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 drove internet traffic to the LeanSpa website by using fake news sites. LeadClick knew that the news site were fake 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 make those lies even 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 bough 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 liable for $4.1 million that it had collected from LeadClick and was sought by the FTC to provide consumer redress.
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 $3.7 million to consumers who bought the deceptively advertised product.
In early 2013, the FTC filed an amended complaint seeking an injunction against LeadClick, an affiliate marketing network operator for LeanSpa, and its parent company, CoreLogic. Inc., as well as a court order requiring them to turn over $11.9 million in ill-gotten gains they made through the deceptive supplement marketing scheme. 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 website.
Later that year, a U.S. district court in Connecticut ruled 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, CoreLofic, had to disgorge $4.1 million n ill-gotten gains it received from LeadClick, as par of the $11.9 million total judgment.