court-of-appeals

Last week the U.S. Court of Appeals for the Second Circuit upheld a lower court ruling against an affiliate network for deceptively promoting the LeanSpa weight-loss supplement (FTC v. LeadClick Media, LLC). PMA member Richard Newman first alerted our members to this case last May when the U.S. District Court for the District of Connecticut initially held the network liable (“No Immunity for Affiliate Network with Ability to Control Advertising Process”) for claims made by affiliate publishers.

While some sites have criticized the decision (“Does the FTC Get to Ignore Section 230 of the CDA?”), the FTC heralded it as a “victory for consumers.”  For the performance marketing industry, it is a significant decision in that it opens the door for more actions filed on the basis of publisher false advertising. It is the first case by a federal court of appeals that holds an affiliate network liable for the actions of the affiliates.

Case Background

The basic facts of the case were that LeadClick operated an “affiliate marketing network” (generally termed a “CPA network” in our industry) and employed affiliate managers that recruited affiliates, managed merchant relationships, and matched affiliates with merchants.  LeadClick contracted with LeanSpa to promote their weight-loss products through the affiliate channel as well as direct media buys. The contract was a CPA deal based on LeanSpa’s free trial offer.

The “vast majority” of affiliate sites promoting LeanSpa were fake news sites made to look like genuine news sites with fake consumer content and reviews. LeadClick’s contract with affiliates required them to submit their sites for approval, and LeadClick provided LeanSpa content requirements to the affiliates.  LeadClick affiliate managers suggested edits to the affiliate sites. In addition, LeadClick at times purchases banner ads on legitimate news sites that linked to their affiliates’ fake news sites.

Prior Litigation

The FTC first sued LeanSpa in 2011 and settled with them to return money to consumers who bought the products. Next the FTC sought an injunction against LeadClick to require them to turn over their profits made through the affiliate promotions. The district court found in favor of the FTC and ordered LeadClick to disgorge all of the money it made from LeanSpa. LeadClick appealed.

Decision on Appeal

Two major issues pertinent to our industry were raised on appeal: 1) whether the network was liable under Section 5 of the FTC Act, and 2) whether the network was immune under Section 230 of the Communications Decency Act (CDA).

Liability Under The FTC Act

The FTC had to prove that 1) a representation, omission, or practice, 2) was likely to mislead consumers acting reasonably under the circumstances, and 3) the representation, omission, or practice was material. LeadClick argued that it did not create the deceptive content. The court held that under the FTC Act, LeadClick could be held liable because it “directly participate[d] in a deceptive scheme and ha[d] the authority to control the deceptive content at issue.”

LeadClick did not dispute that the affiliates engaged in false and deceptive advertising practices. Although LeadClick did not create the sites, the court held LeadClick liable because it 1) knew fake sites were common in the industry, 2) recruited affiliates and monitored their sites (direct participation), and 3) had the ability to control the practices of the affiliates.

Immunity Under the CDA

Section 230 of the CDA states that providers of an “interactive computer service” should not be treated as the publisher of any information provided by another information provider. This includes information services, systems, and access software providers.

The court held that LeadClick was an “information content provider” and was not liable under the FTC Act for the actions of the affiliates but rather for its own role in the deceptive practices. The actions of recruiting affiliates, paying the affiliates to advertise the products, knowing about the fake new sites, advising content edits, purchasing the banner ads, etc. helped the affiliates to develop the deceptive sites. Taken together, LeadClick’s actions rose to the level of being deceptive.

For Consideration

This case leaves open a number of issues affiliate marketers need to consider moving forward. Some of these include:

  • Are there differences between CPA networks and other affiliate networks that would have resulted in a different outcome?
  • Would the CPA network have been immune if it had only recruited the affiliates but not monitored their sites or suggested edits? Would that practice be better or worse?
  • Are Outsourced Program Managers liable if they recruit an affiliate and monitor their site but do not cure any deceptive practices?
  • Should all tracking networks be immune as a “interactive computer services” and what would it take to make that happen?

As issues such as these move through the courts, we will continue to inform our members. The PMA has many whitepapers and guides available to help affiliate managers, networks, merchants, and affiliates.

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Tricia Meyer is an attorney and affiliate marketer. She is the founder and owner of Helping Moms Connect and Sunshine Rewards as well as the current Executive Director of the Performance Marketing Association. You can find her on Twitter @SunshineTricia.

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