FTC v. LeanSpa, LLC, No. 11-CV-1715 (D. Conn. Mar. 5, 2015)
The FTC challenged the use of fake news (and no, they don’t mean The Daily Show) to sell LeanSpa’s weight-loss and colon-cleanse products online. LeanSpa sold its products through websites it owned and operated, and also hired LeadClick to advertise its products on LeadClick’s affiliate marketing network. “Affiliate networks gather ‘offers,’ which are the products and services sold by various merchants, and recruit affiliate marketers to drive Internet traffic to those offers on merchants’ websites.” Affiliates promote merchants’ products in various ways, including by email, banner ads, and search engine placement, as well as by creating their own webpages to advertise the products.
“LeanSpa paid LeadClick a set amount – between $35 and $45 – each time a consumer enrolled in LeanSpa’s free-trial program after having been directed to LeanSpa’s website by a LeadClick affiliate.” LeadClick would then pay the affiliate whose site drove the consumer to LeanSpa’s site, after keeping 10-20% of the money as its share. Some affiliate marketers used fake news sites to promote the products; at the time, fake news sites were “fairly common” in the affiliate marketing industry, and LeadClick employees knew this. LeadClick chose which publishers to allow as affiliates and which to deny; it hired affiliates who used fake news pages.
LeadClick staff occasionally discussed fake article pages, fake news pages, or “news style” pages among themselves and with affiliates and merchants. Sometimes, LeadClick allowed or at least failed to object to the use of fake news pages. LeadClick employees referred to a particular set of terms for the weight loss program—“Step 1” and “Step 2”—used on some fake news sites. LeadClick employees also sometimes suggested that affiliates alter their websites, such as by not mentioning a free trial or by providing ingredient information for affiliates’ use. Once, an affiliate manager checked in with an affiliate to make sure his webpage was “set up good [sic],” without any “crazy miss leading [sic] info.” The affiliate manager agreed that it would be a “good idea” for the affiliate to remove references to the webpage being a news site, and the affiliate manager suggested that he could “just add advertorial.”
LeadClick also bought ad space for its merchants and affiliates at other publishers’ sites, spending between $1-2 million/month at its peak. Some of this space contained banner advertisements linking to fake news pages that promoted LeanSpa’s products. “Sometimes LeadClick identified fake news sites as destination pages for the banner advertisements when negotiating with media sellers,” and sometimes it even emailed the seller versions of the sites or sent links.
Further, the plaintiffs contended that LeadClick’s role in helping LeanSpa to overcome its financial woes contributed to a violation of Section 5 and Connecticut’s Unfair Trade Practices Act (CUTPA). LeanSpa had trouble because of high chargebacks—charges disputed by consumers—and LeadClick helped it find new credit card processors overseas, and also tried to help it to increase sales volume so that the percentage of transactions that were chargebacks would decrease.
LeanSpa eventually became LeadClick’s top producer—billings increased from over $30,000 in September 2010 to over $2,000,000 in December 2010. But LeanSpa didn’t pay its full debt. It owed LeadClick $6.4 million by March 2011 and around $10 million by June 2011. LeadClick continued to provide it ads in order to collect from it, though CoreLogic—which bought LeadClick—ultimately decided to sue LeanSpa for the unpaid amount, and the business relationship ended.
As for CoreLogic, LeadClick closed its bank account and put its money into CoreLogic’s account. This was part of CoreLogic’s consolidation of administrative founctions for its subsidiaries. Previously, CoreLogic had advanced $16 million to LeadClick, of which $8.2 million was repaid by the end of August 2011. “There was no agreed upon repayment schedule or repayment deadline, no security for those advances, no written loan agreement, and no interest due in connection with the funds CoreLogic provided to LeadClick in 2011.” Then CoreLogic’s Board of Directors voted to cease LeadClick’s operations.
LeadClick argued that it did not directly violate the FTCA or CUTPA (the state statute, also allegedly violated) and that there was no aiding and abetting liability under CUTPA. Initially, the court found the fake news sites deceptive, using logos of genuine news outlets and formatting as if they were news articles. E.g., a caption under a picture of a reporter reads, “Julie investigates the Acai Berry diet to find out for herself if this super diet works.” The articles said, “[W]e here at [purported news station] are a little skeptical and aren’t sure that we’ve seen any real proof that these pills work for weight loss. So we decided to put these products to the test. What better way to find out the truth than to conduct our own study?” The article then goes on to describe a week-by-week analysis of the reporter’s results in using LeanSpa products, and concludes, “After conducting our own personal study we are pleased to see that people really are finding success with it (myself included 🙂 ).” These were express claims of independent investigation.
In addition, “[w]hile there is no express statement that the comments [in the supposed comment sections of these sites] are made by independent consumers, the implication is so clear that no reasonable jury could conclude otherwise.” E.g.,
My friends and I have all been waiting for the hca cleanse diet to hit the news. Atleast [sic] 5 of us have all done the diet (costing us upwards of $300+) and we all lost a bunch of weight. This stuff truley [sic] is incredible and has changed all of our lives. Good luck to everyone who takes advantage of this wonderful opportunity.
False testimonials are deceptive. Deception results simply from the fact that “the seller has told the public that it could rely on something other than his word.” And these claims were also material; the independent investigation claims were express and presumed material, while “the claim that the comments were provided by independent consumers is so strongly implied that it is essentially express, so it can also be presumed material.” Even without a presumption, “no reasonable juror could find that claims of independent testing – by consumers or reporters – were not important to consumers’ choice.”
LeadClick argued that the material misleadingness of the parts it was allegedly responsible for was a uniquely factual inquiry that couldn’t be decided on summary judgment, especially given the involvement of other misrepresentations made by LeanSpa. But “one material misrepresentation is not excused by the existence of another misrepresentation.” Indeed, misrepresentations that are corrected before purchase can violate §5 if they generate consumer interest, and “[i]f full information does not save a deceptive claim from violating Section 5, neither does an additional deceptive claim.”
LeadClick didn’t create the fake news sites. Can it be held liable? The FTC described its theory as an agency theory of liability, which I have elsewhere advocated. It argued that LeadClick’s liability came from its control and knowledge of the affiliate marketers’ activities, and thus from its own conduct. Further, “[u]nder the FTC Act, a principal is liable for misrepresentations made by his/her agents (i.e., those with the actual or apparent authority to make such representations) regardless of the unsuccessful efforts of the principal to prevent such misrepresentations.” Sometimes, a seller may be held responsible even when the “salespersons were what might have been considered at common law independent contractors.” Courts have held individual defendants liable for a corporation’s conduct where they “(1) participated in the acts or had authority to control the corporate defendant and (2) knew of the acts or practices,” and the court found the same logic persuasive here.
It was undisputed that LeadClick employees knew about the fake news sites. As for participation or control, that can be shown by “involvement in business affairs” or “role in the development of corporate practices,” including the “ability to review and approve advertisements.” “[D]irect participation can be demonstrated through evidence that the defendant developed or created, reviewed, altered and disseminated the deceptive marketing materials.” Here, no reasonable jury could fail to find that LeadClick both participated in, and had the authority to control, the affiliate marketers’ conduct relating to the fake news sites. LeadClick solicited and hired affiliate marketers who were using fake news sites to advertise LeanSpa’s products, after screening them. LeadClick claimed that, “in practice, affiliate marketers were not required to submit their ‘websites’ for approval unless [it] specifically requested to see the page,” but LeadClick still had the authority to review pages. After the FTC began suing affiliate marketers for using fake news sites, LeadClick started to screen fake news pages, and thus it had the authority to control them.
Although merchants like LeanSpa may also have had authority to approve or disapprove the use of fake news sites, LeadClick had authority of its own. “Just as LeanSpa would be liable for approving requests to advertise with fake news sites, LeadClick, as LeanSpa’s agent, is liable for its own decision to effectuate that decision.”
LeadClick also participated in the deception by buying ad space on genuine news sites and selling it to affiliates who advertised with fake news. That “provided a way for consumers to browse directly from a genuine news site to a fake one,” and LeadClick clearly knew this was happening, because it sometimes identified fake news pages “as destination pages for the banner ads when negotiating with media sellers.” LeadClick also affected the products advertised on the fake news sites, which contained a purported test of a two-step product combination. LeadClick implemented a rule that affiliates had to pair LeanSpa products with other LeanSpa products. “No reasonable jury could find that LeadClick did not have the authority to control affiliates’ use of fake news pages or that LeadClick did not participate in the deception.”
CDA §230 did not change the outcome. The FTC’s claims were not based on “information provided by another information content provider.” “[A] service provider is ‘responsible’ for the development of offensive content only if it in some way specifically encourages development of what is offensive about the content,” or “‘contributes materially to the alleged illegality of the conduct,” Moreover, “there may be several information content providers with respect to a single item of information (each being ‘responsible,’ at least ‘in part,’ for its ‘creation or development’).” Notice of the unlawful nature of the information is not itself enough to make the service provider responsible. But entities can be information content providers when “the nature of the service provider’s product virtually requires, or makes extremely likely, that users will create unlawful conduct.” In the Subway v. Quiznos case, the court held that a jury could find that defendants were information content providers where they “actively solicited disparaging representations about [the plaintiff] and thus were responsible for the creation or development of the offending contestant videos.”
I suspect Eric Goldman will be unhappy: Here, LeadClick solicited and hired the affiliate marketers to advertise LeanSpa’s products, knowing that affiliates used fake news pages and advised them about which products should be advertised in the fake investigations. Plus, its media buys materially contributed to the unlawful nature of the fake news sites “by providing affiliates running fake news sites with a way to direct consumers from genuine news sites to fake news sites.” Because the deception came from the misrepresentation that independent testing was being conducted by genuine news reporters, LeadClick’s media buying “contributed to that deception by providing consumers with yet another reason to think that the news site was genuine.”
LeadClick also lost its arguments against the requested monetary remedies. First, LeadClick argued that there were genuine factual disputes about consumer reliance. While proof of reliance is required for a traditional common law fraud claim, the FTCA is not that. “Requiring proof of subjective reliance by each individual consumer would thwart effective prosecutions of large consumer redress actions and frustrate the statutory goals of the section.” The FTC raised a presumption of reliance by showing that LeadClick made material misrepresentations, those misrepresentations were widely disseminated, and consumers bought the advertised products. LeadClick did not rebut that presumption.
LeadClick then argued that the FTC’s equitable authority under §13(b) of the FTCA only allowed injunctive relief. Making an argument we’ve seen before, it contended that “the FTC’s federal court enforcement and litigation authority is predicated solely on the language in § 53(b) providing that ‘in proper cases the Commission may seek, and after proper proof, the court may issue, a permanent injunction,’” and since LeadClick has been shut down, the FTC would be unable to obtain a permanent injunction. No, because “courts have consistently held that ‘the unqualified grant of statutory authority to issue an injunction under [S]ection 13(b) carries with it the full range of equitable remedies, including the power to grant consumer redress and compel disgorgement of profits’” even when there’s no likelihood of recurrence.
LeadClick then contested the amount sought as disgorgement, arguing that it could only be held liable for the amount it received from LeanSpa and didn’t distribute to affiliates, which was zero. That also failed because LeadClick received the money the FTC sought from LeanSpa. “[I]t is well established that defendants in a disgorgement action are not entitled to deduct costs associated with committing their illegal acts.” It doesn’t have to disgorge money it never received, but it did receive over $11.9 million from LeanSpa. Its choice to pay the affiliates didn’t matter.
Finally, the court found that CoreLogic was liable as a relief defendant. CoreLogic advanced over $13 million to pay LeadClick’s invoices, and then took LeadClick over, but “ownership itself does not create a legitimate claim to the proceeds of an owned entity if those proceeds originally come from unlawful activity.” If the advances were essentially investments, and the $4 million transfer from LeadClick to CoreLogic was essentially return on investment, then CoreLogic didn’t have a legitimate claim to the funds, which did indeed come from the unlawful activity. The court investigated whether the advance should be considered debt (creating a bona fide claim) or equity (not), and used bankruptcy law as an analogy. Under the factors considered in other cases, the advance was properly described as an investment, not a bona fide arms’-length loan. CoreLogic advanced funds to LeadClick “as part of its corporate policy to fund any ongoing business.” It was undisputed that “there was no agreed upon repayment schedule or repayment deadline, no security for those advances, no written loan agreement, and no interest due in connection with the funds CoreLogic provided LeadClick in 2011.” Thus, no reasonable jury could find a bona fide debt.