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An Inconvenient Truth: Ad Agencies, Affiliates and Ad Networks Are All Subject to the FTC Act

28 Jan, 2011 By: Jeffrey D. Knowles, Venable LLP’s Advertising, Thomas A. Cohn

It is easy to overlook the Federal Trade Commission’s (FTC) interest in affiliate marketing among all the hype and handwringing from bloggers after last year’s release of the FTC Endorsement Guides. But despite the lack of coverage, it is clear that the FTC has taken notice of affiliate marketing in its law enforcement actions against online marketers.

In a recent FTC lawsuit against an online marketer of dietary supplements, alleging that it made false and unsubstantiated product claims and deceptive negative option offers, the Commission also notably added that “Defendants’ products are also promoted via Internet advertisements, Web sites, and E-mails generated by a network of affiliate marketers to direct consumers to Defendants’ websites and products.”
It may not be long before the FTC and state attorneys general target top affiliate marketers and advertising networks for their roles in allegedly deceptive practices.

How Affiliate Marketing Works
Affiliate marketing is a relationship between “affiliates,” “networks” and “advertisers” or “merchants.” “Affiliates” publish content, such as blogs, reviews and banner ads designed to drive consumers to merchants’ sites. When consumers click a link within affiliate content, get directed to and buy on a merchant’s site, the merchant pays the network for that “conversion.” The network uses code and pixels to track which affiliate drove the traffic to the site, so it can pay the affiliate for that converted traffic. Networks profit from the spread between advertisers’ and networks’ payments.

Although affiliate marketing is more prevalent for non-branded products, branded products and national advertisers are increasingly turning to affiliate marketing, to drive consumer traffic to product websites.

The FTC Act Applies to Everyone in the Advertising Stream
In addition to the “advertiser” or “merchant,” ad agencies, affiliates and networks may be held legally responsible for misleading claims in ads or for failing to disclose material connections.

In a November 2010 speech at the Promotion Marketing Association’s law conference, FTC Consumer Protection Bureau Director David Vladeck warned attendees that advertisers should vet affiliates before engaging them and monitor top performers throughout the relationship, to detect and correct any deceptive practices.

Vladeck’s comments made clear that the FTC views any party in the advertising stream as potentially liable for deceptive practices, under a “knew or should have known” standard. In determining whether an advertiser, agency, affiliate or network should be held liable, the FTC would likely look at:
• The extent of the party’s participation in the preparation of the challenged ad.
• Whether the agency, affiliate or network knew or should have known that the ad included false or deceptive claims.
• For an ad network, the FTC may look at its participation and knowledge with regard to both the advertiser’s ads and the affiliate-generated content.

Therefore, agencies, affiliates and networks should not rely on an advertiser’s assurance that its ad claims are truthful and substantiated. Instead, they have a duty to check on those claims and the information used to substantiate them, or run the risk of being snared in law enforcement actions.

Jeffrey D. Knowles is a partner at Washington, D.C.-based Venable, where he leads the advertising and marketing law practice. Thomas A. Cohn is counsel at Venable. They can be reached at (202) 344-4000.

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