Affiliate Summit West 2010

Law Enforcement Risks for Advertisers, Affiliates and Networks

Thomas A. Cohn, Of Counsel, Venable LLP (Moderator)Dean Graybill, Assistant Regional Director, Western Region, Federal Trade CommissionDavid Katz, VP Corporate Development and General Counsel, Cyberplex Inc.

SECTIONS 5 & 12 OF THE FTC ACT

• “Unfair or deceptive acts or practices in or affecting commerce are hereby declared unlawful.”

• “It shall be unlawful for any person, partnership, or corporation to disseminate, or cause to be disseminated, any false advertisement . . . by any means . . . for the purpose of inducing . . . directly or indirectly, the purchase . . . of food, drugs, devices, services, or cosmetics.”

• “The dissemination or the causing to be disseminated of any false advertisement . . . shall be an unfair or deceptive act or practice . . . under section 5.”

WHEN IS AN AD DECEPTIVE? If it contains a representation or omission of information

that would be material to consumers

and that would mislead consumers acting reasonably under the circumstances.

WHEN IS AN AD UNFAIR?If it is likely to cause substantial consumer injury [physical or economic]That is not reasonably avoidable by consumers themselvesAnd is not outweighed by benefits to consumers or competition.

SAME STANDARDS APPLYTO ALL PRODUCTS

SAME STANDARDS APPLYIN ALL ADVERTISING MEDIA

FTC AD LAW BASICS All express/implied claims that reasonable consumers take from

ad must be truthful and not misleading

Ad may be literally truthful yet still deceptive

Ad may be deceptive by omission

BEFORE running ad, advertisers must have "competent and reliable scientific evidence" to support all health/safety/ efficacy claims.

Fine-print disclosures won't cure an otherwise deceptive ad!

If disclosure needed to prevent ad from being deceptive, must be “clear and conspicuous,” effectively convey correct net impression.

“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 near, and when possible, on the same screen as the triggering claim.

• Use text or visual cues to encourage consumers to scroll down a Web page when it is necessary to view a disclosure.

• When using hyperlinks to lead to disclosures, make the link obvious;• Label the hyperlink appropriately to convey the importance, nature and relevance

of the information it leads to;

Dot Com Disclosures - continued:

To make disclosures clear and conspicuous, online advertisers should:

• Use hyperlink styles consistently so that consumers know when a link is available;

• Place the hyperlink near relevant information and make it noticeable;• Take consumers directly to the disclosure on the click-through page;• Assess the effectiveness of the hyperlink by monitoring click-through rates and

make changes accordingly

Dot Com Disclosures – continued:To make disclosures clear and conspicuous, online advertisers should:

• Recognize and respond to any technological limitations or unique characteristics of high tech methods of making disclosures, such as frames or pop-ups.

• Display disclosures prior to purchase, but recognize that placement limited only to the order page may not always work.

• Creatively incorporate disclosures in banner ads or disclose them clearly and conspicuously on the page the banner ad links to.

• Prominently display disclosures so they are noticeable to consumers, and evaluate the size, color and graphic treatment of the disclosure in relation to other parts of the Web page.

• Review the entire ad to ensure that other elements: text, graphics, hyperlinks or sound, do not distract consumers. attention from the disclosure.

Dot Com Disclosures – continued:To make disclosures clear and conspicuous, online advertisers should:

• Repeat disclosures, as needed, on lengthy Web sites and in connection with repeated claims.

• Use audio disclosures when making audio claims, and present them in a volume and cadence so that consumers can hear and understand them.

• Display visual disclosures for a duration sufficient for consumers to notice, read and understand them.

• Use clear language and syntax so that consumers understand the disclosures.

When is a claim deceptive?

Three-part test: Was claim made [what was it]? Was claim likely to mislead reasonable consumer? Was claim material?

Does claim involve information important to consumers and likely to affect their choice?

Materiality presumed for: express and intentionally implied claims claims involving health, safety, other areas

reasonable consumer would be concerned with [efficacy, cost, quality]

Note: intent to deceive not required!

Substantiation Basics - know what:

your ad conveys – both express and implied claims

the evidence is for each product claim

Substantiate all objective claims – express and implied – that reasonable consumers will take from ad

Have substantiation for each claim at time made

Substantiate each claim with competent and reliable evidence: what would independent experts with expertise in field rely on?

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

FTC Online Advertising Cases: Bogus cancer cure cases: ongoing

Private label cold remedy cases: Rite Aid/CVS/Improvita

Continuity disclosures - JAB Ventures

CAN SPAM cases – Hoodia

H1N1 joint alert with FDA - warning letters

Future priorities: weight loss, flu, lethal diseases; kids; grant/debt/work-from-home

TESTIMONIALS & ENDORSEMENTS

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

T’s or e’s on key attribute of product must represent what consumers will generally achieve

Use clear/conspicuous disclaimers if endorser’s experience is not representative – BUT:

Revised Guides ELIMINATE this safe harbor -- if atypical consumer testimonial used, now must give clear and conspicuous disclosure of generally expected results!

Avoid testimonials that assert extreme results that can’t be substantiated and/or are unlikely to be real

Expert Endorsements Qualifications give her expertise she’s claimed to have Expertise directly relevant to claims and product Actually used her expertise to examine/evaluate product If expert endorses product as superior to others, must result from actual

comparison with other products

Disclosure of Material Connections• disclose ties between advertisers and endorsers that might materially affect

weight/credibility of endorsement (connection not expected by audience) – proposed guides make clear this applies to ONLINE formats: blogs, discussion boards

• But for experts/celebrities, current guides say consumers will ordinarily expect that celebrity/expert endorsers will be compensated for their endorsements

• So, advertiser need not disclose payment to celeb/exp endorser

• But, revised Guides change this: FTC says assumptions behind across-the-board statement no longer warranted.

WHO MAY BE HELD LIABLE FOR WHO MAY BE HELD LIABLE FOR DECEPTIVE CLAIMS?DECEPTIVE CLAIMS?

• Advertiser – Strict liability• Ad agency – “Knew or should have known”• Individual corporate officers• Endorsers• Possibly also: shopping channels, catalogs, payment processors,

fulfillment houses, others with a role in the promotion• Affiliate marketers? Ad networks?

POSSIBLE CONSEQUENCES OF DECEPTIVE POSSIBLE CONSEQUENCES OF DECEPTIVE ADVERTISING?ADVERTISING?• Cease and desist

orders with 20-year reporting requirements

• Refunds for consumers • [Rite Aid, $500,000;

CVS, nearly $2.8 Million; separate complaint vs Improvita, Rite Aid’s supplier

• Bans and bonds• Informational

remedies, such as disclosures in future ads or corrective advertising

AFFILIATE MARKETING: FTC & STATE AGs

• State attorneys general (AGs) have recently stepped up their investigations and begun law enforcement actions against both online merchants and the affiliate marketers who drive online traffic to them.

• Several years ago, both federal and state law enforcement agencies began to notice the concept of affiliate marketing.

• In 2005, the FTC brought actions against 7 adult website companies, alleging that they violated CAN-SPAM Act because they paid affiliate marketers to use deceptive e-mails to drive online traffic to the defendants’ pornographic websites. The combined civil penalty amounts exceeded $1.6 million, but the affiliate marketers were not named defendants in the actions.

AFFILIATE MARKETING: FTC & STATE AGs

• State AGs also began to take action: in 2007, Florida AG announced $1 million settlement over allegedly deceptive “free ringtone” online marketing campaigns.

• That year, Florida AG also announced group of investigations of other online affiliate networks using allegedly deceptive offers for “free” or “complimentary” mobile content (such as ringtones or wallpaper) to enroll consumers into monthly subscription plans, without describing prices/terms of service clearly and conspicuously.

• Two of these matters have settled: Florida AG announced two $1 million settlements with online marketers of mobile content, requiring companies and their affiliate marketers to follow guidelines on disclosure of material terms in online marketing of mobile content.

AFFILIATE MARKETING: FTC & STATE AGs

• FTC first sued affiliates directly in May 2009, alleging that defendants purchased “sponsored links” that appeared on results pages of Internet search engines when consumers search for “making home affordable.” Defendants’ ads, which prominently displayed the full govt. URL “www.MakingHomeAffordable.gov,” then appeared among the search engines’ results.

• Consumers who clicked on ads were not directed to govt. program site, but were diverted to sites that sell paid loan modification services. These commercial sites, not affiliated with govt., required consumers to enter personally identifying and confidential financial info, and then either offered loan modification services or sold consumers’ information to companies that market them.

AFFILIATE MARKETING: FTC & STATE AGs

• Although FTC did not name these commercial loan modification websites as defendants or allege they were engaged in deception, it did allege that the affiliate defendants were attempting to defraud homeowners trying to use the govt. site, by falsely implying through search results that visitors were being sent to the govt’s website.

• Several recent enforcement actions only underscore perils of affiliate marketing: various state AGs have cited affiliate marketers in their latest actions against online promotions, and these may be followed by other AG actions against merchants, affiliates and/or networks that engage in deceptive advertising or knowingly assist and facilitate it.

AFFILIATE MARKETING: FTC & STATE AGs

• In addition, affiliates’ unauthorized 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.

• FTC likely to take on affiliate marketing soon: in its recently revised Endorsement Guides, FTC made clear that if bloggers are endorsers, they may be held liable for making false or unsubstantiated claims and/or for failing to disclose material connections between them and advertisers. And FTC's consumer protection director referred to deceptive affiliate marketing in recent speeches.

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 offer's 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;

• With respect to any endorsement (third-party promotion of advertiser's product to consumers), 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

publishing content designed to drive online traffic to the merchant abide by all state and federal consumer protection laws and regulations including the FTC Act and the CAN-SPAM Act;

• These agreements should also require affiliates to comply with the FTC's revised Endorsement Guides;

• These agreements should also 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;

• These agreements should also 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; and

• Agreements must provide that any affiliates who violate these laws, regulations and guides be terminated by the merchant or network, and shall forfeit any commissions earned in the course of committing such violations.

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?• Thomas A. Cohn

• 212-370-6256

• tacohn@venable.com

• www.venable.com

Affiliate Summit West 2010

Law Enforcement Risks for Advertisers, Affiliates, Networks

Time: 11:30am-12:30pm

• Thomas A. Cohn, Of Counsel, Venable LLP (Moderator)• Dean Graybill, Assistant Regional Director, Western Region, Federal Trade Commission• David Katz, VP Corporate Development and General Counsel, Cyberplex Inc.