Affiliate Summit West 2011

The Regulatory Landscape for Advertisers, Affiliates, Networks

William I. Rothbard, Law Offices of William I. RothbardThomas A. Cohn, Of Counsel, Venable LLP

OVERVIEW OF TOPICS• FTC Powers to Regulate Deception and Unfairness• FTC/AG Enforcement Priorities• Ad Substantiation • Clear & Conspicuous Disclosure/Negative Option• FTC Endorsement Guidelines • Merchant-Advertiser Responsibility & Liability• Affiliate/Network Responsibility & Liability• Merchant-Advertiser/Affiliate Best Practice-Compliance Tips • Mobile Marketing• Privacy

WHEN IS AN AD DECEPTIVE? When a claim or omission would materially mislead consumers

acting reasonably in the circumstances.

STRICT LIABILITY – Intent to Deceive not required. Knowledge of Deception also not required except for money judgments against principals, which require proof of knowledge or reckless indifference to truth or falsity

WHEN IS AN AD UNFAIR?When it is likely to cause substantial consumer injury (physical or economic).

It is not reasonably avoidable by consumers themselves.

And it is not outweighed by benefits to consumers or competition.

SAME STANDARDS APPLYTO ALL PRODUCTS

SAME STANDARDS APPLYIN ALL ADVERTISING MEDIA

FTC REMEDIES

Cease & Desist Orders – conduct restrictions; recordkeeping

Consumer Redress - FTC wants all your money

Civil Penalties for Rule and Order Violations

Bans and Bonds – death knell for your livelihood

Ex Parte (without notice) TROs, asset freezes, receiverships – death penalty for your business

FTC/AG ENFORCEMENT PRIORITIES

• Financial Offers (grants, Internet biz ops, home loan modifications, debt relief, tax relief, etc.)

• Negative Option/Discount Membership Clubs/Upsells • Dietary Supplements • Free Offers • Affiliate Deception/Fraud • CAN-SPAM • Privacy • New target areas, i.e., penny auctions

Before disseminating an ad, the advertiser must be able to

support all objective claims with:

COMPETENT AND RELIABLE EVIDENCE

SUBSTANTIATION

Advertisers must substantiate all objective performance, efficacy, health, and safety claims — express and implied — with:

COMPETENT AND RELIABLE SCIENTIFIC EVIDENCE

What would independent scientists with expertise in the field rely on?

Methodologically sound tests, studies, scientific research

Based on expertise of professionals in field

Objectively conducted by qualified people

Using procedures accepted as accurate

Yielding statistically significant results

Anecdotal evidence from consumers

Popular press articles

Sales materials from manufacturer

Low return rate

Money-back guarantee

COMPETENT AND RELIABLE SCIENTIFIC EVIDENCE

WHAT IT ISN’T WHAT IT IS

“NEW” FTC SUBSTANTIATION STANDARD?• Iovate and POM Wonderful

• Weight Loss Claims – at least 2 controlled clinical studies on advertised product by separate, independent researchers

• Disease Claims – FDA-Approved Only

“Clear and Conspicuous:” Effectiveness of Disclosures

Prominence Will consumers notice the disclosure?

Presentation Is the language easy to understand? Does it contradict other assertions in the ad?

Placement Is it located where consumers will see it?

Proximity Is it close to the language being qualified?

Dot Com Disclosures: FTC Business Education/Guidance [circa May 2000]

To make disclosures clear and conspicuous,online advertisers should:

• Place disclosures close to the triggering claim.• When using hyperlinks to disclosures, make the link uniform and obvious, label the

type of information it leads to, and monitor click-through rates for effectiveness. • Disclose material purchase terms on order page, near order button, as well as in

Terms & Conditions.• Disclose key privacy terms, such as 3d party marketer datasharing, on order page. • Disclose key purchase terms in banner ads where possible or on linked page. • Avoid elements (i.e., text, graphics) that distract from disclosures.• Use “plain English” to make disclosures.

CLEAR AND CONSPICUOUS NEGATIVE OPTION• S. 3386, “Rockefeller Law” – bars billing data transfer from “initial” merchant to

“post-transaction 3d party” merchant, requiring latter to obtain account number from consumer; mandates disclosure of material terms of all post transaction 3d party offers and all negative option offers of any seller “before obtaining consumer billing information”

• FTC Negative Option Report (Jan. 2009) – offers detailed analysis and guidance for application of the “clear & conspicuous” standard to Internet-based negative options, including full disclosure of terms, noticeability, etc.

• Commerce Planet, Central Coast Nutraceuticals, iWorks – FTC litigation that could establish case law on “clear & conspicuous” standard for online trial/continuity offers.

• New California law - more precise, stringent definition of “clear & conspicuous” for negative option than FTC standard; purchase terms must be in “larger” type than surrounding text, or clearly contrasted or set off from the surrounding text of “equal size.”

REVISED FTC ENDORSEMENT GUIDES

Testimonials still can’t be used to communicate claims that would be unsubstantiated if made directly by advertiser

Testimonials still must represent what consumers “typically” will achieve

BUT: if they don’t, “Results not typical” disclaimer no longer suffices, clear & conspicuous disclosure of “generally expected results” now required, unless advertiser can prove consumers don’t think the results are typical. No FTC enforcement of this yet but cases can be expected

Disclosure of material connections between advertisers and lay (non-expert) endorsers must be made. This now applies to bloggers endorsing products, who also can be held liable for making false claims, and to celebrities endorsing products in unconventional formats (i.e., talk shows) or social media where consumer may not think celebrity is being paid. Advertiser principally liable for failure to disclose.

Page 15

FTC/AG ENFORCEMENT AGAINST BLOGS

• FTC "closing letter" to AnnTaylor Stores: April 2010• Some AT bloggers failed to disclose they received $500 gift cards for writing

reviews of AT’s summer 2010 collection. FTC investigated whether AT had taken sufficient steps to prevent/correct the failure to disclose this "material connection.“

• FTC closed investigation without action because few bloggers failed to disclose they’d been given gift cards and AT later adopted written policy against gifts to bloggers without first telling them they were expected to disclose them.

• FTC closing letter demonstrates it expects marketers to have a written policy governing disclosures by affiliates and to enforce it.

FTC/AG ENFORCEMENT AGAINST BLOGS • Reverb: Aug. 2010 FTC settlement with PR agency that used its employees

to blog positive “customer” reviews for video games of agency’s client. Signals FTC’s intent to hold advertisers and their “hired guns” responsible for product blogs that don’t disclose material connections to advertisers

• Ann Taylor and Reverb show FTC is targeting advertisers and their agents, not bloggers, for nondisclosure of material connections. Expect more FTC blog cases

• Nationwide Florida AG investigation of affiliate networks for alleged use of deceptive flogs (“faux news”). Copeac is one publicly known target, accused of using fake news sites, linked from legitimate news sites,” to promote scams.

MERCHANT-ADVERTISER RESPONSIBILITY

• Claim Substantiation • Compliance with FTC Endorsement Guidelines• Clear and Conspicuous Pre-Sale Disclosure of Material Terms &

Conditions, including key billing terms on order page, not in hyperlinked T&Cs

• Getting express, informed consumer billing consent - no prechecks• Responsive customer service, including fulfillment of stated

cancellation/refund policies• Anti-Affiliate Fraud Policies and Procedures• Clear Privacy Policy Terms and Data Sharing Opt-Out Rights

AFFILIATE/NETWORK RESPONSIBILITY

• CAN-SPAM Compliance

• Endorsement Guidelines compliance, including disclosure of material financial connections to advertiser

• Compliance with merchant-advertiser’s compliance guidelines and approved non-deceptive ad copy, avoidance of hyped, unapproved claims

• Avoidance of fraudulent or confusing incentivized marketing schemes

• Effective network monitoring of, and disciplinary action against, affiliate misconduct

OVERLAPPING ADVERTISER AND AFFILIATE NETWORK LIABILTY

• Advertiser and Affiliates/Networks can have “cross liability” for the other’s acts. Liability isn’t automatic, depends on degree of participation, ratification, and negligent or willful ignorance or disregard

• Affiliates/Networks could be liable not only for their deceptive claims and practices but advertiser’s claims as well if they were involved in creating the claims or had reason to believe they’re untrue or unsubstantiated; can’t necessarily rely on advertiser’s assurances

• Advertiser is liable for deceptive claims it directs and pays its affiliates to make. • Advertiser also can be liable for deceptive claims and practices of affiliates it did not

authorize but had reason to believe were occurring and ignored or didn’t take action to stop

• Advertiser-Affiliate/Network contracts should contain reps and warranties of legal compliance, including with FTC laws and regs, CAN-SPAM, etc., and hold harmless indemnity clauses to protect against damage caused by the other party.

FTC/AG ONLINE ENFORCEMENT ACTIONS • FTC actions against 7 adult website companies, alleging they violated CAN-SPAM Act because

they paid affiliate marketers to use deceptive e-mails to drive online traffic to the defendants’ websites. The combined civil penalty amounts exceeded $1.6 million, but the affiliate marketers were not named defendants in the actions.

• FTC actions against major affiliate networks, including a settlement with ValueClick, for deceptive incentivized marketing, and Swish Marketing, still in litigation, for alleged use of deceptively buried prechecks in upsell offers .

• FTC action against Commerce Planet for alleged violation of “clear & conspicuous” requirement for online biz op continuity offer. FTC suit challenges only the advertiser’s negative option billing disclosures, not its affiliate networks, despite evidence also of affiliate fraud. Commerce Planet illustrates importance of advertisers working only with responsible affiliate networks and reacting forcefully against first signs of fraud. Ongoing suit against non-settling defendant could

help clarify meaning of “clear and conspicuous” for online continuity offers.

AFFILIATE MARKETING: FTC & STATE AGs

• FTC action against affiliate marketers for deceptive search ads for home loan modification services displaying , “www.MakingHome Affordable.gov,” that implied a government program but, in fact, diverted consumers to a paid commercial site. Home loan providers not charged but could have been if they sanctioned the fraud.

• Several Florida AG cases against advertisers and affiliate networks for offering allegedly deceptive “free” or “complimentary” mobile content and other services without clear disclosure of monthly subscription terms.

• Two of these Florida matters have resulted in $1 million settlements, requiring online advertisers and their affiliate marketers to follow guidelines on disclosure of material terms in online marketing of mobile content.

• New York AG settlements with major discount membership clubs for allegedly deceptive negative option upsells; Affinion-$8 million; Web Loyalty-$5.2 million

AFFILIATE MARKETING: FTC & STATE AGs

• Unauthorized affiliate use of celebrity and news media images/marks is increasingly subjecting them (and the online merchants to which they link) to charges of trademark infringement, false endorsement and related allegations, under both state and federal law. These actions have taken the form of both consumer class actions and Lanham Act suits by owners of specific marks.

• Aggressive FTC and AG action against affiliate marketing is likely to continue as long as it remains a significant source of fraud and deception in Internet marketing. The FTC's chief consumer protection official has warned of further cases in recent speeches.

• Deceptive affiliate marketing in the booming area of penny auctions, along with deceptive disclosure of game rules by the auction sites, is a prominent candidate for future enforcement action.

Top 5 Tips For Affiliates• Ensure that affiliate advertising of any merchant’s products or services is

truthful, substantiated, and not deceptive or unfair;

• Do not publish "flogs" (fake blogs) or other false content, false or unsubstantiated product claims, or offer incentives to consumers in return for their response to any ad, unless the terms and conditions of the offer are clearly and conspicuously disclosed;

• Do not publish fake news articles or other fake media titles, without clearly and conspicuously disclosing that the content is an advertisement;

• Do not publish false or unsubstantiated endorsements, and be sure to clearly and conspicuously disclose any material connections with the merchant and/or the network; and

• Do not infringe on the personal rights, trademark, copyright, patent rights, service mark, or any other intellectual property right of any third party mentioned in published content.

Top 5 Tips For Merchants/Networks• Enter into written agreements with affiliate marketers, requiring that all

affiliates abide by state and federal consumer protection laws and regulations including the FTC Act, the FTC’s Endorsement Guidelines, and the CAN-SPAM Act.

• Agreements should require that affiliates not infringe on the personal rights, trademark, copyright, patent rights, service mark, or any other intellectual property right of any third party.

• Agreements should require that affiliates clearly and conspicuously disclose the terms and conditions of any incentives, points, rewards, cash, or prizes promised to consumers in return for their response to any advertisement.

• Agreements must provide that any affiliates who engage in non-compliant acts be terminated and forfeit commissions.

• Monitor affiliate behavior and enforce contractual sanctions against misconduct

MOBILE MARKETING

• Telephone Consumer Protection Act (“TCPA”) covers texts as well as calls.

• TCPA requires express prior consent, including for messages/calls using autodialers, whether or not an established business relationship (EBR) exists.

• Unlike FTC, TCPA currently doesn’t require express written prior consent for robocalls/texts to wired lines where an EBR exists; proposed FCC rule, however, would adopt FTC consent requirement for robocalls/texts to all phones, whether or not there’s an EBR.

PRIVACY• Superhot regulatory/legislative issue now and in 2011; huge implications for online

marketing industry and behavorial advertising model.• FTC cases against deceptive collection and use of personal data, failures to comply

with posted privacy policies, security breaches, deceptive tracking.• Ameriquest –consent order prohibiting 3d party outbound marketing to leads

without prior notice to consumers by lead generators, before phone number is provided, that they may be called by other marketers, by how many, and by whom.

• FTC Privacy Report –recommends: Do Not Track option; “just in time” disclosure of and express consent to 3d party datasharing at point of personal data entry or purchase; notice of and express consent to subsequent privacy changes. Suggests “intangible consumer harm alone (“reputational injury,” “injury to consumer dignity”) could be basis for enforcement action, without economic or physical injury.

• Federal legislative initiatives expanding consumer choice and control over data.

CONCLUSION: CAVEAT VENDOR!• Affiliates, networks and merchants should consider themselves on

notice: everyone in the online advertising stream who engages in or assists with fraud might end up in the crosshairs of law enforcement.

• Everyone involved in online marketing must be careful to publish truthful content that is not deceptive and contains the proper disclaimers and disclosures, and they must learn to adapt to this more aggressive regulatory landscape.

• It is advisable to seek expert counsel who thoroughly understands the FTC’s and state AGs' thinking and likely enforcement strategies, so you have the benefit of sound advice concerning the best ways to avoid or fight off these regulatory challenges.

QUESTIONS?

• William I. Rothbard Thomas A. Cohn• 310-453-8713 212-370-6256 • Brothbard@roadrunner.com

tacohn@venable.com• www.ftcadlaw.com www.venable.com