Companies that advertise online stand at the edge of a complex web of arrangements—among ad brokers, ad software purveyors, ad distributors and their affiliated networks—that ultimately delivers an ad to a consumer surfing online. Legitimate companies wishing to advertise their goods and services probably lack direct contractual relationships with many of the actors in the ad-delivery chain. Moreover, such companies may not be aware of unethical practices employed by some actors in that chain. Nonetheless, enforcers are beginning to hold these legitimate companies responsible for the misdeeds of disreputable parties involved in delivering their ads.

Unfair and Deceptive Adware

Parties in the ad-delivery chain face strong incentives to deliver volumes of advertisements to consumers and sometimes respond aggressively. One tactic is deploying "adware": software that facilitates pop-up or pop-under ads, redirection of search requests, installation of toolbars, and more. For example, when downloading "free" games, screensavers or other content via the Internet, consumers can unknowingly download bundled adware. Thereafter, adware may monitor their online activities and serve up such a steady stream of advertisements that the consumer's Internet experience is substantially degraded. Moreover, adware is often designed to resist removal and even defeat anti-spyware programs.

Active Enforcement

Government action against adware distributors themselves is ongoing. Last November, for example, the Federal Trade Commission (FTC) terminated an administrative action against Zango, Inc. (formerly known as 180solutions, Inc.), one of the world's largest adware companies, upon its agreement to a $3 million penalty. Just this month, the agency accepted a $1.5 million fine from Direct Revenue LLC, another major player in the online ad industry. Claims in both of these cases were similar: the adware companies acted deceptively by failing to disclose adequately to consumers that downloading free content and software would result in the installation of adware, causing pop-up ads. Further, these companies acted unfairly, according to the FTC, by failing to provide consumers a reasonable and effective means to identify, locate and remove adware. The government thus complained that these companies violated the FTC Act's prohibition against unfair and deceptive trade practices. Similar actions have been brought by state authorities in Washington and New York.

Companies Caught in the Web

The novel recent development is government action against the companies whose products and services were advertised, even when they admittedly lacked actual knowledge of disreputable acts occurring further downstream. In conjunction with an agreement with the New York Attorney General to discontinue an investigation into possible civil violations, Priceline.com, Inc., Travelocity.com LP and a third party each agreed in January 2007 to pay fines between $30,000 and $35,000 and enhance online advertising policies. The companies had advertised through Direct Revenue but had terminated this business relationship prior to the settlement. In its public releases, the New York Attorney General did not assert that any of these businesses knew of, let alone controlled, the extent of consumer injury. At most, Priceline was said to have known that adware was downloaded without notice and consent. A thrid company was merely "aware of the controversy" and "should have been aware" of Direct Revenue's deceptive practices. Finally, although Direct Revenue apparently misrepresented to Travelocity that it conformed to "best industry practices," Travelocity nonetheless was aware of consumer complaints and "might have discovered" consumer harm "had Travelocity conducted appropriate due diligence."

Business Implications

All companies advertising online should recognize the risk that, in the words of New York Attorney General Andrew Cuomo, they "will now be held responsible when their ads end up on consumers' computers without full notice and consent." Affirmative due diligence obligations follow on the heels of these settlement agreements, in New York, at least, will not allow companies to "insulate themselves from liability by turning a blind eye to how their advertisements are delivered, or by placing ads through intermediaries." In essence, the adware policies required under the New York agreements include enriching disclosures to consumers upon downloading adware, removing obstacles to deleting adware, binding advertising partners by contract to consumer-friendly practices, and regular monitoring of advertising partners' practices.

The bewildering array of online advertising options leads many legitimate companies to hire intermediaries to handle their ad placement. But as recent actions by the FTC and state authorities make clear, the freedom that companies may gain thereby to concentrate on their core business is purchased at the risk that unmonitored intermediaries delivering ads to the public may be giving them a bad name and causing them to face regulatory exposure.