A Connecticut Federal District Court granted summary judgment against LeadClick Media, an affiliate marketing network, and its parent company, Core Logic, Inc., finding that those companies must turn over $11.9 million in ill-gotten gains. In finding for the FTC on summary judgment, the court ruled that LeadClick was responsible for the false and deceptive ads made by affiliate marketers that LeadClick recruited on behalf of LeanSpa, LLC, a company that sold acai berry and “colon cleanse” weight-loss products.
The district court’s ruling stems from a case filed by the FTC and the State of Connecticut in December 2011 against LeanSpa and its principal, Boris Mizhen. The FTC’s complaint alleged that LeanSpa used fake news websites (created by LeadClick and its affiliates) to promote their products, made deceptive weight-loss claims, and told consumers they could receive free trials of acai berry and “colon cleanse” products, and only have to pay the nominal cost of shipping and handling. After the complaint was filed, the parties agreed to an order, which temporarily halted the illegal conduct of LeanSpa and Boris Mizhen. In January 2014, the FTC settled its case with LeanSpa and Boris Mizhen, wherein LeanSpa and Boris Mizhen agreed to surrender assets totaling approximately $7.3 million.
In the summary judgment ruling, the court held that the fake news sites developed by LeadClick’s affiliates deceived consumers by using actual news organizations names and logos along with made-up testimonials from purported users of the LeanSpa products. The major issue on summary judgment was whether LeadClick could be held responsible for the deceptive fake news sites, which the FTC admitted were not created by LeadClick. The court rejected LeadClick’s fierce contention that it did not participate in the acts or had the authority to control its affiliate marketers. According to the court:
[N]o reasonable jury could deny that LeadClick both participated in, and had the authority to control, the affiliate marketers conduct in so far as it related to the fake news sites. Specifically, LeadClick’s affiliate managers were tasked with scouting for new affiliates. Affiliate managers “routinely gathered information about affiliates,” and they would solicit affiliates to join eAdvertising. Thus, LeadClick solicited and hired affiliate marketers using fake news sites to advertise LeanSpa’s products. Notably, “[a]ffiliate marketers had to apply to join the eAdvertising Network, and LeadClick would decide which to accept.” … Although LeadClick asserts that, “in practice, affiliate marketers were not required to submit their ‘websites’ for approval unless [it] specifically requested to see the page,” it does not deny that it had the authority to review pages. Indeed, after the FTC began suing affiliate marketers in April 2011 for using fake news sites, LeadClick started to screen fake news pages by removing their ability to advertise certain products without approval from the merchant. This evidence establishes that, as a matter of law, LeadClick had the authority to control the affiliate marketers’ use of fake news pages, and LeadClick cites to no evidence from which a reasonable jury could infer otherwise.
The court also rejected LeadClick’s claim that it was immune from liability under section 230 of the FDA, which states that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” In denying LeadClick’s immunity claim, the court held:
No reasonable jury could deny that LeadClick was an “information content provider.” LeadClick solicited and hired the affiliate marketers to advertise LeanSpa’s products, knowing that affiliates used fake news pages. LeadClick continued paying Davidson and other affiliates running fake news pages for their referrals to LeanSpa’s website. LeadClick communicated with LeanSpa and with affiliates running fake news pages regarding which products should be advertised as the “Step 1” and “Step 2” products purportedly under independent investigation. LeadClick also screened advertisements according to merchants’ preferences.
After finding LeadClick liable for the fake news sites developed by its affiliates, the court determined the proper remedy was for LeadClick to disgorge “the amount of consumer payments it received from LeanSpa as a result of its affiliate marketing activities in connection with LeanSpa,” which LeadClick admitted was $11.9 million. As part of the $11.9 million judgment, LeadClick’s parent company, CoreLogic, must disgorge $.1 million in ill-gotten gains.
The court’s ruling against LeadClick is important for several reasons. First, the opinion includes findings of fact that expose how the lucrative partnership between LeanSpa and LeadClick operated. Second, the court rejected LeadClick’s argument that they were not liable because they did actually create the fake new sites, sending a clear message to other affiliate market networkers that a “Who me?” defense isn’t like to stand up going forward. Third, the court rejected the immunity claims made by LeadClick, finding that LeadClick at least played a part in the development of the fake news sites even if not directly. Finally, the court’s opinion, at great length, explained why Core Logic was liable as a proper relief defendant. LeadClick and Core Logic are appealing the ruling.