FTC CASES RE: AFFILIATE MARKETING

THOMAS A. COHN, PARTNERLECLAIR RYAN, NEW YORK

thomas.cohn@leclairryan.com

AFFILIATE SUMMIT NYC MEETUP

MAY 29, 2012

FTC v. Legacy Learning Systems settlement [March 2011]: affiliate marketing and consumer testimonials

Legacy, seller of lesson DVDs, including “how to play guitar” series, represented that product reviews were endorsements reflecting opinions of ordinary consumers or independent reviewers.  Customers didn’t know that many favorable endorsements were posted by affiliate marketers who received commissions from Legacy for sales generated.  Failure to disclose that material connection allegedly violated FTC Act.

Terms of proposed consent order: $250,000 settlement, plus provisions about Legacy’s future business practices:

Legacy agreed not to misrepresent status of any product user or endorser, such as that the person is an independent user or ordinary consumer of the product.

Legacy can’t make any representation about product user or endorser unless any material connection between that person and anyone else involved in promoting product is clearly and prominently disclosed.  Proposed order defines “material connection” as relationship that materially affects the weight or credibility of endorsement and wouldn’t be reasonably expected by consumers.

Legacy (cont’d) – final order, June 2011

Legacy must take steps immediately with regard to its affiliate program:  Company will set up and maintain system to monitor and review affiliates’ representations and disclosures to ensure compliance with order. Within 30 days - and semi-annually after that - company will determine its top 50 revenue-generating affiliates.

  At least once a month, Legacy will visit their sites to review their representations/disclosures, and must do this in a way designed not to disclose to the affiliates that they’re being monitored.  For the other affiliates, Legacy will monitor random sample of 50 sites at least once a month.

If affiliates misrepresent their status in any way — for example, by claiming they’re independent reviewer or ordinary person who’s used product, or by failing to disclose material connection with Legacy — then Legacy must immediately terminate them as an affiliate and stop paying them.

For Release: 04/19/2011FTC Seeks to Halt 10 Operators of Fake News Sites from Making Deceptive Claims Re: AcaiBerry Weight Loss Products Web Marketers Falsely Claim Endorsement by ABC, Fox News, CBS, CNN,

USA Today, and Consumer Reports, FTC Alleges

FTC is requesting federal courts to temporarily halt allegedly deceptive tactics of 10 operations using fake news websites to market acai berry weight-loss products. FTC seeks to permanently stop this misleading practice and has asked courts to freeze assets pending trial.

According to FTC, defendants operate websites that are meant to appear as if they belong to legitimate news-gathering organizations, but in fact the sites are simply ads aimed at deceptively enticing consumers to buy the featured acai berry weight-loss products from merchants.

FTC complaints allege that these fake news sites have titles like “News 6 News Alerts,” “Health News Health Alerts,” or “Health 5 Beat Health News.”  Sites often include names and logos of major media outlets, such as ABC, Fox News, CBS, CNN, USA Today, and Consumer Reports, and falsely represent that the reports have been seen on these networks.

For Release: 04/19/2011FTC Seeks to Halt 10 Operators of Fake News Sites from Making Deceptive Claims Re: Acai Berry Weight Loss Products

An investigative-sounding headline on one such site proclaims “Acai Berry Diet Exposed:  Miracle Diet or Scam?”  The article that follows purports to document a reporter’s first-hand experience with acai berry supplements – typically claiming to have lost 25 pounds in four weeks.

“Almost everything about these sites is fake,” said David Vladeck, Director of the FTC’s Bureau of Consumer Protection.  “The weight loss results, the so-called investigations, the reporters, the consumer testimonials, and the attempt to portray an objective, journalistic endeavor.”

FTC Actionsvs.AffiliateMarketers, Exhibit toFTCInvestigator’s Declaration

FTCActionsvs. AffiliateMarketers,Exhibit toFTCInvestigator’s Declaration

From FTC Revised Endorsement Guides FAQs,re: Affiliate Marketing:

I’m an affiliate marketer with links to an online retailer on my website. When people click on those links and buy something from the retailer, I earn a commission. What do I have to disclose? Where should the disclosure be?

Let’s assume that you’re endorsing a product or service on your site and you have links to a company that pays you commissions on sales. If you disclose the relationship clearly and conspicuously on your site, readers can decide how much weight to give your endorsement. In some instances, where the link is embedded in the product review, a single disclosure may be adequate. When the product review has a clear and conspicuous disclosure of your relationship – and the reader can see both the product review and the link at the same time – readers have the information they need. If product review and link are separated, reader may lose the connection.

As for where to place a disclosure, the guiding principle is that it has to be clear and conspicuous. Putting disclosures in obscure places – for example, buried on an ABOUT US or GENERAL INFO page, behind a poorly labeled hyperlink or in a terms of service agreement – isn’t good enough. The average person who visits your site must be able to notice your disclosure, read it and understand it.

For Release: 12/01/2011FTC Action Temporarily Halts Operation that Allegedly Used Fake News Sites to Make Deceptive Claims about Acai Berry Weight-Loss Products

Continuing its crackdown on deceptive health claims, FTC and CT AG sued to stop Lean Spa -- allegedly used fake news websites to market products, made deceptive weight-loss claims, and told consumers they could get free trials of acai berry and "colon cleanse“ products, and only pay nominal shipping/handling costs. Alleged that many consumers ended up paying $79.99 for the trial and paying for more monthly shipments of products that were hard to cancel. Defendants have allegedly collected more than $25 million from consumers.

At request of FTC and CT AG, court issued ex parte temporary restraining order on Nov.14. Parties agreed on Nov. 22 to a preliminary injunction halting the allegedly illegal conduct of defendants, including entities based in the UK; continuing an asset freeze; appointing a temporary receiver; and giving the receiver, FTC and CT AG immediate access to the business premises.

Complaint alleges that defendants hired affiliate marketers who used fake news websites to promote the defendants' products that were misrepresented as objective reports and endorsements by news organizations; engaged in deceptive and unauthorized billing; made unsupported claims that consumers could lose a lot of weight quickly; and falsely stated that the claims were clinically proven.

For Release: 12/01/2011FTC Action Temporarily Halts Operation that Allegedly Used Fake News Sites to Make Deceptive Claims about Acai Berry Weight-Loss Products

Stipulated PI halts defendants from selling "negative-option“ continuity plans, from making unauthorized sales charges, and from making certain deceptive claims. The order also requires defendants to cease collection efforts and extends an asset freeze over the defendants until final resolution of the case.

FTC's 11th case involving allegedly fake news websites used to promote dietary supplements. In April 2011, the FTC charged 10 companies that operated "fake news" sites promoting acai berry weight-loss products.

Notable case for several reasons: continues recent trend of vigorous FTC and AG enforcement, sometimes as co-plaintiffs; continues FTC’s recent practice of naming third parties, such as credit card processors, that FTC claims played a role in furthering alleged fraud; and continues FTC trend of obtaining outright bans against specified conduct (such as negative-option marketing) in the case, at the PI stage.

Also, PI differs from FTC staff guidance in February 2009, regarding online negative-option marketing. Instead of simply requiring clear/conspicuous disclosure at start and end of trial period, PI flat-out enjoins defendants from starting trial period before the date the consumer receives, or defendants reasonably expect the consumer to receive, product.

Central Coast and Jesse Willms cases FTC actions against online advertisers have continued to cite their use of deceptive

affiliate marketing. And the orders against them have imposed severe monitoring requirements which make it difficult to nearly impossible to use affiliate marketers. Two such actions illustrate this aggressive FTC approach:

In January 2012, FTC settled charges against Central Coast Nutraceuticals (CCN) and its principals for deceptively marketing dietary supplements through trial offers that led to unauthorized billing. Defendants were ordered to pay $1.5 million and banned from negative option marketing, deceptive and unsubstantiated product claims, and unauthorized billing.

Significantly, defendants were required to distribute the order to affiliates and networks helping to sell their products, and obtain from them a signed statement acknowledging receipt and expressly agreeing to comply with the terms of the order. Defendants also must review those affiliates’ marketing materials before they are used, to ensure they comply with the order, and must terminate business with any offenders.

FTC again imposed harsh monitoring requirements in a February 2012 settlement with Jesse Willms and other defendants. They were ordered to turn over assets and agree to monitoring and policing of affiliate marketers and networks they do business with. They likewise must serve the order on affiliates and networks and obtain signed statement acknowledging receipt of and agreeing to comply with order.

Affiliate Marketing and the FTC:Next Steps, Best Practices

FTC likely to continue going after non-seller third parties -- affiliate marketers, payment processors, list brokers and others – who engage in deceptive practices or assist and facilitate others who do, that result in consumer injury.

Merchants and Networks need to do “reasonable monitoring” of affiliate marketers, to ensure compliance with consumer protection laws, rules and guides [remember Legacy case]

Affiliates must clearly and conspicuously disclose their “material connections” with advertisers: $ paid.

Affiliates will be held to same standards as merchants: product/service claims must be truthful and substantiated.

MERCHANTS may be held responsible for their own violations, AND/OR those of rogue affiliates who drive traffic to them: FTC cases vs. Legacy Learning, Central Coast, Jesse Willms, LeanSpa.

Affiliate Marketing and the FTC:Next Steps, Best Practices

What do these increasingly aggressive FTC actions mean for affiliates? Regulatory scrutiny is higher than ever, and they must clean up their act or risk enforcement. Such attacks might come from FTC and/or state AGs, who are also more active than ever in policing online marketing. THIS MEANS:

Affiliates must disclose all “material connections” with advertisers, such as $ paid.

Affiliates held to same standards as advertisers: claims must be truthful and substantiated.

Any fake or deceptive formats will greatly increase risk of enforcement. Health claims re: dietary supplements? Very risky! Income claims re: work-at-home, biz opps? Very risky! Limit advertising to foreign markets? May lower, but doesn’t eliminate,

risk! If conduct has any nexus here, then FTC has enforcement jurisdiction!

QUESTIONS?

Read my article in FeedFront 18, “Law Enforcement Perils & Pitfalls for Affiliates”

Come to my ASE12 panel, “Flogs, Farticles, Facebook, Fraud, FTC, oh F%*!”

At ASE, New York City, on August 14, 2012

QUESTIONS NOW?

Thomas A. Cohn, Partner, LeClairRyan Thomas.Cohn@LeClairRyan.com www.leclairryan.com

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