A federal court recently agreed with the Federal Trade Commission (FTC) that an advertiser should be held accountable for the deceptive acts and practices of its affiliate marketers, and ordered that the advertiser disgorge the entire $11.9 million in payments it received. The court held that the advertiser violated Section 5 of the Federal Trade Commission Act (FTC Act) as a matter of law because its affiliate marketers used “fake news sites” to promote products sold online. According to the court, “no reasonable jury could deny” that the advertiser “both participated in, and had the authority to control, the affiliate marketers conduct in so far as it related to the fake news sites.” The court also held that the advertiser was not entitled to immunity under Section 230 of the Communications Decency Act (CDA). Federal Trade Commission v. LeanSpa, LLC, No. 3:11-CV-1715 (D. Conn. Mar. 5, 2015).
The advertiser, LeadClick Media, Inc. (LeadClick), “fiercely disputed” that it had the authority to control the affiliate marketers, and that it was responsible for creating or developing the deceptive content provided on the fake news sites. Even though LeadClick did not create the fake news sites, the court denied LeadClick Section 230 immunity because LeadClick knew that its affiliate marketers used fake news pages, had communications with these affiliate marketers regarding what products to advertise, screened advertisements according to merchants’ preferences, and provided affiliate marketers with a way to direct consumers from genuine news sites to fake news sites.
Weight-loss products marketed and sold online
LeanSpa, LLC, NutraSlim, LLC, and NutraSlim, U.K., Ltd. (collectively, LeanSpa) sold purported weight-loss and colon-cleanse products under various product names. LeanSpa marketed and sold its products through websites it owned and operated.
LeanSpa also hired LeadClick so that LeanSpa’s products could be advertised on LeadClick’s affiliate marketing network. LeadClick’s affiliate marketing network consisted of various “affiliates” (also known as “publishers”) who would market the goods or services of online retailers such as LeanSpa and drive Internet traffic to those retailers’ websites. The affiliates would promote the retailers’ goods and services in various ways, including email marketing, banner advertisements and search-engine placement. The affiliates also would create their own websites.
LeanSpa paid LeadClick a set amount — between $35 and $45 — each time a consumer enrolled in LeanSpa’s free-trial program after having been directed to LeanSpa’s website by a LeadClick affiliate. From September 2010 through June 2011, LeadClick billed LeanSpa for $22 million and collected on $11.9 million of the amounts billed. LeadClick kept between 10% and 20% of the money collected and paid the rest to its affiliates.
Fake news sites
In promoting LeanSpa’s products, some affiliates of LeadClick used fake news sites. These affiliate websites used claims of independent testing and analysis, statements about weight loss results, comments that appeared to be offered by independent consumers, the names of reporters, and logos of genuine news organizations. In fact, there was no independent testing, independent consumer comments or association with news organizations.
LeadClick required its affiliates to apply to join its network, and LeadClick had the ability to deny applications. The court found that LeadClick employees knew that fake news sites were commonly used in the industry and that LeadClick hired affiliates who used fake news sites. LeadClick employees occasionally discussed fake article pages, fake news pages or “news style” pages among themselves and with affiliates and retailers. On some occasions, LeadClick allowed or, at least, failed to object to the use of fake news pages.
In addition to LeadClick’s general awareness of the fake news sites, LeadClick employees had discussions with affiliates about the placement of certain LeanSpa products on fake news sites and sometimes suggested changes to certain aspects of the affiliate websites. LeadClick also engaged in media buying, which entailed purchasing advertising space for its merchants and affiliates.
The FTC and the state of Connecticut brought suit against LeanSpa, LeadClick and certain individual defendants and successors in interest. The FTC and Connecticut alleged that the defendants participated in deceptive acts and practices in violation of Section 5 of the FTC Act and the Connecticut Unfair Trade Practices Act (CUTPA) by deceptively enrolling consumers into plans for purported weight-loss and colon-cleanse products, and using the fake news sites to promote LeanSpa’s products.
LeanSpa and the individual defendants entered into stipulated orders for permanent injunctions and money judgments. The FTC and Connecticut sought summary judgment against LeadClick. LeadClick also sought summary judgment, arguing that it was immune from liability under Section 230 of the CDA.
LeadClick violated Section 5 of the FTC Act as a matter of law
Section 5 of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting commerce.” To prove a deceptive act or practice under Section 5, the FTC must show: (1) a representation, omission, or practice, that (2) is likely to mislead consumers acting reasonably under the circumstance, and (3) the representation, omission, or practice is material. The court quickly concluded that the fake news sites made deceptive claims that were material and would mislead consumers.
The key issue was whether LeadClick could be held liable for its conduct related to the fake news sites even though it did not create the fake news sites and the deception resulted from claims made on those sites. The court noted that individual defendants have been held liable for a corporation’s conduct where they “(1) participated in the acts or had authority to control the corporate defendant and (2) knew of the acts or practices.” Even though this test generally is applied to individual defendants, the court saw no reason not to apply the test to corporate entities such as LeadClick.
Applying the test, the court held that LeadClick violated Section 5 because LeadClick employees knew that its affiliates were using fake news sites to promote LeanSpa products and LeadClick had the authority to control the affiliates’ use of fake news pages. “LeadClick’s assertion that merchants like LeanSpa had ultimate authority to approve or disapprove of the use of fake news sites is not particularly relevant to LeadClick’s liability: LeadClick had the authority to not hire affiliates using fake news sites, to instruct them not to use such sites after hiring them, and to remove them if they continued to do so. Just as LeanSpa would be liable for approving requests to advertise with fake news sites, LeadClick, as LeanSpa’s agent, is liable for its own decision to effectuate that decision.”
LeadClick was not immune from liability under the CDA
Section 230 of the CDA 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.” Relying on Section 230, LeadClick argued that it was entitled to immunity under the CDA because (1) it was an interactive computer service provider or user, (2) the FTC’s claims were based on “information provided by another information content provider,” and (3) the FTC’s claims would treat LeadClick as the “publisher” or “speaker” of such information. In other words, LeadClick contended that it should not be liable for third-party content posted by its affiliates.
The CDA defines “information content provider” as “any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service.” The court stated that the degree to which an entity must be involved in the creation of the information to make that entity “responsible” is “somewhat unclear.” The court looked at cases holding that mere notice of the unlawful nature of the information is not enough to make an entity responsible, but that actively soliciting such information or doing things that “virtually requires, or makes extremely likely” that providers will create unlawful information can make an entity responsible. The court also stated that there may be several information content providers with respect to a single item of information, each being responsible at least in part for its creation or development.
Without relying on any specific case, the court concluded that LeadClick was an “information content provider” as to the fake news sites and therefore not entitled to immunity under Section 230. The court reasoned that LeadClick hired affiliates knowing that they used fake news pages and LeadClick had communications related to products advertised on the fake news pages. The court also stated that LeadClick’s media buying materially contributed to the unlawful nature of the fake news sites by providing its affiliates with a way to direct consumers from genuine news sites to fake news sites.
Because it granted summary judgment in favor of the FTC, the court ordered that LeadClick must disgorge the entire $11.9 million in payments it received from LeanSpa without deducting the amounts it paid to its affiliates.