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Why is LeadClick’s CoreLogic vs. FTC So Important to Affiliate Marketing?

LeadClick (now owned by CoreLogic) managed an affiliate marketing network, until it closed its doors in 2011 and moved it’s entire business to CoreLogic. LeanSpa started using LeadClick’s services in 2010, agreeing to pay LeadClick $35-$45 for each consumer that clicked on a link that originated on an affiliates site, and then enrolled into LeanSpa’s free trial program. During this affiliate relationship, LeadClick earned more than $22 million.

In a case that has been going on for years, The FTC contends that the majority of the money earned during that agreement was earned through deceptive marketing practices. The FTC filed a lawsuit against LeadClick and LeanSpa citing violations of Section 5 of the Trade Commission Act. LeanSpa decided to settle with the FTC, and a summary judgement was made in favor of the FTC, against LeadClick.

LeadClick filed an appeal claiming that it is should not be held liable for content created by the affiliate marketers, and the federal appellate panel has finally responded. It did not agree.

The panel wrote, “While LeadClick did not itself create fake news sites to advertise products … it (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.”

The court contended that LeadClick employees were aware of the use of fake news sites, and even approved the use of them. LeadClick’s standard contract included wording that required they approve proposed marketing pages before they were used by the affiliates. In some cases, LeadClick requested edits be made to some of the content that the affiliates were submitting to be used on the fake news sites.

The panel stated that their decision in the case was based completely on the actions of LeadClick and their employees.  The Second Circuit wrote, while providing supporting decisions from the Ninth and Eleventh Circuits, “[U]nder 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.”

The panel also stated, “LeadClick knew that deceptive false news sites were prevalent in its affiliate marketing network, directly participated in the deception, and had the authority to control the deceptive content of these fake news sites, but allowed the deceptive content to be used in LeanSpa advertisements on its network….Accordingly, LeadClick is liable under Section 5 of the FTC Act for engaging in deceptive acts or practices.”

Actions directly associated with LeadClick lead to significant harm to consumers, the panel reported. They wrote, “As 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.”  The panel also wrote, “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.”

What exactly did LeadClick & CoreLogic do Wrong?

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.”

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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.

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.

Marketers and affiliates should be aware of the precedent set by the Second Circuit. Deceptive schemes that are found to be in violation of the FTC Act might hold responsible more than just the affiliate doing the deceptive action. “A defendant may be held liable for deceptive practices that cause consumer harm if, with knowledge of the deceptive nature of the scheme, he either ‘participate[s] directly in the practices or acts or ha[s] authority to control them,’” the panel states. “A defendant directly participates in deception when it engages in deceptive acts or practices that are injurious to customers with at least some knowledge of the deception. Similarly, 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, may be held liable for engaging in a deceptive practice injurious to consumers.”

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Pesach Lattin

Pesach "Pace" Lattin is one of the top experts in interactive advertising, affiliate marketing. Pace Lattin is known for his dedication to ethics in marketing, and focus on compliance and fraud in the industry, and has written numerous articles for publications from MediaPost, ClickZ, ADOTAS and his own blogs.

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