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Advertising, Marketing & Promotions Alert >> Second Circuit Affirms Ruling Holding Affiliate Marketing Network Liable for Its Affiliates' False Claims

October 12, 2016

The U.S. Court of Appeals for the Second Circuit has affirmed a federal district court’s decision in Connecticut holding the operator of an affiliate marketing network liable for deceptive practices by the third-party affiliate/publishers in its network.

Background
As we have previously discussed, LeadClick Media LLC operated an affiliate marketing network to connect merchants with affiliate/publishers who would promote links to the merchants' products and services online in a variety of ways, including email marketing, banner ads, search engine placement and creating advertising websites (to see a previous D&G Alert on an FTC action against an affiliate marketing network, click here).

LeadClick managed this affiliate network through tracking software that would track the flow of traffic from the links on individual affiliates' websites and services to the merchants' websites, compensating the affiliates for sales resulting from consumers who arrived at the merchant’s websites via such links.

LeanSpa LLC, a merchant that sold purported weight-loss and colon-cleanse products under various brand names, joined LeadClick's service to connect with affiliates in LeadClick’s affiliate marketing network. The Federal Trade Commission (FTC) subsequently asserted that certain affiliates in the LeadClick network used fake news sites to market LeanSpa products and link to the LeanSpa website, thereby earning affiliate commissions for such affiliates. According to the FTC, these fake news sites looked like genuine news sites and also frequently included a “consumer comment” section, but that content was invented.

LeadClick did not itself create the fake news sites to advertise products, but the FTC contended that LeadClick knew that fake news sites were common in the affiliate marketing industry and that some of its affiliates were using fake news sites, approved of the use of these sites, and, on occasion, provided affiliates with content to use on their fake news pages.

The FTC sued LeanSpa and LeadClick, alleging that they had violated Section 5 of the FTC Act. The FTC and LeanSpa reached a settlement, and the FTC moved for summary judgment against LeadClick.

The District Court’s Decision
The district court granted summary judgment in favor of the FTC, holding that LeadClick had violated the FTC Act and that LeadClick was not entitled to immunity under Section 230 of the Communications Decency Act (CDA), which provides immunity from certain liability for Internet service providers based on the content transmitted by their users.

As part of its decision, the district court required LeadClick to disgorge all proceeds that it had received from LeanSpa as payment for affiliate marketing – about $11.9 million.

LeadClick appealed to the U.S. Court of Appeals for the Second Circuit.

The Second Circuit’s Decision
The circuit court affirmed the district court’s ruling that LeadClick had engaged in a deceptive act or practice in violation of the FTC Act.

In its decision, the circuit court first rejected LeadClick's contention that because it had not created the deceptive content appearing on the fake news sites, and because the content was not attributable to it, it could not be held liable. The FTC Act, the Second Circuit said, did not require that a defendant "create deceptive content to be liable." Rather, it held, a defendant may be held liable for engaging in deceptive acts or practices if, with knowledge of the deception, it either directly participated in a deceptive scheme or had the authority to control the deceptive content at issue.

Applying that standard, the Second Circuit pointed out that LeadClick had known that deceptive fake news sites were prevalent in its affiliate marketing network, had directly participated in the deception created by its affiliates, and had the authority to control the deceptive content of these fake news sites but had allowed the deceptive content to be used in LeanSpa advertisements on its network.

Accordingly, the circuit court ruled, LeadClick had properly been held liable for engaging in deceptive acts or practices.

Finally, the Second Circuit affirmed the district court’s decision that Section 230 of the CDA did not immunize LeadClick from liability under Section 5 of the FTC Act

The circuit court rejected LeadClick's contention that it was a mere "interactive computer service provider" under the CDA that should not be liable for the content of its users, deciding instead that LeadClick was an "information content provider" that was responsible in part for the content and therefore not entitled to immunity under the CDA. So it could be held liable under the FTC Act "for its own deceptive acts or practices, rather than for publishing content created by another."

Bottom Line

Affiliate networks need to be aware that they can be held liable for the acts of their affiliates – even if they do not create the content used by such affiliates. Further, the FTC's position that one party in the online advertising ecosystem can be liable for content provided by another party due to the level of control should be an issue that all interactive companies should consider.