Know the risks in affiliate marketing

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Linda Goldstein
Linda Goldstein

The use of affiliate marketers is a highly efficient and effective way for marketers to generate online traffic and new customers. The lack of control that a marketer has over the actions of its affiliates, however, creates increased risk of regulatory action. Recent actions by the Federal Trade Commission (FTC) make clear that lack of control by a marketer will be no defense to an enforcement action.

The FTC has a long history of holding marketers accountable for the actions of those who engage in advertising and marketing activities on their behalf. In the last decade for example, the FTC brought numerous enforcement actions against marketers based on the violations of the Telemarketing Sales Rule or Do Not Call List by their agents. Indeed, even in cases where the marketer seemingly had no knowledge of the violation, the FTC took the position that the marketer had an affirmative obligation to monitor the activities of its telemarketing agents to ensure that they are complying with the law.

The world of affiliate marketing presents even greater challenges for marketers as the identity of the publishers is often unknown to the marketer and it is virtually impossible for any marketer to effectively monitor all of activities of its affiliates. Nonetheless the FTC has made clear that targeting misleading advertising by affiliate marketers will be a top priority for the FTC.

In a recent speech, FTC Bureau Director David Vladeck expressed a growing concern over false and deceptive claims being made by affiliates about products, fake blogs and other content that is not clearly identified as advertising. He warned that legitimate marketers should play a role in bringing order and accountability to the affiliate marketing industry. The FTC's New Testimonial and Endorsement Guidelines have created a new landscape for marketers and their affiliates as the Guidelines make clear that both the marketer and the affiliate can be liable for false product claims and for the failure of the affiliate to disclose material connections to the advertiser.

Recently, the FTC demonstrated just how serious it is about its affiliate marketing initiative when it brought an action for a temporary restraining order and asset freeze against the organization I Works and its principals. This case is one of the largest cases to be brought yet by the Commission in the affiliate marketing space. The taken action of an asset freeze is an indicator of just how aggressive the FTC is likely to be on this issue. The FTC is also seeking full restitution.

The case is significant in relation to affiliate marketing because many of the ads in question were disseminated by affiliates over whom I Works allegedly did not have control. Thus this case will undoubtedly address the question of whether and to what extent the marketer can be held liable for the acts of its affiliates and what degree of monitoring is necessary to avoid liability.

The case serves as good wake-up call to marketers utilizing the services of affiliate networks to ensure that they have reasonable and proper monitoring and compliance procedures in place designed to control the action of their affiliates. A reasonable compliance and monitoring program should at a minimum include the following:

  1. Know your affiliates. If you are contracting with a broker or network, ask them to identify the affiliates and publishers that they use. Transparency is important.
  2. Establish procedures to regularly and routinely monitor the affiliate ads and the traffic being generated by those ads.
  3. Provide clear guidelines and instructions to the affiliates. Make sure they know what claims they can and cannot make about your products and instruct them to disclose the existence of material connections with you. Content such as fake blogs, user reviews and the like should never be tolerated.
  4. Put teeth into your compliance and monitoring programs. Do not process orders generated from non-compliant ads, and take appropriate disciplinary action against affiliates who violate your policies.

At the end of the day, as we saw in the telemarketing arena, the FTC may be moving toward a standard of strict liability. Having an effective compliance monitoring program in place should certainly help mitigate the risk. It is no longer a luxury—it's a necessity for any marketer in the affiliate marketing space.

Linda Goldstein is partner and chair of the advertising, marketing, media & entertainment division at law firm Manatt, Phelps & Phillips in New York City.

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