FTC Scores $12 Million TKO Against Affiliate Network

In “Does The FTC Have Legal Authority Over Affiliate Networks?” (DRMA Voice, July 2014), I wrote about FTC v. LeanSpa et al., which included charges against a now defunct affiliate marketing network, LeadClick, regarding the use of “fake news” sites to make deceptive weight-loss supplement claims. The case, the first Federal Trade Commission (FTC) action against an affiliate network to go to court, was at the summary judgment stage and stood to be the first (after a spate of settlements) to decide whether the FTC actually has legal authority over affiliate networks – and, if so, in what circumstances?

LeadClick denied direct liability because, as a network, it neither created nor published the deceptive advertising (its affiliates did) and was not identified in it. Further, it denied culpability on an “aiding and abetting” theory for the simple but dispositive reason that “aiding and abetting” liability does not exist under the FTC’s basic enforcement statute, Section 5 of the FTC Act. While “aiding and abetting” liability is expressly available in the FTC’s Telemarketing Sales Rule (TSR), no such provision is in Section 5, which means that “aiding and abetting” authority must be “implied” in the statute.

In arguing it isn’t, LeadClick relied on a Supreme Court decision, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994), which held that the Securities & Exchange Commission (SEC) lacks express or implied authority to enforce its statutory ban on securities deception under an “aiding and abetting” theory. It argued the decision logically extends to Section 5 because of the similarities between the SEC’s and FTC’s anti-deception mandates.

Despite devoting many a keystroke to this argument in its summary judgment papers, LeadClick, its affiliate network brethren, and all online advertising service providers will have to wait another day for an answer to the “aiding and abetting” question. In a resounding victory for the FTC, the court levied a $11.9 million summary judgment against LeadClick (the amount it collected from its client, LeanSpa), finding it directly liable for the false advertising of its publishers and sidestepping “aiding and abetting” liability entirely, saying it wasn’t pled in the complaint. The court also rejected LeadClick’s statutory immunity defense rooted in the Communications Decency Act’s protection of a content-neutral “interactive computer service” from liability for wrongful statements made by “publishers” or “speakers.” The court said LeadClick was not a neutral interactive computer service but a knowing and willing participant in its publishers’ deceptions.

The court dismissed LeadClick’s contention that it could be liable only if it created, published or was publicly identified in its affiliates’ false ads. It said liability could be predicated 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 the authority to control the unlawful acts of their companies. The court added that liability also could rest in the law of agency, under which a principal is liable for the acts of its agent, even if the affiliates were technically not agents but independent contractors and even if the acts were unauthorized.

The court found ample evidence from which to conclude that LeadClick had the authority to control its affiliates and participated in their fake news sites. LeadClick: (1) recruited affiliates with knowledge that fake news sites were common in the affiliate marketing industry; (2) had contractual authority to review and approve affiliate ads and sites; (3) discussed, reviewed and made suggestions for the sites; (4) discussed fake news sites with affiliates, knew they were being used, and allowed or failed to stop them; and (5) brokered the purchase 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 genuine news site.

In addition to the LeadClick judgment, the court ordered its parent, CoreLogic, to disgorge $4 million it received from LeadClick in a fraudulent conveyance. CoreLogic is not responsible for paying the LeadClick judgment, however, and since LeadClick is defunct, the $12 million restitution award is primarily symbolic. Both CoreLogic and LeadClick are appealing.

For other affiliate networks that are still very much going concerns, the LeanSpa decision, and its liability rationales, are far from symbolic. Every proprietary affiliate network controls or has the authority to control its publishers and is – or could be – in an agency relationship with them. Every affiliate network thus runs the risk of FTC liability and potential multimillion-dollar judgments for the deceptive advertising practices of its affiliates. After LeanSpa, this risk is greater than ever for those networks who do not run tight ships and do everything they possibly can to police their affiliates and root out the bad ones.

Talking about Direct Response, Online Marketing

Comments are closed.

  • Newsletter Sign Up

    join our mailing list
  • Tags


  • Recent Posts

  • Categories

  • Archives