In recent years, affiliate marketing has emerged as a profitable medium to generate interest in a merchant’s products or services, with affiliate marketers often earning huge payouts for generating leads or sales for merchants.  The FTC has taken notice, filing a number of actions against affiliate marketers for violations of Section 5 of the FTC, including several high-profile suits against marketers of weight-loss products.  In March, the FTC obtained summary judgment against LeadClick Media, Inc., an affiliate marketing network operator hired by LeanSpa, LLC to advertise its weight-loss products through affiliate websites using a number of fake news websites.  The Ruling highlights the broad net the FTC now casts in its cases.

The FTC originally sued LeanSpa for making deceptive claims about its weight loss products through fake news stories.  The FTC later amended its complaint to include LeadClick and CoreLogic, the corporate parent of LeadClick.  LeanSpa and its principals settled in December 2013, while LeadClick and CoreLogic continued toward trial.  Most recently, both the FTC and the remaining defendants moved for summary judgment, which the court granted in the FTC’s favor. 

On the question of liability, the FTC held that LeadClick had deceived consumers through websites made to look like news reports with testimonials from reporters and describing the science behind the product.  In reality, all claims of independent analyses and tests, weight loss results, and consumer comments were fake.  That LeadClick did not create the fake news sites did not defeat liability.  The court explained that “a defendant is liable under the FTCA for its own conduct, even where that conduct relates in some way to the conduct of third parties.”  The court found LeadClick had the authority to control the affiliates’ deceptive use of fake news by not hiring affiliates creating fake news sites, instructing them not to use such sites after hiring them, and removing them from the network if the affiliates failed to comply.  LeadClick did not exercise these options.   The court held LeadClick also participated in the deception by purchasing advertising space on real news sites and selling it to affiliates advertising with fake news sites, thus creating a direct link from a genuine news site to a fake one.  The court’s discussion of liability for the actions of others is something the FTC is likely to use elsewhere as it continues to broaden the scope of those held responsible for consumer injury.

The court rejected LeadClick’s argument that it was immune from FTC Act liability under the Communications Decency Act as a provider of an interactive computer service.  Section 230 of the CDA states that “no 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.”  However, the court characterized LeadClick as also being an “information content provider,” explaining that an entity that both provides an interactive computer service and is responsible for information content creation is not immune from liability arising from publication of that content.  The court noted that the “degree in which an entity must be involved in the creation of the content to make that entity responsible is somewhat unclear,” but held no reasonable jury could deny LeadClick was an “information content provider.” In particular, LeadClick solicited and hired affiliate marketers to advertise LeanSpa’s products, knowing that the affiliates used fake news pages.  LeadClick also communicated with LeanSpa and provided direction to affiliates regarding which products should be advertised on the websites and engaged in media buying linking the genuine news sites to fake news sites.

In addition, LeadClick unsuccessfully argued the FTC could not obtain relief under Section 13(b) of the FTC Act.  The court first found that the FTC was entitled to a presumption of consumer reliance, as the fake news sites were widely disseminated and referred thousands of customers to LeanSpa’s websites.  As we have written previously, the FTC was permitted to obtain monetary relief because Section 13(b) “carries with it the full range of equitable remedies.”  The court held that LeadClick must disgorge the full amount of funds it received from LeanSpa, as a result of its affiliate marketing activities without deducting moneys paid by LeadClick to the affiliates who ran the actual ads.

Finally, the court addressed the liability of CoreLogic, LeadClick’s parent company as a relief defendant.  LeadClick closed its bank account and put its money into CoreLogic’s bank account, which CoreLogic stated was part of administrative consolidation.  The FTC sought those funds.  The court found CoreLogic liable, rejecting CoreLogic’s argument that it was entitled to the funds because it had provided valuable consideration for the money received and that it had done so in good faith.  Moreover, the court stated “ownership does not create a legitimate claim to the proceeds of an owned entity if those proceeds originally come from unlawful activity.”

Whether in actions against payment processors or affiliate networks, the FTC has made a concerted effort to disrupt the eco-system in which it believes deception lives.  This case goes a long way in that effort.