There is nothing new about the FTC bringing enforcement actions based on deceptive advertising practices.  Those cases are the FTC’s bread and butter.  But in recent years the FTC has been pushing forward with cases that address the increasingly complex network of entities involved in marketing, including companies that collect, buy, and sell consumer information and play other behind-the-scenes roles in marketing campaigns.  The FTC has also taken a strong interest in deceptively formatted advertising, including “native” advertising that does not adequately disclose sponsorship connections.  A recent Court of Appeals decision highlights the potential for any internet company to be liable for a deceptive advertising campaign that it had a hand in orchestrating – even if the company itself does not create the advertising material.

The decision in this case, FTC v. LeadClick Media, LLC, comes from the U.S. Court of Appeals for the Second Circuit and is a significant victory for the FTC and its co-plaintiff, the State of Connecticut.  Specifically, the decision holds that online advertising company LeadClick is liable for the deceptive ads that were published as part an advertising campaign that it coordinated, even though LeadClick itself did not write or publish the ads.  In addition, the Second Circuit rejected LeadClick’s argument that its ad tracking service provided it with immunity from the FTC’s action under Section 230 of the Communications Decency Act (CDA).

Background of the LeadClick Case

Three main players were involved in the advertising campaign at issue in FTC v. LeadClick.  LeanSpa, a marketer of weight-loss and colon-cleanse products; LeadClick, which was hired by LeanSpa to market its products; and a network of “affiliates” or “publishers,” which contracted with LeadClick to develop websites and place ads that promoted LeanSpa products.  According to the Second Circuit, “the vast majority of internet traffic to LeanSpa’s websites from LeadClick’s affiliate network came from fake news sites.”

LeadClick provided its affiliates with unique links to use in LeanSpa ads.  LeadClick ran a service called HitPath, which registered clicks from these ads, allowing LeadClick to observe individual clicks on the ads and attribute them to the correct affiliate.  LeadClick used the information from HitPath to determine how much to charge LeanSpa and pay its affiliates.  Although it was LeanSpa’s claims of “free trials” of its products and its affiliates’ fake news representations that initially brought the FTC’s attention in 2011, it was LeadClick’s role in coordinating the marketing campaign that was litigated all the way up to the Second Circuit.  (All other defendants except one settled with the FTC long ago.)

LeadClick’s Defense Under the FTC Act

LeadClick argued that it could not be held liable for deception under Section 5 of the FTC Act because it did not create the deceptive content that appeared on its affiliates’ websites.  The Second Circuit, however, followed several other federal courts of appeal in holding that a defendant can be held liable for a third party’s misrepresentations.  Specifically, “a defendant may be held liable for engaging in deceptive practices or acts if, with knowledge of the deception, it either directly participates in a deceptive scheme or has the authority to control the deceptive content at issue.”  The Second Circuit underscores that this is a form of direct liability, not “merely aiding and abetting the deceptive conduct of another.”

The Second Circuit cited abundant evidence to support the conclusion that LeadClick knew about its affiliates’ misrepresentations.  Employees testified that there were “many” fake news sites among LeadClick’s affiliates, and “everyone was using ‘em.”  The Second Circuit also pointed to numerous ways in which LeadClick had control over or directly participated in the creation of deceptive content.  For instance, LeadClick, on its own initiative and at the direction of LeanSpa, required affiliates to alter content on their sites.  LeadClick also purchased advertising space on real news sites for its affiliates to use.  Finally, LeadClick had authority to approve affiliates’ use of fake news formats, and LeadClick exercised this authority.

LeadClick’s Section 230 Defense

The Second Circuit also rejected LeadClick’s argument that its HitPath service gave it immunity under CDA Section 230 – something that any company participating in online advertising economy will want to note.  As the court, this blog, and many others have noted, Section 230 immunity is broad:  the provider of an “interactive computer service” may not be “treated as the publisher or speaker” of information provided by a third party.  Although Section 230 was developed as a reaction to cases that held an online service provider liable for a user’s defamatory statement, the statute applies to a far broader range of third-party content – including deceptive statements.

In this case, however, the Second Circuit held that Section 230 does not apply to LeadClick, for the simple reason that the FTC’s case against LeadClick was based on the company’s direct participation in the development of deceptive advertising for LeanSpa.  Thus, in the court’s view, LeadClick was sued by the FTC for its own deceptive conduct – approving deceptive fake news, buying space for deceptive banner ads, etc. –not for publishing the content of another speaker.

What’s the takeaway from this decision?  An internet company cannot expect to take advantage of Section 230’s immunity when it steps beyond the role of a “neutral intermediary” and gets involved in the decisions about the messages that content will carry.  When a company is so deeply involved in the creation of the content, as was the case in LeadClick, it may not only lose its Section 230 immunity but also become directly liable for deception under the FTC Act – even if it did not create the offending content.