FTC wins second appellate victory over 230 defense

FTC v. LeadClick Media, LLC, 151009cv
(2d Cir. Sept. 23, 2016)
The FTC and Connecticut sued LeadClick over its role in the
use of deceptive websites to market weight loss products. LeadClick managed a
network of aliates/publishers to advertise the products of LeadClick’s
merchant client, LeanSpa.  Some
affiliates created deceptive websites making false efficacy claims, including
claims about independent testing and testimonials.  The FTC also sued CoreLogic, LeadClick’s parent company, as a
relief defendant. The court of appeals rejected LeadClick’s §230 defense, but
did let CoreLogic off the hook for $4.1 million in relief.
Facts: Until it went out of business in 2011, LeadClick
operated an affiliatemarketing network, connecting
merchant clients to thirdparty publishers/affiliates who
advertised the merchant’s
products. The affiliates used email marketing, banner ads, searchengine
placement and websites they created. LeadClick managed the affiliate network
through tracking software, referred to as “HitPath,” that would “track the flow
of traffic from each individual affiliate’s marketing website to the merchant’s
website while remaining invisible to the consumer.”
LeadClick’s affiliate managers were responsible for scouting
and recruiting new affiliates, researching affiliates, and matching affiliates
with particular merchant offers. “LeadClick would review and control which
affiliates were selected to provide online advertising for each merchant’s
offer.”  LeadClick also was a media
buyer: it bought space for banner ads from well-known websites, then resold the
space, sometimes to affiliate marketers, at a markup.
LeanSpa hired LeadClick in September 2010.  LeanSpa paid a set amount, typically $35 to
$45, each time a publisher’s
ad led a consumer to LeanSpa’s
landing page and that consumer enrolled in LeanSpa’s freetrial
program.  LeadClick paid 80-90% of that
to the publisher and kept the rest. To track individual consumer actions,
LeadClick routed consumers through the HitPath server to the LeanSpa website
via publisher-unique links. 
LeadClick became LeanSpa’s primary marketing network, and
LeanSpa became LeadClick’s top customer, responsible for about 85% of all
eAdvertising division sales, or $22 million in billing.  LeanSpa was chronically behind on its
payments to LeadClick, but ultimately paid LeadClick $11.9 million.  Following industry practice, LeadClick paid
publishers before getting paid by LeanSpa, and ultimately terminated its
business arrangement with LeanSpa.
Some of LeadClick’s affiliates used fake news sites, which “looked
like genuine news sites: they had logos styled to look like news sites and
included pictures of supposed reporters next to their articles.” Theygenerally
represented that a reporter had performed independent tests that demonstrated
the efficacy of the weight loss products and included a “consumer comment”
section, where fake “consumers” praised the products.  The vast majority of LeadClick traffic to
LeanSpa’s websites came from fake news sites.
The evidence showed that LeadClick (1) knew that fake news
sites were common in the affiliate marketing industry and that some of its
affiliates were using fake news sites, (2) approved of the use of these sites,
and, (3) on occasion, provided affiliates with content to use on their fake
news pages. For example, one LeadClick employee told an affiliate interested in
marketing LeanSpa offers that “News Style landers are totally fine.” Another
employee told a potential new client that “[a]ll of our traffic would be
through display on fake article pages.” LeadClick’s standard contract with
affiliate marketers also required affiliate marketers to submit their proposed
marketing pages to LeadClick for approval before they were used. 
LeadClick employees also requested content edits to some
fake news sites.  For example, after
hearing of a state action against another network for false advertising, a
LeadClick employee reached out to an affiliate to “make sure all [his] pages
[were] set up good[,] like no crazy [misleading] info.” The affiliate responded
that he was removing references to his page being a “news site” and thinking of
“removing the reporter pics” from the site to be safe.  The LeadClick employee advised him not to
stop using the fake reporter’s picture, but to “just add [the term]
advertorial.” Another time, LeadClick employee advised the affiliate to delete
references to acai berry on his fake news site and instead use words like “special
[ingredient], formula, secret, bla, bla, bla” because “we noticed a huge
increase in [actions] with stuff that doesn’t [s]ay acai.”  Providing feedback on another page, another
employee stated that the site “looks good except you CANT say anything about a
free trial.. [sic] I need that removed,” and noted that “[i]t is much more
realistic if you say that someone lost 1012 lbs in 4 weeks rather than
saying anything more than that.”
LeadClick also sometimes purchased ad space on genuine news
sites for banner ads that would link to the fake news sites promoting LeanSpa’s
products as part of its media buying business. 
LeadClick sometimes identified fake news sites as destination pages for the
banner ads when negotiating with media sellers by emailing the media seller a
compressed version of an affiliate’s page or providing the web address for the
destination page.
LeadClick argued that it couldn’t be held liable under
Section 5(a) of the FTCA because it didn’t create the deceptive content, and
the content wasn’t attributable to it. 
The court of appeals responded that, “under the FTC Act, a defendant may
be held liable for engaging in deceptive practices or acts if, with knowledge
of the deception, it either directly participates in a deceptive scheme or has
the authority to control the deceptive content at issue.”  This is consistent with the case law in other
circuits, which also hold that “a deceptive scheme violating the FTC Act may
have more than one perpetrator.”  The
rule that a defendant who knows of another’s deceptive practices and has the
authority to control those deceptive 
acts or practices, but allows the deception to proceed, can be liable is
consistent with the longstanding rule that “an omission in certain
circumstances may constitute a deceptive or unfair practice.”  (Very nice equivocation on the meaning of “omission,”
which in this context usually refers to an omitted statement, not an omitted action.)
Though the FTCA doesn’t expressly provide for aiding and
abetting liability, that wasn’t the kind of liability being imposed.  A defendant with knowledge of deception who
directly participates or who has the authority to control the deceptive
practice, but doesn’t, is itself engaged in an deceptive practice.  
That standard was satisfied here, as the evidence showed.
Direct participation was shown by the facts that a LeadClick employee “scouted”
fake news websites to recruit potential affiliates for the LeanSpa account; LeadClick
employees required alterations to the content of its affiliates’ fake news
pages by instructing them to revise their pages to comply with explicit
directives from LeanSpa; a LeadClick employee instructed an affiliate to check
that his fake news site was not “crazy [misleading]” and advising him not to
remove the reporter photograph, but to “just add advertorial”; LeadClick
employees advised affiliates on the content to include in their pages to
increase consumer traffic (telling an affiliate “[i]t is much more realistic if
you say that someone lost 1012 lbs[.] in 4 weeks rather than
saying anything more than that”); and LeadClick purchased banner ad space on
genuine news sites to resell that space to affiliates running fake news pages
to “generat[e] quality traffic in very lucrative placements.”
Likewise, LeadClick had the authority to control the
deceptive practices of affiliates that joined its network, but didn’t.  Ultimately, “[a]s the manager of the
affiliate network, LeadClick had a responsibility to ensure that the
advertisements produced by its affiliate network were not deceptive or
misleading. By failing to do so and allowing the use of fake news sites on its
network, despite its knowledge of the deception, LeadClick engaged in a
deceptive practice for which it may be held directly liable under the FTC Act.”  Moreover, LeadClick was directly liable “regardless
of whether it intended to deceive consumers ‐‐ it is enough that it
orchestrated a scheme that was likely to mislead reasonable consumers.” 
What about the CDA? Under §230, a provider of an interactive
computer service won’t be held responsible “unless it assisted in the
development of what made the content unlawful.” 
See FTC v. Accusearch Inc.,
570 F.3d 1187 (10th Cir. 2009).  The
court here doubted whether LeadClick was even an interactive service provider,
because it didn’t provide “computer access in the sense of an internet service
provider, website exchange system, online message board, or search engine.”  Its routing of consumers from its affiliates’
webpages to LeanSpa’s websites via the HitPath server “was wholly unrelated to
its potential liability under the statute”—that is, none of the acts for which
it was being held liable depended on the fact that it provided that routing,
which was just done to keep track of who it was supposed to pay.  If it had contracted out that function, it
would still have been the actor responsible for all the acts the court
previously deemed to justify direct liability.
More disturbingly, the court reasoned that this “service”—access
to the HitPath server—wasn’t the kind of activity Congress intended to protect
in granting immunity, because the routing “was invisible to consumers and did
not benefit them in any way. Its purpose was not to encourage discourse but to
keep track of the business referred from its affiliate network.”
But none of this matters, because LeadClick was an
information content provider with respect to the content at issue. It
participated in the development of the deceptive content: it recruited
affiliates for the LeanSpa account that used false news sites; it paid those
affiliates to advertise LeanSpa products online, knowing that false news sites
were common in the industry (if this is participation, §230 protection is a
dead letter); it occasionally advised affiliates to edit content on affiliate
pages to avoid being “crazy [misleading],” and to make a report of alleged
weight loss appear more “realistic”; and it bought ad space from legitimate
news sites, “thereby increasing the likelihood that a consumer would be
deceived” by the fake news sites. 
LeanClick’s managerial role “far exceeded that of neutral assistance.”
Further, LeadClick wasn’t being held liable as a publisher
or speaker of another’s content, but for its own deceptive acts or
practices.  This is a version of the
agency argument I’ve made before, I think, but it means we have to be very
careful about when failure to act (omission) counts as a deceptive act or
practice. Here, the court reiterated that LeadClick’s own conduct was “providing
edits to affiliate webpages, … purchasing media space on real news sites with
the intent to resell that space to its affiliates using fake news sites, and [having]
the authority to control those affiliates and allow[ing] them to publish
deceptive statements.”  I imagine Eric Goldman
will be none too pleased, but it does seem significant that the editing
suggested was to increase deceptiveness, not just to increase the
attractiveness of the content.
Finally, relief defendant liability: In 2005, CoreLogic’s
predecessor bought LeadClick (as an indirect owner through its wholly owned
subsidiary CLUSI). In 2010, LeadClick became a direct subsidiary of CoreLogic,
and a sister company to CLUSI.  During
the restructuring, CoreLogic transitioned LeadClick and six of its sister
subsidiaries into a “shared services system” to streamline and enhance back
office functions across the subsidiaries. Shared services programs allow
related entities to consolidate some or all of their backoffice
functions, such as accounting, legal and compliance, human resources, and
information technology, into a single office.
When LeadClick accrued a payable expense, CoreLogic would
make the payment directly on its behalf, and track the payment as an advance to
LeadClick. Both LeadClick and CoreLogic intended that LeadClick would later
reimburse CoreLogic for those advances, and ultimately LeadClick repaid a total
of $8.2 million of its advance balance to CoreLogic.  Half of this amount was repaid in a single
cash transfer of $4.1 million in August 2011, the month before LeadClick ceased
business.  The district court treated
that transfer as gratuitous and held CoreLogic liable as a relief defendant.

The court of appeals found that CoreLogic was not an
appropriate relief defendant because CoreLogic had a legitimate claim to repayment
of its prior advances to LeadClick.  A
relief defendant needs a legitimate claim, which can be based on an outstanding
loan, but not on a gratuitious transfer. 
Though CoreLogic lacked a formal loan agreement, the transfer of $4.1
million was  the repayment of an outstanding
intercompany loan, implemented as part of its shared services agreement under
which CoreLogic had previously paid LeadClick’s accounts payable. Shared
services agreements generally don’t involve formal debtor-creditor
relationships, since such documentation “is incompatible with the very purpose
of shared services: streamlining operations and increasing efficiency by
reducing excess paperwork.” Because the companies were consolidated under
general accounting principles for public companies, an interest charge would be
inappropriate. “Under these circumstances, the lack of a formal loan agreement
does not create suspicion that the transactions were a sham.”

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