We wrote previously about the FTC’s efforts to hold an affiliate network (LeadClick) and that network’s successor (CoreLogic) responsible for their role in working with LeanSpa, a marketer of dietary supplements. LeanSpa primarily marketed its diet products through “fake news” stories placed by affiliate marketers. Here is a link to an example of the “fake news stories” at issue: https://www.ftc.gov/sites/default/files/documents/cases/2013/08/130828leanspaexha.pdf. The Second Circuit recently affirmed the FTC’s efforts to hold LeadClick responsible, but rejected the FTC’s efforts to hold CoreLogic responsible as a relief defendant. The opinion provides important guidance regarding the circumstances under which affiliate networks may be held responsible for advertising, the applicability of the Communications Decency Act (“CDA”), and the contours of relief defendant liability.
The FTC and the Connecticut AG sued LeanSpa in 2011, later amended the complaint to add LeadClick, and then further amended the complaint to add CoreLogic as a relief defendant. LeanSpa settled. In 2015, the District Court granted the FTC’s motion for summary judgment against both LeanSpa and CoreLogic, requiring LeadClick to disgorge all proceeds it received from LeanSpa and CoreLogic to disgorge $4.1 million, which was an amount LeadClick had transferred to CoreLogic. The defendants appealed, raising three issues: 1) LeadClick’s liability under Section 5 of the FTC Act and its Connecticut state counterpart; 2) LeadClick’s immunity under Section 230 of the CDA; and 3) CoreLogic’s liability as a relief defendant.
LeadClick argued that a defendant could only be held liable under Section 5 of the FTC Act for deception when a defendant created the content in question or when that content was attributable to the defendant. The Second Circuit disagreed. After a lengthy discussion of the issue, the court adopted the test used for imposing liability on an individual in an FTC action: A defendant may be held liable for deceptive practices that cause consumer harm if, with knowledge of the deceptive nature of the scheme, the defendant either participated directly in the practices or had the ability to control those practices.
The court rejected LeadClick’s argument that imposing liability under such a standard imposed “aiding and abetting liability,” which LeadClick argued the FTC lacked citing the Supreme Court’s decision in Central Bank of Denver. The Second Circuit passed on the question of whether the FTC had aiding and abetting authority, and instead clarified that it found LeadClick was liable, not for the acts of others, but because of its direct participation in or ability to control conduct LeadClick knew was deceptive.
The court then summarized the conduct of LeadClick that satisfied the standard that it had set:
- LeadClick knew “fake news pages” were prevalent in affiliate marketing and that its own affiliates were using fake news sites to market LeanSpa products.
- LeadClick required changes to the content of its affiliates pages to comply with directives from LeanSpa.
- LeadClick advised affiliates on what content to include on their fake news sites to increase consumer traffic.
- LeadClick purchased banner advertisement space on genuine news sites to resell to affiliates running fake news sites to generate better and more lucrative traffic.
Authority to Control:
- LeadClick had ultimate authority to approve or disapprove of an affiliate using a fake news site.
- LeadClick approved fakes news sites for LeanSpa.
Regarding the applicability of CDA immunity, the court applied a three-part test: 1) is the defendant a provider or user of an interactive computer service; 2) is the claim based on information provided by another information content provider; and 3) would the claim treat the defendant as the publisher or speaker of that information. Relying on the same reasoning it used in analyzing Section 5 Liability, the court found that liability here was not premised on information provided by the affiliates (the ads), but on LeadClick’s involvement with the ads placed by the affiliates.
Regarding CoreLogic’s liability as a relief defendant, the court reversed the district court’s finding that CoreLogic was not entitled to keep funds LeadClick had transmitted to it as part of LeadClick being consolidated into CoreLogic. The Second Circuit noted that, to be a proper relief defendant, the entity in question must have no legitimate claim to the “ill-gotten” funds transferred to it that the FTC seeks to recover.
CoreLogic maintained that the $4.1 million distribution LeadClick made to CoreLogic was the repayment of a loan such that CoreLogic had a legitimate claim to the funds, and, therefore, CoreLogic was not a proper relief defendant. The FTC maintained below and on appeal that the lack of a formal loan agreement between the parties meant that CoreLogic had no legitimate right to the funds making the payment a “gratuitous distribution” that should be disgorged. The Second Circuit found that the lack of a formal loan agreement elevated form over substance. The court noted that there was no dispute that: CoreLogic had paid LeadClick’s accounts payable, which were treated as intercompany loans for accounting purposes; and the parties intended for the loans to be repaid as the parties consolidated accounts receivable functions. The court found that the absence of a formal loan agreement in circumstances involving inter-company transfers between commonly-owned companies did not change the legitimate nature of the claim CoreLogic had to the funds in question. Thus, the court directed that judgment be entered in favor of CoreLogic. Interestingly, this aspect of the court’s opinion was not covered in the FTC’s press release. One suspects that if an advertiser made such an omission, the FTC would consider it material.
The court’s opinion provides important guidance on when companies doing business with those allegedly engaged in deception can be held liable. The FTC continues to widen its net and this opinion will provide fabric for further doing so.