Dissecting an $11.9M Affiliate Marketing Judgment

Corey D. Silverstein

The Federal Trade Commission scored another major win in early October when the 2nd U.S. Circuit Court of Appeals upheld a lower court ruling, requiring LeadClick Media LLC to pay an $11.9 million award.

The 2nd Circuit includes the states of Connecticut, New York and Vermont, where it has appellate jurisdiction.

For the countless affiliate networks that incorrectly believe that affiliate networks cannot be found liable by the FTC for the acts of their affiliates, think again.

The FTC released its own press release on Oct. 4 calling the 2nd Circuit’s decision a “victory for consumers.”

This case began in 2011 when the FTC and the state of Connecticut chose to pursue LeanSpa and its principal Boris Mizhen. The defendants were accused of utilizing fake news websites to promote their own products, make deceptive weight-loss claims and were also accused of misrepresenting the costs associated with “free” trials.

In July 2014, the FTC announced that it had reached a resolution with LeanSpa and Mizhen.

On Aug 28, 2013, the FTC and the state of Connecticut filed its third amended complaint for preliminary injunction and other equitable relief. The third amended complaint added claims against LeadClick and CareLogic Inc. (the parent company of LeadClick). It is alleged that LeadClick was an “affiliate marketing network operator for LeadSpace.”

The plaintiffs alleged that “LeadClick’s network lured consumers to LeanSpa’s online store through fake news websites designed to trick consumers into believing that real, independent news outlets and genuine customers, rather than paid advertisers and actors, had reviewed and endorsed LeanSpa’s products.”

In the early part of 2015, the U.S. District Court in Connecticut granted the FTC’s request for summary judgment. Amongst other things, the court found that LeadClick was responsible for the false claims made by affiliate marketers it recruited on behalf of LeanSpa.

The district court, in finding LeadClick responsible for the deceptive content on its affiliates’ websites, noted that LeadClick recruited the affiliates, had power to approve or reject their marketing websites, paid the affiliates, purchased advertising space for them and gave them feedback about the content of their sites.

It is essential to note that LeadClick attempted to defend itself by claiming immunity under 47 U.S.C. § 230 of the Communications Decency Act but the court rejected that defense. The 2nd Circuit agreed with the lower court and found Section 230 inapplicable because LeadClick participated in the development of the deceptive content.

For those of you unfamiliar with Section 230 of the CDA, now is a great time to read up. Section 230 is arguably one of the most important laws that all e-commerce operators should be deeply familiar with.

Section 230 explicitly states, “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information provider.”

Section 230 gives interactive online services of all types broad immunity from certain types of legal liability stemming from content created by others.

News sites, chat blogs, public forums and tube sites have all utilized Section 230 in one way or another. A common misunderstanding about Section 230 is that the statute provides complete protection. That is simply not the case. Federal criminal liability and intellectual property claims are exempt from Section 230 protection.

This case presents an amazing learning opportunity for e-commerce websites (including adult industry businesses) to stay away from specific activities that can get you into the cross-hairs of the FTC. This case is yet another example of the strength, persistence and tenacity of the FTC and the 2nd Circuit has confirmed the inapplicability of Section 230 when a party seeking Section 230 immunity is found to have participated in the unlawful act. It is noteworthy that a pattern has been developing throughout the U.S. where Section 230 is becoming more difficult to utilize.

This situation also presents a window for affiliate networks, affiliate programs and individual affiliates to carefully review their services and practices and ensure that they are not running afoul with the law. Most notably that they are not engaging in deceptive trade practices or otherwise violating the law. Affiliate networks and programs need to consult with attorneys familiar with FTC regulations so that they can evaluate whether they may be engaging in conduct that goes too far and could subject them to liability for actions related to the products and services that they are promoting.

For the countless affiliate networks that incorrectly believe that affiliate networks cannot be found liable by the FTC for the acts of their affiliates, think again. LeadClick Media’s misfortune presents a learning opportunity for everyone else and it would be a shame if people didn’t learn from the mistakes of others.

Corey D. Silverstein is the managing and founding member of the Law Offices of Corey D. Silverstein P.C., which focuses on representing all areas of the adult industry and his clientele includes hosting companies, affiliate programs, content producers, processing companies, website owners and performers, just to name a few. His websites include MyAdultAttorney.com and Porn.law. Silverstein can be reached by email at corey@myadultattorney.com; his site, MyAdultAttorney.com; or by telephone at (248) 290-0655

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