Appeals Court Upholds First FTC Judgment Against an Affiliate Network

In “FTC Scores $12 Million TKO Against Affiliate Network” (DRMA Voice, April 2015), I wrote about FTC v. Lean Spa et al., the first Federal Trade Commission (FTC) action against an affiliate network ever to go to court (disclosure: I represented the merchant defendant). As the seminal action, it was the first to test (after a spate of settlements) the FTC’s assertion that its enforcement authority over deceptive business practices under Section 5 of the FTC Act extended to an affiliate network that did not itself originate the deception (in this case, fake news sites promoting the merchant-client’s product that were created and operated by the network’s publishers).

The now-defunct affiliate network, LeadClick, said it could not be held liable because it neither created nor published the deceptive advertising (its affiliates did) and was not identified in it. It also said it couldn’t be culpable under an “aiding and abetting” theory because aiding and abetting liability does not exist under Section 5 of the FTC Act. (See “Does The FTC Have Legal Authority Over Affiliate Networks?” [DRMA Voice, July 2014] for a discussion of the aiding and abetting question.)

In a big victory for the FTC, the trial court granted summary judgment against LeadClick on a theory of principal liability for its publishers’ false advertising. Rejecting its contention that it could be liable only if it created, published or was publicly identified in the false ads, the court said liability could rest on other forms of participation in advertising or on the authority to control it, in the same way that individual liability can attach under the FTC Act to principals who participate in or have control over their companies’ unlawful acts.

Ample evidence of such participation and control included LeadClick’s: (1) recruitment of affiliates with knowledge that fake news sites were common in affiliate marketing; (2) contractual authority to approve affiliate ads and sites; (3) edit suggestions for the sites; (4) discussion of fake news sites with affiliates with knowledge they were being used, and failing to stop them; and (5) purchasing of advertising space on genuine news sites for affiliates using fake news sites, intending thereby to enhance the authenticity of the fake site by linking it to a real news site.

In an even more resounding and consequential win for the FTC, the Second Circuit Court of Appeals, in September, issued the first appellate ruling on affiliate network liability under Section 5, affirming the district court’s fact findings, judgment, and analogical reasoning applying the standard for individual liability for corporate acts to an entity such as an affiliate network. Citing Ninth and Eleventh Circuit authority in two other FTC cases (respectively, FTC v. Neovi, and FTC v. IAB Marketing Associates) that a defendant may be liable for deceptive content even if it was not solely responsible for it, the court stated that a party is liable for deceptive practices that:

“cause consumer harm if, with knowledge of the deceptive nature of the scheme, he either ‘participate[s] directly in the practices or acts or ha[s] authority to control them’ … a defendant who knows of anotherʹs deceptive practices and has the authority to control those deceptive acts or practices, but allows the deception to proceed, may be held liable….This is consistent with the FTCʹs longstanding policy that an omission in certain circumstances may constitute a deceptive or unfair practice.”

The court rejected LeadClick’s argument that applying a test that imposes liability based on direct participation in or authority to control deceptive practices “conflates principal liability with aiding and abetting liability, which is foreclosed under the FTC Act.” Without deciding whether, in fact, aiding and abetting authority is foreclosed, the court said there was no confusion because:

“we conclude that a defendant acting with knowledge of deception who either directly participates in that deception or has the authority to control the deceptive practice of another, but allows the deception to proceed, engages, through its own actions, in a deceptive act or practice that causes harm to consumers … This direct liability is distinguishable from liability for merely aiding and abetting the deceptive conduct of another.” (emphasis in original)

The court also affirmed the lower court’s rejection of a statutory immunity defense based on the Communications Decency Act’s (CDA) protection of a content-neutral “interactive computer service” from liability for wrongful statements made by “publishers” or “speakers.” LeadClick was not a neutral interactive computer service but a knowing and willing participant in its publishers’ deceptions.

While refuting LeadClick’s claim that it was conflating distinct theories of liability, the Second Circuit, perhaps unwittingly, was engaging in some liability conflating in another way, by injecting a “knowledge” element in the standard for individual liability under the FTC Act. Knowledge of deception is a requirement for individual monetary liability, but not conduct liability, which requires only direct participation in or control over the challenged behavior. Given the control that affiliate networks have over their publishers, however, and with it the ability to know what they are doing, convincing a judge they were ignorant of publisher hanky-panky could be a tall order.

As a highly influential appellate court, the Second Circuit’s decision affirming the right of the FTC to hold affiliate networks legally responsible for the deceptive acts of their publishers (and shooting down the CDA immunity defense) should be a big deal to every affiliate network worried about FTC risk – which should be all of them. With this groundbreaking win in its pocket, the FTC’s already vigorous affiliate marketing enforcement program can be expected to become more robust than ever.

Smart affiliate networks will use this occasion as an opportunity to conduct a top-to-bottom review of their internal compliance policies and practices, with assistance from expert FTC counsel. Less wise ones, those who do not run tight ships and fail to police their affiliates and root out the bad ones, could be the next LeadClick – though unlike LeadClick, they may not be defunct and may actually find themselves on the hook for a multi-million dollar judgment.