Lumosity’s $2M Fine & the Risk of “Fake It ‘Til You Make It”

How Lumosity got in trouble

Lumosity, the San Francisco-based company offering brain-training tools, came under fire from the FTC this week for the deceptive advertising allegations.  Director of the FTC’s Bureau of Consumer Protection Jessica Rich said the following: “Lumosity preyed on consumers’ fears about age-related cognitive decline, suggesting their games could stave off memory loss, dementia, and even Alzheimer’s disease. But Lumosity simply did not have the science to back up its ads.”

As a result of the FTC action, Lumosity has agreed to pay a $2M settlement as well as notify all of its users about the FTC action and offer a clear cancellation process before user accounts auto-renew.

Since inception in 2007, Lumosity raised $67.5M over the course of four rounds.  It currently has a user base topping 70 million globally and 2013 revenues (the most recent numbers available) of roughly $24M.

Lumosity always touted some research to back its claims, but apparently this was more of a case of the “fake it ’til you make it” mentality we’re all accustomed to in the startup marketing world.  Teams appear larger, products appear more robust, etc.  This mantra is both effective and necessary for most startups and allowed Lumosity to quickly amass a huge user base.   However, this is a good reminder of the liability risks that can come along with a bit of extra marketing embellishment.

How insurance can help

The good news is that with the proper insurance in place, Lumosity could be spared from a hefty bill here.  Beyond the settlement itself, the company will have to deal with the legal expenses and costs related to notifying its users.

There are a couple different insurance products that could kick in here to cover the company’s expenses.  In order to figure out which ones, we have to look at two things: the allegations and the type of claim.

The allegation here is deceptive advertising, general liability (GL) insurance could kick in to provide cover.  The “personal injury” protection provided by a general liability policy provides cover for libel, slander, misrepresentation, and more when present in the insured company’s advertising materials.

As for the type of claim, it’s important to note that this claim came in directly from the FTC.  Government entities have a tendency to personally name the directors and officers of the company in the action, and therefore put the execs’ personal assets at risk.  A directors and officers insurance policy could kick in here to add an extra layer of protection should this be the case.

Marketers at startups are aggressive (and they should be!), but it doesn’t mean that you should fly by the seat of your pants as a company.  Insurance is a simple tool to help mitigate the risks of a bullish marketing strategy.