Who: U.S. Court of Appeals for the Second Circuit
Where: United States of America
When: 23 September 2016
Law stated as at: N./A.
What happened: LeadClick Media, LLC (“LeadClick”), a U.S. affiliate marketing network – or Cost Per Acquisition (“CPA”) network – connecting merchants to affiliate publishers in order to advertise merchants’ products, contracted with LeanSpa to promote their weightloss and colon-cleansing products through the affiliate channel as well as direct media buys. The contract was a CPA deal based on LeanSpa’s free trial offer.
The vast majority of traffic driven from LeadClick’s network to the product merchant’s websites was from phony news sites – with names like Health8News.net, NewsHealth6.com and ConsumerNews24.com – that showed fake reporters’ claims of independent studies that attested the efficacy of LeanSpa’s products, as well as fabricated testimonials and reviews from fictional customers. Also, LeadClick at times purchased banner ads on legitimate news sites that linked to their affiliates’ fake news sites.
In 2011, the Federal Trade Commission (“FTC”), together with the State of Connecticut, sued LeanSpa and its parent company, CoreLogic, Inc. (“CoreLogic”), for unfair trade practices and settled with them to return money to consumers who bought the products. Subsequently, the FTC sought an injunction against LeadClick requiring them to turn over their profits made through the affiliate promotions. In 2015, a Connecticut District Court found in favour of the FTC and ordered LeadClick and CoreLogic, to disgorge all of the money made from LeanSpa (equivalent to 85% of LeadClick’s revenue).
LeadClick appealed against the above decision, asking the Court to decide on:
- whether the network was liable under Section 5 of the FTC Act; and
- whether the network was immune under Section 230 Communications Decency Act (“CDA“).
In FTC v. LeadClick Media, LLC, the Court of Appeal, while releasing CoreLogic, found LeadClick liable on the basis that:
- it approved its affiliates’ use of the fake news sites;
- it suggested substantive edits to those web pages; and
- it purchased advertising space on legitimate websites for banner ads that linked to those fake news sites.
LeadClick was accordingly ordered to pay a $11.9 million penalty.
It was held that the hosting/intermediary defence under Section 230 CDA was not available to LeadClick because it had directly participated in the development of deceptive advertising for LeanSpa.
Why this matters:
This is the first time that a federal Court of Appeal has held a CPA network liable in connection with the actions of third-party marketers.It potentially opens the door for more actions filed on the basis of publishers’ false advertising and deceptive advertising campaigns.
This case demonstrates the possible legal liability that can arise if networks step beyond the role of a “neutral intermediary” and get involved in decisions about the messages that content will carry. , CPA networks need to ensure their agreements are carefully drafted, but just as important is to ensure they follow practices and procedures that minimise their risk of being held liable for the acts of network affiliates.