In a recent a case before the U.S. Second Circuit Court of Appeals, the second circuit was faced with the issue of whether online advertiser, LeadClick Media, LLC, is liable under the FTC Act for deceptive content it did not create. Ultimately, the second circuit concluded that online advertisers like LeadClick could be held liable where the advertiser participated in a deceptive scheme or where the advertiser has the authority to control the deceptive content in question, even if the advertiser did not create the deceptive content itself. The second circuit’s decision represents a significant victory for the FTC, and should signal alarm bells for online advertisers using affiliates to advertise a merchant’s business or products.
LeadClick’s Online Advertising Operations
Until 2011, LeadClick ran an affiliate marketing network, which provided advertising for internet-based sales businesses. LeadClick arranged for advertising for its merchant clients by connecting those merchants to third-party publishers, known as affiliates, who then advertised the merchant’s products. LeadClick’s affiliates advertised the merchants’ products in a number of various ways, including email marketing, banner ads, search-engine placement, and through advertising websites.
LeadClick oversaw the advertising efforts of its affiliates through tracking software (HitPath) that would “track the flow of traffic from each individual affiliate’s marketing website to the merchant’s website while remaining invisible to the consumer.” As of 2011, LeadClick employed eight to ten staff members in its “eAdvertising” division. Several of those employees were responsible for managing LeadClick’s affiliates and managing relationships with affiliate marketers, while others were responsible for working with merchants and managing relationships with merchants. More specifically, affiliate managers were tasked with scouting and recruiting new affiliates, researching affiliates, and matching affiliates with certain merchants. As part of its business practices, LeadClick would review and control which affiliates were chosen to provide online advertising for each particular merchant. LeadClick would also engage in “media buying,” whereby it would purchase advertising space for banner ads from well-known websites and then resell the ad space to affiliate marketers.
LeadClick Agrees to Provide Online Marketing for LeanSpa Through LeadClick’s Affiliate Network
In August 2010, LeadClick contacted LeanSpa, an internet retail business that sold purported weight-loss and colon-cleansing products under various brand names, to solicit its business. LeanSpa thereafter hired LeadClick to provide it with online advertising through LeadClick’s affiliate network in September 2010. Pursuant to the parties’ agreement, LeanSpa was required to pay LeadClick between $35 and $45 “each time a publisher’s advertisement directed an online consumer to LeanSpa’s landing page and that consumer enrolled in LeanSpa’s free-trial program.” LeadClick was responsible to pay 80%-90% of the amount it charged to LeanSpa to the publisher under separate agreements with its affiliate marketers. The remaining 10%-20% was pocketed by LeadClick as compensation for “its role in connecting merchants with its affiliate network and managing those affiliates.”
LeadClick eventually became LeanSpa’s primary marketing network. In fact, by 2011, “LeanSpa offers represented approximately 85 percent of all eAdvertising division sales.” In all, LeadClick billed LeanSpa more than $22 million for its efforts, but LeanSpa was only ever able to pay LeadClick $11.9 million of the money it owed.
LeadClick and its Affiliates Use of Fake News Sites
Because both LeadClick and its affiliates were paid on a per contact basis, it benefitted both to have as many visits to LeanSpa’s websites as possible. So, how did LeadClick and its affiliates drive traffic to LeanSpa sites? First, certain affiliates hired by LeadClick used fake news sites to market LeanSpa products. These fake news sites, which purport to be real news sites, “generally represented that a reporter had performed independent tests that demonstrated the efficacy of the weight loss products. The websites also frequently included a ‘consumer comment’ section, where purported ‘consumers’ praised the products.” According to the second circuit:
While LeadClick did not itself create fake news sites to advertise products, as discussed below, it (1) knew that fake news sites were common in the affiliate marketing industry and that some of its affiliates were using fake news sites, (2) approved of the use of these sites, and, (3) on occasion, provided affiliates with content to use on their fake news pages.
Furthermore, the second circuit said that LeadClick was aware of the fake news sites, approved of its affiliates’ use of the fake news sites, and that it requested edits to the content of the fake news sites. LeadClick also purchased advertising space for its affiliates, which banner ads would then link to the fake news sites relating information about LeanSpa products.
FTC Sues LeanSpa and Others, Amends Complaint to Add LeadClick as Defendant
In November 2011, the FTC sued LeanSpa and a host of other weight-loss peddlers for unfair trade practices. During discovery, the FTC learned of LeadClick’s involvement in the alleged deceptive content advertising LeanSpa products. As a result, the FTC amended its complaint to include LeadClick and its former officer, Richard Chiang, as defendants.
LeadClick Moves to Dismiss, But District Court Disagrees
In response to being named in the amended complaint, LeadClick and Chiang moved to dismiss, claiming immunity under Section 230 of the Communications Decency Act (“CDA”). The district court denied LeadClick’s motion. In May 2014, the FTC moved for summary judgment against LeadClick and relief defendant CoreLogic. That same day, both LeadClick and CoreLogic moved for summary judgment on the FTC’s claims.
District Court Grants Summary Judgment Against LeadClick, Finding Advertiser Responsible for Affiliates Deceptive Content
In March 2015, the district court granted the FTC’s motion for summary judgment, finding LeadClick responsible for the deceptive content of its affiliates. As part of the decision, the district court required LeadClick to disgorge all proceeds that it received from LeanSpa. The district court’s decision also required CoreLogic to disgorge $4.1 million, which represented the amount that LeadClick had transferred to CoreLogic in August 2011. LeadClick and CoreLogic subsequently appealed.
On appeal, the defendants raised three issues: “(1) LeadClick’s liability under Section 5 of the FTC Act and CUTPA, (2) LeadClick’s purported immunity under Section 230 of the CDA, and (3) CoreLogic’s liability as a relief defendant.”
Second Circuit Upholds LeadClick’s Liability for Deceptive Content of its Affiliates
As to the first issue, LeadClick argued in its opening brief, as well as its reply brief, that “because it did not create the deceptive content appearing on the false news sites, nor was that content attributable to it, it cannot be held liable under the FTC Act.” However, the second circuit disagreed. According to the second circuit:
LeadClick knew that deceptive false news sites were prevalent in its affiliate marketing network, directly participated in the deception, and had the authority to control the deceptive content of these fake news sites, but allowed the deceptive content to be used in LeanSpa advertisements on its network. Accordingly, LeadClick is liable under Section 5 of the FTC Act for engaging in deceptive acts or practices.
LeadClick’s Liability Arose From its Own “Deceptive Practices”
As part of its opinion, the second circuit provided a laundry list as to why LeadClick was liable under Section 5 for the deceptive content of its affiliates. The second circuit said LeadClick knew that “the use of false news pages was prevalent in affiliate marketing, and … its own affiliate marketers were using fake news sites to market LeanSpa’s products.” LeadClick also directly participated in the deceptive scheme by, among other things, scouting fake news sites to recruit potential affiliates to advertise LeanSpa products, requiring alterations to the contents of its affiliates’ fake news sites, advising affiliates on the content of their sites to increase traffic, and purchasing banner ad space on genuine news sites that was then sold to affiliates running the fake news pages, the second circuit explained. LeadClick also retained the authority to control the deceptive acts or practices of its affiliates.
In the mind of the second circuit:
LeadClick is not liable here merely because it aided and abetted its affiliatesʹ deception. Rather, its liability arises from its own deceptive practices: directly participating in the deceptive scheme by recruiting, managing, and paying a network of affiliates to generate consumer traffic through the use of deceptive advertising and allowing the use of deceptive advertising where it had the authority to control the affiliates participating in its network.
Moreover, LeadClick is directly liable regardless of whether it intended to deceive consumers ‐‐ it is enough that it orchestrated a scheme that was likely to mislead reasonable consumers. And the scheme did just that: the majority of traffic from LeadClick’s affiliate network came from fake news sites, generating enough traffic to bill LeanSpa for approximately $22 million and earn LeanSpa recognition as LeadClick’s “top customer.”
No Immunity under Section 230 of the CDA
As to the second issue, LeadClick claimed it was immune under Section 230 of the CDA “because it was an interactive computer service provider, it did not publish deceptive content, and the plaintiffs seek to hold it liable for the deceptive statements of its affiliates.” The second circuit disagreed, concluding “that LeadClick is not entitled to Section 230 immunity because it is an information content provider with respect to the deception at issue and because LeadClick is liable under the FTC Act for its own deceptive acts or practices, rather than for publishing content created by another.”
CoreLogic Not a Proper Relief Defendant
Finally, the second circuit turned to the issue of CoreLogic’s liability as a relief defendant. There, the second circuit held that the district court erred in ordering CoreLogic to disgorge the $4.1 million it had been paid by LeadClick in August 2011. The second circuit reasoned that under the circumstances of the case, CoreLogic had a right to repayment, and that “[i]t did not merely hold the transferred funds in a custodial capacity.” Accordingly, the second circuit said CoreLogic was not a proper relief defendant.
Second Circuit’s Opinions Serves as a Warning to All Online Advertisers
While the second circuit ultimately absolved CoreLogic, its holding against LeadClick is the more noteworthy portion of its opinion. Under the second circuit’s ruling, an online advertiser can be liable for the deceptive content of its affiliates. However, in order to establish liability under Section 5, the FTC must prove that the advertiser “directly participat[ed] in the deceptive scheme by recruiting, managing, and paying a network of affiliates to generate consumer traffic through the use of deceptive advertising and allowing the use of deceptive advertising where it had the authority to control the affiliates participating in its network.”
Thus, it seems that even though an online advertiser may be held liable under Section 5 for deceptive content it did not create, the online advertiser must have had some direct participation in the deceptive content and/or the authority to control the deceptive content. That then begs the question, “How would the FTC pursue advertisers who did not participate in the deceptive content and/or or lacked authority to control the affiliates efforts?”
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