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The Risks and Rewards of Affiliate Marketing

27 Jan, 2011 By: Linda A. Goldstein

Linda A. GoldsteinThe use of affiliate marketers is an effective way for marketers to generate online traffic and new customers. The lack of control that a marketer has over the actions of its affiliates, however, creates increased risk of regulatory action, and recent actions by the Federal Trade Commission (FTC) make clear that lack of control by a marketer will be no defense to an enforcement action.

The FTC has a long history of holding marketers accountable for the actions of those who engage in advertising and marketing activities on their behalf. In the past decade, the FTC brought numerous enforcement actions against marketers based on the violations of the Telemarketing Sales Rule by their agents. Indeed, even in cases where the marketer seemingly had no knowledge of the violation, the FTC took the position that the marketer had an obligation to monitor the activities of its telemarketing agents to ensure compliance.

The world of affiliate marketing presents even greater challenges for marketers as the identity of the publishers is often unknown to the marketer and it is virtually impossible for any marketer to effectively monitor all of its affiliates’ activities. Nonetheless the FTC has made clear that targeting misleading advertising by affiliate marketers will be a top priority.

In a recent speech, the FTC’s David Vladeck expressed growing concern about marketers and affiliates struggling to follow the FTC’s new Testimonial and Endorsement Guides, which make clear that both can be liable for false product claims and for the failure of the affiliate to disclose material connections to the advertiser.

Last month, the FTC brought an action for a temporary restraining order and asset freeze against a company called I Works and its principals. This is one of the largest cases brought by the Commission in the affiliate marketing space, and the use of an asset freeze is a likely indicator of just how aggressive the FTC will be in this space.

Many of the ads in question were disseminated by affiliates over which I Works allegedly did not have control. Thus this case will undoubtedly address the question of whether and to what extent the marketer can be held liable for the acts of its affiliates and what degree of monitoring is necessary to avoid liability.
The case serves as good wake-up call to marketers utilizing the services of affiliate networks to ensure that they have proper monitoring and compliance procedures in place with their affiliates. Such a program should, at a minimum, include the following:

1. Know your affiliates. If you are contracting with brokers or networks, ask them to identify the affiliates and publishers that they use.
2. Establish procedures to regularly and routinely monitor affiliate ads and traffic generated by those ads.
3. Provide clear guidelines and instructions to the affiliates about what claims they can and cannot make about your products and instruct them to disclose the existence of material connections with you.
4. Do not process orders generated from non-compliant ads and take appropriate disciplinary action against affiliates who violate your policies.

At the end of the day, the FTC may be moving toward a standard of strict liability, but having an effective compliance monitoring program in place should help mitigate risk.

Linda Goldstein is chair of the Advertising, Marketing and Media division of Manatt, Phelps & Phillips, LLP, based in the firm’s New York office. She can be reached at