What was critical to the analysis
undertaken by the court was that the charges assailed against LeanSpa and its
principals involved the violations of several regulatory provisions, i.e. as
for Connecticut, the Connecticut Unfair Trade Act and federally, the Electronic
Funds Transfer Act (EFTA) and Sections 5 and
12 of the FTC Act. The findings revealed
that there were misleading claims made about the weight-loss potential of the
product being advertised. There was also
the enticing method of stating ot the public that they can received free trials
of the product but that they had to pay a shipping and handling. This sales method had a reoccurring function
that was difficult to cancel. The
consumers were trapped with monthly shipments.
That triggered the EFTA which states conditions for transfers and
consumer right to notifications and process.
The FTC,
LeanSpa and principals entered a settlement that set requirements for disclosure about terms of refunds,
endorsements, and of the trial promotion itself, involving the charges and the
ability of cancelling. The defendants
had to provide disclosure that the endorsements were actors and not actual
users. They also had to engage in
clinical trials that would substantiate their claims for the effects of the
product being sold and to also substantiate that their product had undergone
clinical trials. The FTC was imposing
the requirement of having competent and reliable scientific evidence.
Subsequently, the FTC amended its complaint asserting claims on an affiliate marketing
network operator LeadClick that allegedly swayed shoppers to LeanSpa’s web
store. The news appearing presentations
appeared realistic to consumers about the weight loss benefits and
experiences. The news appearing
statements were never clarified to consumers for them to learn that they were
actors and not independent news outlets.
The function and roles
between product company and marketers distinguished, revealed elements of
liability that the FTC could not ignore and that the court noted. A program called HitPath was used by
LeadClick. This program would register the clicks and would recognize to which
account it would be attributed. The system would recognize the affiliate that
was responsible for the lead in by the consumer to the product. This information allows the marketers to
allocate appropriate compensation to the affiliate, i.e., commission. The marketing campaign was deemed suspect by
the FTC and essentially the court in its decision.[1]
The Second Circuit determined that LeadClick’s marketing campaign was
liable for systematically conducting a program that deceived consumers noted
levels of transactions. While defenses
were raised, the discussion dealt with the depiction of the defendant’s role on
the marketing process with affiliates, placements of ads and sales, creation of
ads, and potential immunities under Section 230 of the Communications Decency Act. The court looked into the revenue stream
between the merchant clients, the affiliates, LeadClick, and LeanSpa. The court also determined the creation of the
ads via false news representations.
What the court determined demonstrated that while creation of the news
sites did not originate with the defendant, there were other pertinent aspects
that drew liability to the defendant.
The court found that the defendant knew that affiliates were using fake
news to sell the LeanSpa product. The
court also became aware that the defendant approved the ads, as well, the
defendant provided content for the ads. These three aspects drew direct
liability to defendant and demonstrated direct involvement on the marketing
plan toward consumers. The defendant, per
the court, was aware of the deception and did not curtail it nor stop it. Hence, the defendant was deemed directly
liable under the FTC Act. The defendant
in response claimed that its actions were so similar to aiding and abetting
liability. Yet the court determined that the defendant’s actions contributed to
the deception on consumers and it was not tantamount to eh exception under the
FTC Act. By the defendant purchasing
ads and providing content it is liable.
Having knowledge that the third-party marketers were using false
information,[2] attributed liability to the
defendants. The Second Circuit noted
that the Eleventh Circuit, previously found the FTC to have provided the
requisite evidence to demonstrate liability by virtue of the defendant’s
knowledge of third-parties’ false statements to consumers. It as well found
that the Ninth Circuit, in FTC v. Neovi, Inc.[3] had
determined liability of the defendant by it having caused the harm not just
aiding.
While defendant defended by claiming to be immune under Section 230 of
the Communications Decency Act (CDA), the court artfully informed that
defendant that “grant of immunity applies only if the interactive service
provider is not also an ‘information content provider’ of the content which
gives rise to the underlying claim.”
The court also stated that an information
content provider within the CDA is “any person or entity that is responsible, in whole or in
part, for the creation or development of information provided through the
Internet or any other interactive computer service.” Since the defendant was the content provider and writer
exerting discretion, it was not immune from liability. The court deemed the
defendant as participating in the placement and publishing of the content.
LeadClick’s participation was ‘material’ to the deceptive content.
The decision out of the Second
Circuit sends signal to marketers to beware of the its content and affiliates
representation. The effort to be at
arm’s length may not be enough to shield it from liability under the FTC Act or
to claim immunity under the CDA.
Disclosures are becoming more of the norm in consumer protection regimes
with endorsements clarified as to their identity to avoid misrepresentations.
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