Hot Startups Rocked With Lawsuit Threat

Harmless Internet timewasters not so innocent, lawyers claim

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    NEWSLETTERS

    TK
    Joi Ito
    Zynga founder Mark Pincus is now facing the threat of a class-action lawsuit.

    Silicon Valley's venture capitalists think social games are the next big pot of money.

    Unfortunately, so do class-action lawyers.

    Kershaw, Cutter & Ratinoff, a Sacramento-based law firm, has announced an investigation into social gaming, claiming the business is rife with abuse:

    Users of these games may have been charged without their consent for "special offers" that result in hidden charges to credit and debit cards, sometimes through the use of phone text messages and auto-recurring SMS subscriptions. Many of these companies and advertisers making "special offers" then make it very difficult — or impossible — for users to get their money refunded.

    Social games like Mafia Wars and FarmVille, played on Facebook and MySpace, let people play with their online friends in cartoonish fantasy worlds for free. Game publishers like Zynga and RockYou make some money through conventional advertising, but they also profitably help marketers sign up new users for services like a Netflix subscription or a Video Professor DVD set.

    It's a big business: Zynga's 2009 revenues are estimated at somewhere between $100 million and $200 million. And Electronic Arts spent $400 million acquiring Playfish, a rival maker of Facebook games.

    That means the likes of Zynga are big enough to be a target for the likes of Kershaw, Cutter & Ratinoff, which has won a number of class-action cases, including a similar suit against AOL for deceptive subscription come-ons. AOL settled that case for $25 million. And according to TechCrunch, another law firm is considering a similar class-action claim against the industry.

    Social game players can pay to buy points which they spend on so-called "virtual goods" -- in-game add-ons which speed up gameplay or give them an advantage against other players. But they can also acquire these points by accepting offers.

    The social networks which host these games can potentially benefit: Game publishers like Zynga spend money to buy advertising on their sites as they seek to sign up new users to which they can market offers.

    But the relationship has grown less cozy: Facebook booted Zynga's latest game, FishVille, off of its site for violations of its terms of service. And Offerpal Media, a startup which brokers offers for social games, abruptly replaced founder Anu Shukla after she publicly declared her company to be aboveboard. The new CEO, George Garrick, promised to improve Offerpal's business practices.

    It's not just users getting scammed, according to critics of the social-gaming business. Users are taking advantage of advertisers by clicking on offers just to get points, and then cancelling the service.

    Zynga CEO Mark Pincus, speaking in front of an audience of entrepreneurs at Berkeley earlier this year, confessed to doing "every horrible thing in the book" to get revenues for his startup -- an apparent reference to accepting misleading ads and offers.

    "That sounded bad enough when it was reprinted on a tech blog; imagine how it's going to sound in court," observed Valleywag, a Silicon Valley gossip blog.

    Court is a ways away: The law firm has only announced an investigation, and if it decides to proceeed, it must persuade a judge to certify the case for class-action status. But given Kershaw, Cutter & Ratinoff's track record of class-action litigation, the threat seems like one social-gaming startups should take seriously.

    Representatives of Zynga and Facebook, two companies prominently targeted by the investigation, did not immediately respond to a request for comment.

    Here's Zynga's Pincus on how he built his business: