Should A Company Be Liable For What Its Affiliates Do?

from the section-230? dept

Wed, Mar 23rd 2011 4:05am — Mike Masnick

We all know that there are bogus product reviews online. At times, it's difficult to take reviews seriously because of this. So, to some extent, it seems like a good thing that the FTC is apparently cracking down on bogus online reviews, as demonstrated by its decision to fine a company called Legacy Learning Systems Inc., to the tune of $250,000. Apparently, the company had an affiliate program, and those "affiliates" posted all sorts of positive reviews of the company's educational DVDs for things like "Learn and Master Guitar."

However, part of this is troubling. I have no problem with the FTC going after bogus reviews. Where it could get questionable is fining LLS for the actions of its affiliates. Lots of companies have affiliate programs, and it seems to set a dangerous precedent if the company is blamed for any actions taken by those affiliates. If the company was encouraging fake reviews or something along those lines, perhaps it would move liability back to the company, but it's not at all clear that's what happened here. Now, the FTC's press release on this is a bit vague. At one point, it suggests that the company had a special "review ad" affiliate program. If that's the case, then perhaps the company was specifically soliciting fake reviews, in which case the liability could potentially be justified. But later in the press release, the FTC seems to suggest it doesn't matter:

"Whether they advertise directly or through affiliates, companies have an obligation to ensure that the advertising for their products is not deceptive," said David Vladeck, Director of the FTC's Bureau of Consumer Protection. "Advertisers using affiliate marketers to promote their products would be wise to put in place a reasonable monitoring program to verify that those affiliates follow the principles of truth in advertising."

Perhaps our various Section 230 experts can weigh in on this, but I can't see how the above statement fits with Section 230. If the affiliates are doing deceptive practices on their own, without direct encouragement from the company, then I can't see how the company itself is liable, and I certainly can't see a legal obligation to put in place a "reasonable monitoring program." In fact, I would think that Section 230 says the exact opposite.

Once again, I have no problem with cracking down on fake reviews, but shouldn't it be the reviewers themselves who are liable for being deceptive? Blaming the company in cases where they might not know seems only likely to make the whole concept of affiliate programs too big a liability for most companies to bother offering.

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Filed Under: affiliates, endorsements, ftc, liability
Companies: legacy learning systems

31 Comments

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Tom, 23 Mar 2011 @ 4:27am

Should A Company Be Liable For What Its Affiliates Do?

To some extent, yes, companies should be responsible. (This is the case, for example, with TCPA and junk faxes.) With no directly traceable revenue stream (i.e. no charges to the customer's credit card), it's all too easy to create a shadow affiliate that misbehaves, only to close it when justice comes calling before opening it up again under a different name.

What it boils down to is this: If a company pays its affiliates, it tacitly endorses their actions on its behalf, and should hold some measure of responsibility. Additionally, the root company is in a better position to recover damages from affiliates than end customers are.
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Jay Blanc, 23 Mar 2011 @ 4:56am

In this case, it's because the word "affiliate" was being substituted for the word "employees" to try and distance themselves. The company was clobbered because it was *employing* people to do bad things, not merely "affiliated" with people who do bad things.

You can't rationalise away an obligation with linguistics, an advertiser is barred from making false advertisements. Employing people to post notices is advertising, not "freedom of affiliation".
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Anonymous Coward, 23 Mar 2011 @ 4:58am

This is a problematic area
It's become even more so in the last 10-15 years thanks to the 'net -- because it's nearly impossible for an external observer to discern the difference between (a) a rogue affiliate that's doing something completely disapproved of by the parent company and (b) an affiliate that doesn't really exist, but it just a sockpuppet for the parent company (and is thus employed as a tactic to create plausible deniability).

There have been so many cases of (b) at this point that claims of (a) are met with (appropriate) disbelief. (And how do we know they were (b)? Because they were sloppy and careless.)

This is unfortunate for those involved in (a), because believing them means believing that they're the 1-in-1000 exception, and this strains credulity. But there are ways that companies legitimately caught up in this can help themselves:

1. Have a policy that any affiliate caught doing bad things will not only be shut down, but will be outed. Making a publicly example of them sends a message to others and provides evidence to the everyone else that the parent is serious.

2. Structure the affiliate agreement such that affiliates who misbehave lose everything -- and more. Enforce contractual penalties that are a sufficient deterrent.

3. Make sure these policies are in place, and publicly available, before an affiliate program is launched.
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CarlWeathersForPres (profile), 23 Mar 2011 @ 4:59am

It's called agency law
And it's been around for 200 or so years. If you ask someone to do something and they do it wrong the liability falls on you if they believe that the actions were in the scope of what you directed them to do. Ignorance shouldn't be a defense, and to put in some light checks shouldn't be too much of an issue.
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Adam Wasserman (profile), 23 Mar 2011 @ 5:01am

C-28 (CASL)
It is also the case with Canada's Anti-Spam Law (which actually covers a whole lot more than just spam).

In this law, any brand owner that benefits directly or indirectly from the any violation of law is vicariously liable. The only exceptions are if they can prove a complete absence of any business relationship, or if they prove that they exercised due diligence in preventing their brand name from being used unlawfully.

Since this law applies to commercial electronic messages either sent or received in Canada, American companies may find themselves being sued for email that was sent from the US to Canada.

I have a feeling that may work out to be be similar to getting sued for patent infringement in East Texas.
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Bengie, 23 Mar 2011 @ 5:02am

To a degree
The affiliate should be held responsible for their own actions and should be the first to pay for any suit resulting from their actions. But if the affiliate cannot afford the amount, then the company that hired them should have to foot the rest of the bill.

In the end, the affiliate should really take full blame, but the problem with that is it could very likely be a shell and as soon as any money is involved, they can just claim bankruptcy and close shop with virtually no responsibility.

Better yet, allow the management within the company to be directly responsible instead of letting the company act as a shield to protect the assholes within.
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Jay Blanc, 23 Mar 2011 @ 5:07am

Re: This is a problematic area
The most important thing for companies to remember is that there is no legal recognition of "Affiliates" being any different from someone directly employed or a contract worker. The same joint liability applies, and companies have to realise that taking on hundreds, or even thousands of "Affiliates" places them at liability risk.

If you do not want hoards of semi-anonymous people acting on your behalf, then don't employ hoards of semi-anonymous people as your "affiliates". If you do, then be prepared for the liability issues.
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Chronno S. Trigger (profile), 23 Mar 2011 @ 5:08am

Re:
But aren't you suggesting we punish the company on the off chance that they are intentionally doing it? Shouldn't we wait until we have proof that the company is doing something underhanded?
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The eejit (profile), 23 Mar 2011 @ 5:18am

Re: To a degree
But...But...Corporations are people too!

Won't someone please think of the pirate corn-farmers?

...think I've got it covered now.
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Shon Gale (profile), 23 Mar 2011 @ 5:25am

@Mike: You are a writer of good news articles. But you are definitely not a businessman. Duh! Protect your brand! Watch your affiliates like a hawk. Watch your ASS or LOSE it. One should have a monitoring program in place and in my experience you need to monitor the monitor.
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Richard (profile), 23 Mar 2011 @ 5:29am

Re: Re:
It can be very difficult to prove this kind of thing - so maybe not.

I think that if a company has a well published policy with regard to affiliates and can be seen to be taking action when they step (substantially) outside it then that should be enough to remove liability. It's one of thos (rare) situations where a certain amount of strict liability is justifiable.
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Anonymous Coward, 23 Mar 2011 @ 5:56am

Re:
I agree completely.

Another way to look at it is this:

In a free market, deceptive advertisement is problematic and needs to be stopped. The ultimate beneficiary of deceptive advertising is the company who's product is being advertised.

If you don't hold the company responsible, you create an incentive for the behavior to continue.

If you do hold them responsible, you create an incentive for them to police their own affiliates and prevent it from happening.

Seems like a no-brainer to me.
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Michial Thompson, 23 Mar 2011 @ 6:23am

Affiliate Programs
I cannot speak about the reviews and such directly, but I am currently involved in a lawsuit where a company I have a contract with, has an affiliat that is violating my contract.

In my case the court case is based on language in my contract that states that the other company will not facilitate in any way another of it's affiliates to compete with me for a period of time.

My court case actually involve multiple companies due to this language.

In the case of the reviews though, I would say that if LLS was aware of the deceptive practices of it's affiliate and did not take action to stop their affiliate then they should be held responsible. They directly benefited from the reviews, and they had an affiliation with the company, so at least in theory they should have been able to put a stop to the deceptive reviews.
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Anonymous Coward, 23 Mar 2011 @ 6:40am

The release implies that the reviews were being published on third party sites, with links back to the company.

Assuming this to be the case, 230 would not come into play.
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ChronoFish (profile), 23 Mar 2011 @ 6:44am

Re: To a degree
I would agree that *ultimately* the person/group/business/affilate doing the actual unlawful act should be held liable. BUT...it would be a two-step process.

The business who runs the affiliate program is liable for the paying of the fine levied by the government. If this fine is due to the actions of a 3rd party "contractor" (affiliate) then the company would have grounds for suing the affiliate.

This eliminates the "bogus/shadow" affiliate concern that are really setup by the company themselves.

-CF
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Anonymous Coward, 23 Mar 2011 @ 7:13am

One of the greatest inventions of online marketing has been the "rogue affiliate". Companies think that by simply registering a separate domain (usually with bogus registry info), and using it to publishing misleading material, that they can avoid liablity. They always link into their program with an affiliate code, and when they get called out on it, they blame the "rogue affiliate" and "shut down the offending account". Oh, they still take the traffic, but they are no longer paying that "rogue affiliate".

So quite often, affiliates aren't even really affiliates.

If they main site or program owner is aware of false advertising, they should be liable for accepting the traffic from it. That doesn't just mean "not paying the affiliate" but actively blocking traffic coming from that affiliate and not continuing to accept it. It means knowing who your affiliates are, and being able (and willing) to work with authorities to deal with deceptive marketing practices. No matter the structure, the selling company bears at least some responsiblity for how their products are marketed.
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The eejit (profile), 23 Mar 2011 @ 7:32am

Re:
This is one of those things that seems to be completely untested in courts, both in the US and elsewhere, and would be a very interesting case to watch.
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Chris Rhodes (profile), 23 Mar 2011 @ 7:36am

Re: Re: Re:
It can be very difficult to prove this kind of thing - so maybe not.

Due process is hard. Better to just shoot first and not have to ask questions at all.
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Chris Rhodes (profile), 23 Mar 2011 @ 7:41am

Re: It's called agency law
If you ask someone to do something and they do it wrong the liability falls on you if they believe that the actions were in the scope of what you directed them to do.
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Chris Rhodes (profile), 23 Mar 2011 @ 7:43am

Re: It's called agency law
If you ask someone to do something and they do it wrong the liability falls on you if they believe that the actions were in the scope of what you directed them to do.

I think the key section of that sentence is the last: "what you directed them to do".

Also, "if [the affiliate] believes" is I think incorrect, as anyone can say they believed anything. I would think it would be what a court decides a reasonable person would believe in the same circumstance.
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Anonymous Coward, 23 Mar 2011 @ 7:54am

Yes, it should. No exception.

(And yes, I'm answering the question in the title before reading the article.)
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Mike C. (profile), 23 Mar 2011 @ 8:00am

Re: This is a problematic area
What about allowing companies to set up an affiliate network, but as a guarantor of behavior instead of a simple business contract for services rendered. In other words, the affiliate is primarily responsible for the behavior that's at issue, but if the affiliate is a "throw away" account and the actual end user cannot be located then the company is on the hook for any fines and/or penalties.

This gives the company reason to (a) make sure affiliates are real people and not just throw away accounts and (b) make sure the contact info stays up to date so that any liability due to bad faith activities can be applied to the appropriate party.
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Art, 23 Mar 2011 @ 8:16am

I agree that it should be the reviewers that are responsible, unless it turns out that Legacy gave the affiliate a scripted review to post.

This particular company is interesting to me because I did a lot of research 1 year ago to find a learn-at-home guitar program and it was very obvious to me that most of the review sites for all the various guitar programs are done by affiliates.

I actually ended up ordering this program (Legacy Learn and Master Guitar) direct from the company (not through an affiliate link) and I am very happy with the program. It is too bad that this FTC action may hurt the reputation of the company because the program and the online community support offered by the instructor Steve Krenz is really amazing. (And no, I am not an affiliate of any kind :-)
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Anonymous Coward, 23 Mar 2011 @ 8:24am

"But aren't you suggesting we punish the company on the off chance that they are intentionally doing it? Shouldn't we wait until we have proof that the company is doing something underhanded?"

Lets see, you pay people to talk about your product but are not aware of what they are doing? Why would you pay them yet? Can I just send a company a bill that states I was reccomending them?

Why should a CEO be punished if the books are cooked? The CEO didn't audit the books.

SOX was created for just this purpose, punish those that did something wrong or should have known something was wrong. That is why the punishment in SOX for failing to provide proper oversight is almost as harsh as fraud.
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Paul Alan Levy (profile), 23 Mar 2011 @ 8:37am

Not a section 230 issue
Although I am confident, based on our disagreement when the blogger guidelines came out http://pubcit.typepad.com/clpblog/2009/10/do-the-ftcs-new-advertising-guidelines-run-afoul-of-sectio n-230.html, that Eric Goldman would disagree with me, but I don't see this as a section 230 issue. The company is being held liable (or at least faces the potential for liability) based on the relationship between the company and the affiliates, and not based on what the affiliates place online using the company's interactive computer system. You can debate whether or not it is a good idea to hold the company liable for the affiliates and on what standard. That is the subject of much of the commentary here. But that does not go to section 230.
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Anonymous Coward, 23 Mar 2011 @ 9:10am

Maybe this would force Google to clean up its ad network? A friend of mine had to reformat her hard drive after encountering a malware ad from Google AdSense. (Good thing I block ads...)
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The eejit (profile), 23 Mar 2011 @ 10:34am

Re:
no, but it would force those using AdSense to clean up their acts.
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CarlWeathersForPres (profile), 23 Mar 2011 @ 12:46pm

Re: Re: It's called agency law
Yeah, I paraphrased and left out reasonable person in both instances, but the point is still the same, if you direct someone to do a task and don't necessarily direct them how to do it, they can do the task in the manner they think it should be done.

Really, if it wasn't this way and I want to break the law, I just direct someone to help market online, impliedly illegally, and I get off because I "didn't know." The best way to limit the activity is to go after the people calling the shots, then they'll make sure that their agents(or affiliate in Mike's terms) will not commit the "evils" that congress decided to legislate against.
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Gene Cavanaugh, 24 Mar 2011 @ 3:20pm

Holding companies responsible for affiliate actions
Your articles are generally wonderful, but you are out-to-lunch on this one!
Many, many years ago, companies would, for example, hire marketing organizations (generally hard-to-find personages) and point out that misleading or even damaging advertising was "not me!". True, in those days the offenses were sometimes even violent (see Carnegie's history!).
This led to an expansion of "respondeat superior" - if you can show, both proactively and after the fact, that you did not encourage and do not encourage such acts, you may be okay - the act may have been a rogue action. Otherwise, you are responsible for the actions of the people you hire (so, no longer can you have someone you "do not control" turn machine guns on protestors!).
To me, the doctrine needs to be MORE strictly enforced.
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Eric Goldman (profile), 24 Mar 2011 @ 5:05pm

A couple of links
Paul Levy mentioned my posts on this topic. See http://blog.ericgoldman.org/archives/2009/10/a_fuller_defens.htm

I also note the 1-800 Contacts v. Lens.com decision, which rejected affiliate liability in the TM context: http://blog.ericgoldman.org/archives/2011/03/important_ninth.htm

I've generally taken the position that government regulators have a more expansive view of affiliate liability than the actual law; i.e., when tested in court, the regulators' views fail. http://blog.ericgoldman.org/archives/2008/08/affiliate_liabi.htm

Eric.
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affiliate marketing (profile), 12 Sep 2017 @ 2:55am

affiliate marketing
Affiliate marketing overlaps with other Internet marketing methods to some degree, because affiliates often use regular advertising methods. Those methods include organic search engine optimization (SEO), paid search engine marketing (PPC - Pay Per Click), e-mail marketing, content marketing and in some sense display advertising.
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