Antitrust Law Daily Liability of Internet ad network affirmed, but disgorgement erroneous
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Monday, September 26, 2016

Liability of Internet ad network affirmed, but disgorgement erroneous

By E. Darius Sturmer, J.D.

Although LeadClick Media was properly found liable under the FTC Act and Connecticut law for its role in the use of deceptive websites to market weight loss products, its corporate parent CoreLogic could not be held liable as a relief defendant in a federal/state enforcement action, the U.S. Court of Appeals in New York City has decided. Summary judgments against LeadClick and CoreLogic were therefore affirmed in part, reversed in part, and remanded (FTC v. LeadClick Media, LLC, September 23, 2016, Chin, D.).

According to a complaint filed by the FTC and the State of Connecticut, LeadClick’s management of a network of affiliate publishers to advertise products of its merchant client, LeanSpa, on the Internet violated the FTC Act and Connecticut Unfair Trade Practices Act (CUTPA). Some of the affiliates created deceptive "fake news" websites, falsely claiming that independent testing confirmed the efficacy of LeanSpa’s products. The vast majority of Internet traffic to LeanSpa’s websites from LeadClick’s affiliate network came from fake news sites. While LeadClick did not itself create these fake news sites, it purportedly knew that they were common in the affiliate marketing industry, knew some of its affiliates were using them, approved of that use, and occasionally provided the affiliates with content to use on their fake news pages.

The federal district court in New Haven, Connecticut, held that LeadClick’s conduct violated both the FTC Act and the CUTPA, that LeadClick was not entitled to immunity under the Communications Decency Act (CDA), and that CoreLogic must disgorge money that it had received from LeadClick.

LeadClick liability. The appellate court rejected LeadClick’s argument that it could not be held liable because it did not create the deceptive content on the fake news sites and the deceptive content could not be attributed to it. A defendant could be held liable for engaging in deceptive practices or acts if it directly participated in a known-deceptive scheme or had the authority to control the deceptive content at issue, the appellate court said. This direct liability was distinguishable from liability for merely aiding and abetting the deceptive conduct of another, so a contention by LeadClick that the imposition of aiding and abetting liability against it had been foreclosed under the FTC Act was irrelevant. A deceptive scheme violating the FTC Act could have more than one perpetrator, the court noted.

Myriad evidence before the trial court supported its findings that LeadClick knew of the deception and directly participated in deceptive practices, the appellate court explained. This evidence included employee testimony about fake news sites, LeadClick affiliates’ sites containing false information, and LeadClick’s familiarity with the specific content of those sites. Further, evidence showed that LeadClick participated in the deceptive advertising scheme by "scouting" fake news websites to recruit potential affiliates for LeanSpa, instructing affiliates to revise their pages in several directions, and purchasing advertising space on genuine news sites to resell that space to affiliates running fake news pages. LeadClick’s own actions caused significant harm to consumers, the court added. As the manager and orchestrator of the affiliate marketing scheme, LeadClick held the ultimate authority to control the deceptive practices of affiliates that joined its network, the court noted. The FTC did not need to show that LeadClick intended to deceive consumers in order to establish direct liability, only that it orchestrated a scheme likely to mislead reasonable consumers. Thus, the lower court did not err in concluding that the company was directly liable under the FTC Act and CUTPA, the appellate court stated.

Immunity. LeadClick was not entitled to immunity under Sec. 230 of the CDA, the court added. The company did not meet all of the three component parts courts had established as requisite for application of the statute—(1) that it be a provider or user of an interactive computer service, (2) that the claim was based on information by another information content provider, and (3) that the claim would treat the defendant as the publisher or speaker of that information. In the appellate court’s view, LeadClick was an information content provider with respect to the content at issue and was liable for its own content, not merely because it was the "publisher or speaker" of deceptive conduct provided by its affiliates.

CoreLogic’s relief defendant liability. The district court did, however, err in finding that CoreLogic had to disgorge $4.1 million it received from LeadClick in August 2011, the appellate court determined. CoreLogic had a legitimate claim to repayment of its prior advances to LeadClick. Its intercompany advances to LeadClick constituted valuable consideration entitling it to repayment. The lack of a formal loan agreement did not create suspicion that the transaction was a sham, in light of the shared services context in which the distribution arose. Even without the formalities of an arm’s-length loan agreement, it was undisputed that CoreLogic advanced funds to LeadClick, both parties intended these advances to be repaid, and the August transfer reduced the outstanding intercompany balance, the court concluded.

The cases are Docket Nos. 15-1009-cv and 15-1014-cv.

Attorneys: Michele Arington for the FTC. Matthew F. Fitzsimmons, Connecticut Office of the Attorney General, for the State of Connecticut. Elisa Jaclyn D’Amico (K&L Gates LLP) for LeadClick Media, Inc. Jonathan Hacker (O'Melveny & Myers LLP) for CoreLogic, Inc.

Companies: LeadClick Media, Inc.; CoreLogic, Inc.

MainStory: TopStory Advertising ConsumerProtection StateUnfairTradePractices ConnecticutNews NewYorkNews VermontNews FederalTradeCommissionNews

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