Markets Wired

In a victory for consumers, the U.S. Court of Appeals for the Second Circuit has upheld a lower court ruling requiring the operator of an affiliate marketing group to pay $11.9 million for its part in helping to promote LeanSpa, a deceptively marketed weight-loss supplement.

In issuing its ruling, the Circuit Court found that LeadClick Media, LLC recruited affiliate marketers that used fake news sites to drive internet traffic to the LeanSpa website. The Court of Appeals also rejected LeadClick’s claim of immunity under the Communications Decency Act, finding such immunity inapplicable because LeadClick participated in the development of the deceptive content.

LeadClick knew that the news sites were phony and actively participated in creating their content. The decision is the first by a court of appeals holding the operator of an affiliate marketing network liable for deception by third-party marketers.

“LeadClick knew its affiliates were lying to consumers and took steps to help make those lies more effective,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “The Circuit Court’s ruling goes a long way toward ensuring that affiliate networks can’t hide behind claims of immunity when their consumer fraud is exposed.”

In the ruling, the Circuit Court also found that LeadClick bought advertising banner space from legitimate online news sites with the intent to resell it for use with fake news sites, “thereby increasing the likelihood that a consumer would be deceived by the content.” Separately, the Court found, however, that relief defendant CoreLogic, Inc., LeadClick’s parent company, could not be held liable for $4.1 million that it had collected from LeadClick and was sought by the FTC to provide consumer redress.

Case History. The FTC and the State of Connecticut first sued LeanSpa and its principal Boris Mizhen in 2011, charging them with using fake news websites to promote their products, making deceptive weight-loss claims, and telling consumers they could receive free trials of acai berry and “colon cleanse” products, while only paying the nominal cost of shipping and handling. The complaint alleged that many consumers ended up paying $79.99 for the “free” trial, and for recurring monthly shipments of products that were hard to cancel. The defendants allegedly made more than $25 million from consumers in the United States.

The FTC and the State of Connecticut subsequently settled with LeanSpa and Mizhen, who agreed to stop their deceptive practices and surrender assets for redress to consumers. The FTC later returned more than $3.7 million to consumers who bought the deceptively advertised product.

The FTC amended its complaint to add claims against LeadClick, an affiliate marketing network operator for LeanSpa, and CoreLogic, Inc., LeadClick’s parent company. The amended complaint alleged that LeadClick’s network lured consumers to LeanSpa’s online store through fake news websites designed to trick consumers into believing that real, independent news outlets and genuine customers, rather than paid advertisers and actors, had reviewed and endorsed LeanSpa’s products. The amended complaint also alleged that CoreLogic received tainted funds from LeadClick.

In 2015, a U.S. district court in Connecticut granted the FTC’s motion for summary judgment, ruling that the fake news sites developed by LeadClick’s affiliates deceived consumers. In finding LeadClick responsible for the deceptive content on its affiliates’ websites, the court noted that LeadClick recruited the affiliates, had power to approve or reject their marketing websites, paid the affiliates, purchased advertising space for them, and gave them feedback about the content of their sites.

In granting the FTC’s request for summary judgment, the court ordered LeadClick to disgorge the $11.9 million it received from LeanSpa as payment for its affiliate marketing services. It also ruled that LeadClick’s parent company, CoreLogic, had to disgorge $4.1 million in ill-gotten gains it received from LeadClick, as part of the $11.9 million total judgment.

LeadClick and Corelogic appealed the district court’s ruling, leading to the circuit court decision announced today.

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