Fed. Trade Comm'n v. LeadClick Media, LLC
| Citation | 838 F.3d 158 |
| Decision Date | 23 September 2016 |
| Docket Number | 15-1014-cv,Docket Nos. 15-1009-cv,August Term 2015 |
| Parties | Federal Trade Commission, State of Connecticut, Plaintiffs-Appellees, v. LeadClick Media, LLC, successor to LeadClick Media, Inc., CoreLogic, Inc., Defendants-Appellants, LeanSpa, LLC, a Connecticut limited liability company, NutraSlim, LLC, a Connecticut limited liability company, NutraSlim U.K. Limited, a United Kingdom limited liability company, DBA LeanSpa U.K. LTD, Boris Mizhen, individually and as an officer of LeanSpa, LLC, NutraSlim, LLC, and NutraSlim U.K. LTD, Richard Chiang, individually and as an officer of LeadClick Media, Inc., Angelina Strano, Relief Defendant, Defendants. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Walter P. Loughlin (David R. Fine, Elisa J. D'Amico, Paul F. Hancock, David A. Bateman, on the brief), K&L Gates LLP, New York, NY, Harrisburg, PA, Miami, FL, and Seattle, WA, for Defendant-Appellant LeadClick Media, LLC.
Jonathan D. Hacker (Anton Metlitsky, Burden H. Walker, on the brief), O'Melveny & Myers LLP, Washington, D.C. and New York, NY, for Defendant-Appellant CoreLogic, Inc.
Michele Arington , Assistant General Counsel (Jonathan E. Nuechterlein, General Counsel, Joel Marcus, Director of Litigation, on the brief), Office of the General Counsel, Federal Trade Commission, Washington, D.C., for Plaintiff-Appellee Federal Trade Commission.
George Jepsen, Attorney General, Jonathan J. Blake, Matthew F. Fitzsimmons, Assistant Attorney Generals, Office of the Attorney General, Hartford, CT, for Plaintiff-Appellee State of Connecticut.
Thomas M. Hefferon, William M. Jay, Goodwin Procter LLP, Washington, D.C., for Amici Curiae United States Chamber of Commerce, Consumer Mortgage Coalition, Consumer Data Industry Association, Independent Community Bankers of America, Mortgage Bankers Association, National Consumer Reporting Association, and Real Estate Providers Council.
Before: Hall, Lynch, and Chin, Circuit Judges.
In this case, plaintiffs-appellees the Federal Trade Commission (the “FTC”) and the State of Connecticut (the “State”) seek to hold defendant-appellant LeadClick Media, LLC (“LeadClick”) liable for its role in the use of deceptive websites to market weight loss products. LeadClick managed a network of affiliates—known as “publishers”—to advertise on the internet products of its merchant client, LeanSpa, LLC and related entities (collectively, “LeanSpa”). Some of these affiliates created deceptive websites, falsely claiming that independent testing confirmed the efficacy of the products. The FTC and the State brought this action below, asserting claims against LeadClick under Section 5 of the Federal Trade Commission Act (the “FTC Act”), 15 U.S.C. § 45(a)(1), and the Connecticut Unfair Trade Practices Act (“CUTPA”), C.G.S.A. § 42-110b(a). The FTC also filed a claim against defendant-appellant CoreLogic, Inc. (“CoreLogic”), LeadClick's parent company, as a relief defendant.
The district court (Hall, C.J. ) granted summary judgment in favor of the FTC and the State, holding that (1) LeadClick violated the FTC Act and CUTPA as a matter of law, and (2) LeadClick was not entitled to immunity under Section 230 of the Communications Decency Act (the “CDA”). It also ordered CoreLogic to disgorge money that it had received from LeadClick.
We affirm the district court's grant of summary judgment for the FTC and the State with respect to the claims against LeadClick, reverse as to the claim against CoreLogic, and remand with instructions to the district court to enter judgment in favor of CoreLogic.
The facts are largely undisputed and may be summarized as follows.
Until ceasing operations in 2011, LeadClick operated an affiliate-marketing network to provide advertising in internet commerce. LeadClick arranged for advertising for its merchant clients by connecting them to third-party publishers—affiliates—who advertised the merchant's products. The affiliates advertised products in a variety of ways, including email marketing, banner ads, search-engine placement, and creating advertising websites. LeadClick managed the affiliate network through tracking software, referred to as “HitPath,” that would “track the flow of traffic from each individual affiliate's marketing website to the merchant's website while remaining invisible to the consumer.” J. App. at 986 ¶¶ 120-21.
In 2011, LeadClick employed a staff of eight to ten people in its “eAdvertising” division. Some of those employees worked as affiliate managers, managing relationships with affiliate marketers, while others worked as account managers, managing relationships with merchants. Affiliate managers were responsible for scouting and recruiting new affiliates, researching affiliates, and matching affiliates with particular merchant offers. LeadClick would review and control which affiliates were selected to provide online advertising for each merchant's offer.
Independent from its eAdvertising affiliate network business, LeadClick engaged in “media buying” by purchasing advertisement space for banner advertisements from well-known websites. After LeadClick purchased media space, it would resell the space, sometimes to affiliate marketers, at a markup.
In August 2010, an eAdvertising account manager contacted LeanSpa to solicit business, suggesting that “LeanSpa could be a great fit in the eAds network.” J. App. at 714-15a. LeanSpa, an internet retail business, sold purported weight-loss and colon-cleanse products under various brand names. LeanSpa hired LeadClick to provide online advertising through its affiliate network in September 2010.
Pursuant to their contractual arrangement, LeanSpa was to pay LeadClick a set amount—typically $35 to $45—each time a publisher's advertisement directed an online consumer to LeanSpa's landing page and that consumer enrolled in LeanSpa's free-trial program (referred to herein as an “action”).1 This arrangement was commonly referred to in the affiliate marketing industry as a cost per action (“CPA”) agreement. LeadClick was responsible for paying 80 to 90 percent of the amount it charged LeanSpa per action to the publisher under separate CPA agreements with its affiliate marketers. LeadClick would retain the difference as compensation for its role connecting merchants with its affiliate network and managing those affiliates.
To keep track of individual actions, LeadClick provided a unique link to its affiliate marketers for use in LeanSpa advertisements. When customers clicked on that link, they would unknowingly be routed through the HitPath server to the LeanSpa website. The HitPath server would record information on the customer, including the specific affiliate that directed the consumer to LeanSpa. The data was then used by LeadClick to determine the total number of actions for which it could charge LeanSpa and its corresponding contractual liability to the individual affiliates responsible for those actions. Because both LeadClick and its affiliate marketers profited per action generated, they were incentivized to maximize consumer traffic to LeanSpa's websites.
As the business relationship progressed, LeadClick became LeanSpa's primary marketing network, and LeanSpa became LeadClick's “top customer.” J. App. at 343a; 908a; 1016a. By 2011, LeanSpa offers represented approximately 85 percent of all eAdvertising division sales.
In total, LeadClick billed LeanSpa $22 million over the course of their contractual agreement. LeanSpa was chronically behind on its payments to LeadClick: LeanSpa owed LeadClick $6.4 million by March 2011 and approximately $10 million by June 2011. LeanSpa ultimately paid LeadClick $11.9 million, approximately half of its outstanding bill.
In accordance with industry practice, LeadClick paid its publishers before it received payment from LeanSpa. Despite LeanSpa's steep outstanding balance, LeadClick continued to pay its affiliate marketers for advertising LeanSpa products online. In September of 2011, LeadClick terminated its business arrangement with LeanSpa.
Certain affiliates hired by LeadClick used fake news sites to market LeanSpa products. These fake news sites, which were common in the industry at the time, looked like genuine news sites: they had logos styled to look like news sites and included pictures of supposed reporters next to their articles. The articles generally represented that a reporter had performed independent tests that demonstrated the efficacy of the weight loss products. The websites also frequently included a “consumer comment” section, where purported “consumers” praised the products. But there were no consumers commenting—this content was invented.
The vast majority of internet traffic to LeanSpa's websites from LeadClick's affiliate network came from fake news sites. The FTC investigator who reviewed spreadsheets produced by LeadClick, which documented traffic to LeanSpa's website from LeadClick affiliates, found that all of the 24 identifiable affiliate websites that sent 1,000 or more consumers through LeadClick's affiliate network were fake news sites.
While LeadClick did not itself create fake news sites to advertise products, as discussed below, it (1) knew that fake news sites were common in the affiliate marketing industry and that some of its affiliates were using fake news sites, (2) approved of the use of these sites, and, (3) on occasion, provided affiliates with content to use on their fake news pages.
First, LeadClick knew that fake news sites were commonplace in the industry. For example, one eAdvertising division employee noted that in the summer of 2010, fake news sites were “fairly common,” J. App. at 158-59a, while another testified in his deposition that during his time...
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