Second Circuit Affirms Liability for Manager of Affiliate Marketers

The Second Circuit Court of Appeals agreed with the Federal Trade Commission that a company that managed a network of affiliate marketers could be liable for fake news sites that deceptively promoted weight loss products, even though the company did not create the sites.

Until it ceased operations in 2011, LeadClick operated an affiliate marketing network to provide Internet advertising. The company arranged for advertising for its merchant clients by connecting them to affiliated third-party publishers (affiliates) who advertised the merchant’s products.

LeadClick began working with LeanSpa in 2010. The parties agreed that LeanSpa would pay LeadClick between $35 and $45 each time a publisher’s ad directed an online customer to LeanSpa’s landing page and the consumer enrolled in LeanSpa’s free trial program. As the relationship progressed, LeanSpa became LeadClick’s top customer, with bills totaling $22 million over the course of their contractual agreement.

According to the FTC, however, most of that money was a result of deceptive marketing. LeadClick affiliates used fake news sites to market the LeanSpa products, and both companies were named in an agency lawsuit alleging violations of Section 5 of the Federal Trade Commission Act. LeanSpa settled with the Commission, and a district court judge granted summary judgment in favor of the FTC in the case against LeadClick.

The company appealed to the Second Circuit Court of Appeals, arguing that it could not be liable because it did not create the fake news sites to advertise products itself—instead, the affiliate marketers created the content. The federal appellate panel was not persuaded.

“While LeadClick did not itself create fake news sites to advertise products … 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,” the court wrote.

The panel cited testimony from LeadClick employees that fake news sites were “fairly common” and “everyone was using ’em.” The company knew that its own affiliates’ used such sites, with one employee creating a “scouting report” consisting exclusively of fake news sites, while continuing to pay its affiliate marketers for advertising the LeanSpa products.

LeadClick employees affirmatively approved of the use of fake news sites, the court said. In addition, LeadClick’s standard contract with affiliate marketers required them to submit their proposed marketing pages for approval before they were used. The defendant also requested edits to the content of some of the affiliates’ fake news sites.

The panel emphasized that its ruling was not based on a theory that LeadClick aided and abetted the deceptive practices of LeanSpa and the affiliate marketers. It was wholly based on LeadClick’s own actions. “[U]nder the FTC Act, a defendant may be held liable for engaging in deceptive practices or acts if, with knowledge of the deception, it either directly participates in a deceptive scheme or has the authority to control the deceptive content at issue,” the Second Circuit wrote, citing support from the Ninth and Eleventh Circuits.

“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,” the panel said. “Accordingly, LeadClick is liable under Section 5 of the FTC Act for engaging in deceptive acts or practices.”

LeadClick’s own actions caused significant harm to consumers, the court noted. “As the manager of the affiliate network, LeadClick had a responsibility to ensure that the advertisements produced by its affiliate network were not deceptive or misleading,” the panel wrote. “By failing to do so and allowing the use of fake news sites on its network, despite its knowledge of the deception, LeadClick engaged in a deceptive practice for which it may be held directly liable under the FTC Act.”

Affirming that the defendant was not entitled to immunity under Section 230 of the Communications Decency Act (because it was “being held accountable for its own deceptive acts or practices”), the panel affirmed summary judgment in favor of the FTC against LeadClick.

To read the decision in FTC v. LeadClick Media, click here.

Why it matters: Advertisers should take note of the standard set by the Second Circuit: that a deceptive scheme violating the FTC Act may have more than one perpetrator. “A defendant may be held 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,’” the panel wrote. “A defendant directly participates in deception when it engages in deceptive acts or practices that are injurious to customers with at least some knowledge of the deception. Similarly, a defendant who knows of another’s deceptive practices and has the authority to control those deceptive acts or practices, but allows the deception to proceed, may be held liable for engaging in a deceptive practice injurious to consumers.”

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