Monday, January 9, 2017

Internet and Deceptive Advertising Vindicates the FTC

Internet advertising has become intricate and keen.  Internet advertising may involve multiple participants.  The purpose is essentially to sway readers to purchase products by making representations that at times appear too good to be true.  That is what the Federal Trade Commission and the State of Connecticut determined prior to suing  LeanSpa.  The claims embraced issues of false information to convince consumers on the legitimacy of the product.  Consumers were drawn to LeanSpa’s online sales site using story lines about users who did not actually use the product.  Shipping and handling costs were passed down to the consumer while representing the that the consumer was receiving free trial.  This story is all too common on television infomercials.

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.

[1] Federal Trade Commission v. LeadClick Media, LLC, (2nd Cir. 2016).
[2] See FTC v. IAB Mktg. Associates, L.P., (11th Cir. 2014).
[3] See FTC v. Neovi, Inc., (9th Cir. 2010).

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