Does the FTC Have Legal Authority Over Affiliate Networks?8 Jul, 2014 By: William I. Rothbard
In the past few years, the Federal Trade Commission (FTC) has placed several affiliate networks under consent orders for operating allegedly deceptive advertising schemes in violation of the ban on “unfair or deceptive practices” in Section 5 of the FTC Act. Among other things, these orders require the networks to establish and enforce rigorous compliance controls over their affiliates. Because the cases settled, the FTC has never had to face a serious court test – until now.
In FTC v. LeanSpa et al., the FTC is accusing a now defunct affiliate network, LeadClick, of using “fake news” sites to make deceptive weight-loss claims for a dietary supplement, and has brought a “relief” claim against its parent, Core Logic Inc., a publicly-traded “deep pocket” that is funding the litigation. The case is at the summary judgment stage and could be the first to answer this basic question: despite the spate of FTC settlements with online affiliate networks, does it actually have legal authority over them under Section 5 and, if so, in what circumstances?
LeadClick’s answer to this question is an emphatic, “No!” How could that be, you might ask? Isn’t an affiliate network engaged in advertising for its clients and liable under the FTC Act for deceptive claims made by its affiliates on their behalf? Not, according to LeadClick, if the network neither created nor published the advertising and is not identified in it, which was the case.
But didn’t LeadClick surely know of the fake new sites (it did)? And didn’t it “aid and abet” their use by providing affiliates with a “link” to the seller’s website (it did)? And shouldn’t all that be enough to make it liable under Section 5? No, LeadClick says, for the simple but dispositive reason that “aiding and abetting” is not a basis of liability under Section 5.
This argument would not be available to LeadClick – or any other third party in the telemarketing sphere – because the FTC’s Telemarketing Sales Rule expressly imposes liability on anyone who provides “substantial assistance or support” to a deceptive telemarketing campaign while “knowing or consciously avoiding knowing” of it. In telemarketing cases, therefore, the FTC has had no problem making “aiding and abetting” charges stick against third parties, such as processors, who did not create the deceptive advertising but still played an important support role and chose to “look the other way.”
No such language appears in Section 5. To date, no court has ruled directly on the issue. The Supreme Court, however, has held that the Securities & Exchange Commission (SEC) lacks express or implied authority to enforce its statutory ban on securities deception under an aiding and abetting theory (Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164). LeadClick contends this holding extends to Section 5 because of the similarities between the SEC’s and FTC’s anti-deception mandates. As ammunition for its argument, it cites concessions by FTC chairmen that they lack aiding-and-abetting authority because of the Court’s decision and resulting appeals by the agency to Congress for an express grant of the authority.
The FTC says Central Bank of Denver is distinguishable because “reliance” on a deceptive representation is an element of liability under the SEC’s statute, but not under Section 5. Thus, while the SEC may be required to tie a defendant directly to a misrepresentation (i.e., through attribution or a role in creating it) in order to prove this element, the FTC claims it does not have the same burden and thus can still enforce Section 5 against a defendant like LeadClick that was invisible to the public but played an indispensable “behind the scenes” role in facilitating the fraud.
Another LeadClick defense is that it has statutory immunity from the FTC’s claims because it is only a content-neutral “interactive computer service” under the Communications Decency Act, which shields such entities from liability for the wrongful statements made by third-party “publishers” or “speakers” using their service. Unless the court grants LeadClick summary judgment on this “audacious” defense, it will need to reach the “aiding and abetting” issue. It thus could be the first to decide the question of whether Section 5 can be enforced under an aiding-and-abetting theory against a party that facilitated, but did not create, engage or appear in, deceptive advertising.
While appeals from any decision can be expected, this is a case that all parties who provide important support to online advertisers – whether they are affiliate networks, ad networks, processors, or others – need to be watching carefully. The implications for them – and for the FTC’s concerted effort to widen the “net” of liability (and availability of funds for consumer redress) beyond the advertiser – are huge.
William I. Rothbard is a former FTC attorney and practices in Los Angeles, specializing in advertising and marketing law. He can be reached at (310) 453-8713, Rothbard@FTCAdLaw.com, and www.ftcadlaw.com.