facebook posts might be used too. A reddit AMA done to promote the game can become the source of a feature that is now legally promised.

Of course, that is an extreme possibility. Common sense does apply so project creators aren’t necessarily binding themselves with every word they say, but it certainly isn’t a well defined contract.

Backers in general are a generous and patient group. Failing to include promised features will probably be forgiven, even if legally promised. The project creators that have to watch out are those that fail completely.

No matter what, project creators should try their best, communicate regularly with their backers and own up to mistakes. Fortunately the legal strategy to protect yourself is straightforward; incorporate and properly maintain a limited liability entity. For the target of the recent consumer protection lawsuit though, his LLC may not help, as consumer protection laws can sometimes be used to get through that liability protection.