Perils of Affiliate Marketing - PMA 2008

Perils of Affiliate Marketing

Andrew Lustigman, Esq.Partner

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Bennet Kelley, Esq.Founder

Rudy SmithCEO

November 21, 2008

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What is Affiliate Marketing?

Affiliate marketing is an Internet-based marketing practice in which a business rewards one or more affiliates for each visitor or customer brought about by the affiliate's marketing efforts.

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Who uses Affiliate Marketing?

Currently the most active sectors for affiliate marketing are the adult, gambling, and retail industries

The three sectors expected to experience the greatest growth are the mobile phone, finance, and travel sectors

Source: Internet Statistics Compendium 2007

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Benefits of Affiliate Marketing

Performance marketing / pay for results

Ability to track actions for compensation

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Players in Affiliate Marketing

Affiliate Networks – Provide services to merchants such as aggregation of affiliates and tracking

Publishers or Affiliates – Third parties that promote the goods, services or benefits of an advertiser (merchant) in an affiliate marketing program in exchange for compensation

Merchant – The advertisers in an affiliate marketing program

$$$$$

$$$$$

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Methods of Compensation

Cost Per Action – A fee for each registration / lead who registers

Cost Per Click – a fee for each user that click through to visit a website

Cost Per Sale – A commission on a sale

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Types of Affiliate Sites

Content and niche market websites, including product review sites

Comparison shopping websites and directories

Coupon and rebate websites that focus on sales promotions

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Types of Affiliate Sites (con’t)

Search affiliates -utilize pay per click search engines to promote the advertisers' offers

Registration path or co-registration affiliates who include offers from other merchants during the registration process on their own website

Weblogs and website syndication feeds

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Acquisition Creatives

Banners

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Acquisition Creatives (con’t)

Emails

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Full Page Pop Under

Acquisition Creatives (con’t)

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Conversions

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Different Types of Networks

There are many different sources

Do your homework and find the right solution provider

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Large Networks

LinkShare Performics/Google Network Commission Junction

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Third Party Technology Providers

HitPath Direct Track Link Trust

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Risks of Affiliate Marketing

Compliance with CAN-SPAM

Online Gambling False Advertising /

Changing Advertisements New York Affiliate Sales Tax

– “Amazon Tax” Collection and Sharing of

Data (Privacy Policies)

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Spaminess

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CAN-SPAM Principal Requirements

From line must identify initiator

Subject line must not be deceptive. Adult Messages must provide notice.

Postal Address for Advertiser

Requires Working Opt-OutMechanism for Advertiser

UCE must be identified

as “advertisement”

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CAN-SPAM Act Advertiser Liability

The intent . . . is to make a company responsible for e-mail messages that it hires a third party to send, unless that third party engages in renegade behavior that the hiring company did not know about. However, the hiring company cannot avoid responsibility by purposefully remaining ignorant of the third party’s practices. (Senate Report)

§ 3(12) PROCURE- . . . means intentionally to pay or provide other consideration to, or induce, another person to initiate such a message on one's behalf.

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CAN-SPAM NEWS

FTC FAILS TO WIN STRICT LIABILITY

Impulse Media Group Verdict Follows Summary Judgment

Denial in Cyberheat

COURTS SET HIGH THRESHOLD FOR

INTENTSpamigators Lose On Summary Judgment in

Kennedy-Western Univ. and Opt-in Global

Strict anti-spam policies and policing of affiliates sufficient to defeat allegation of intent.

Friday Nov. 21, 2008

TOP STORIES

SPAM-DAMONIUMAudience Celebration at Affiliate

Marketing Presentation Spills Into Michigan Avenue

Cyberheat ultimately settled with FTC and agreed to monitor its affiliates.

BUT . . . No duty to investigate

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Regulatory Timeline

2004: FTC Final Rule on Adult Labeling FCC CAN-SPAM Rules

2005: FTC (1) Final Rule on Primary Purpose of Email; and (2) Proposed Discretionary Rules

2006:

2007:

2008: FTC Final Discretionary Rules

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Must Be a Sender Under CAN-SPAM

Cannot designate Non-Sender

Name must be in the “From” Line

Must be Responsible for CAN-SPAM compliance

Dropped requirement that Designated Sender be in control of the content or the mailing list used

Designated Sender Rule

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Opt-Out Mechanism

Opt-Out Basics• May offer opt-out options, but

total opt-out must be one of them

• No further use of email address after opt-out

• Separate Business Units: Opt-out for Saab not opt-out for all GM

Discretionary Regs• Cannot impose any conditions

on opt-out requests (e.g, fee or provide information)

• Abandons proposal to reduce processing time to 3 days

• Rejects call for expiration period for opt-out

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CAN-SPAM Plaintiffs

• No Consumer Private Right of Action

• FTC & State AGs

• Internet Access Service Provider (IASP)

– Adversely Effected by Violation– Must demonstrate substantial

harm

• Civil Penalties– $25 – $250 per email– $2 million maximum

• Damage Adjustments– Treble damages if willful– Reduction if violation occurred

despite commercially reasonable efforts to maintain compliance”

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CAN-SPAM Wireless Rules

Commercial Email

Mobile Service Messages

Recipient Consent

No Express Consent Required

Do Not Send Registry

No Wireless Domains List

Enforcement FTC FCC

Toe-may-to Ta-mah-to

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Online Gambling

US: Online gambling/ads are illegal• 2007: Google, Microsoft & Yahoo: $31.5 MM Fine 2006: • BetOnSports indictment included Ad Agencies and their execs

• DotNet sites are illegal unless– there are no web links to an online gambling site; and– Home page has disclaimer stating the site is purely

educational

Online Gambling Liberalization in Europe• Still highly regulated

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Antigua v. United StatesWTO Battle over Online Gambling

• WTO: To the extent online gambling was allowed within the U.S. (some states permit online gambling for horse racing), foreign companies were entitled to equal access to this market

• Awarded $21MM/yr in damages which may be recouped by suspending IP protection for US goods– US-Antigua negotiations ongoing

• EU may bring similar claim– Damages in billions– Decision expected by end of the year

• Dim prospects for efforts to repeal US ban

ANTIGUAFRIDAY FORECAST

84○ AND SUNNY

The High Cost of Free*

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Tallahassee Three StepRingtone Offer Landing Page Requirements• Zone 1 – Price and

Term ($9.99 per month)

• Must be disclosed entirely within 125 pixels in any direction from the cell submit field and the P.I.N. code submit field.

• 12pt. minimum font size• Must be disclosed in

numerical format 0-9 and include $ and without any other text except price/term

Zone 2- Types of Content (Ringtones and Other Text Services)

• Must be disclosed no greater than 20 pixels from the Offer Description (Get 10 Bonus Ringtones)

• Other Text Services can be no smaller than 50% of the font size of the Offer

• Description (Get 10 Bonus Ringtones) Minimum font size is 20pt.

Zone 3 – Age / Other T’s and C’s

• Age description must be above T’s and C’s. Minimum 12pt. font size.

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Internet Marketing FTC v. Adteractive

Co-reg sites• FreeGiftWorld.com• SamplePromotionsGroup.com

Used allegedly deceptive spam and online advertising to lure consumers to co-reg sites

Subject lines such as, "Test and keep this Flat-Screen TV," "Test it – Keep it – Microsoft Xbox 360," and "Congratulations! Claim Your Choice of Sony, HP or Gateway Laptop."

FTC Consent Decrees

QUALIFICATIONS TO “FREE”

OFFERS MUST: • Be in the same color, font, and

size and within close proximity

• Disclose if purchase required• Disclose all monetary and non-

monetary (e.g., credit card application) obligations a consumer is likely to incur to obtain the advertised gift.

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New York Affiliate Sales Tax “Amazon Tax”

New legislation requires certain out-of-state online retailers to start collecting New York sales tax

The law is meant to increase tax revenues and to even the playing field for New York-based online retailers, who already collect the tax

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New York Affiliate Sales Tax “Amazon Tax”

Effective June 2008 Legislation expands “nexus”

connection to the state to trigger sales tax liability to include NY Internet-based affiliate marketing programs

Dubbed “Amazon Tax” because target seen as online retailer

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The new law is based on a novel definition of what constitutes a presence in the state: It includes any Web site based in the state that earns a “referral fee” for sending customers to an online retailer

$10,000 in overall sales by retailer Impact on having New York-based

affiliates Law requires registration and

collection beginning June 1st

New York Affiliate Sales Tax “Amazon Tax”

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Possible to defeat that presumption under certain circumstances

Contracting/Technical Service Bulletins

New York Affiliate Sales Tax “Amazon Tax”

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New York Department of Taxation issued a Technical Service Bulletin TSB-M-08(3)S on May 8, 2008

The 5/8 TSB interprets the law to suggest that an affiliate only utilizing links to the marketer's site, without further promotion of the relationship, would not trigger nexus or the obligation to collect tax

Relying on the 5/8 TSB, marketers have been modifying their affiliate agreements to limit New York-based affiliates to links alone

TT

New York Affiliate Sales Tax “Amazon Tax”

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June 30, 2008 Department of Taxation issued a second bulletin-- TSB-M-08(3.1)S

Contractually obligating New York-based affiliates to limit their marketing activities is a necessary part of defeating the nexus presumption, but not sufficient by itself

Any nonprofit or other organization serving as an affiliate must “maintain on its Web site information alerting its members to the prohibition against” marketing methods beyond the mere link

Remember to call

my accountan

t

New York Affiliate Sales Tax – “Amazon Tax”

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6/30 TSB

Proof of compliance condition – includes Resident representative must submit

annually certification of compliance with marketing limitations to retailer

If organization, representation that Website includes notification prohibiting members from engaging in marketing activities described above.

Representation as to awareness of auditing

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Exemption Summary

Prohibit marketing activities other than linking

Require affiliates that are clubs or not-for-profit organizations to place the information about the prohibition on their Web sites

Require all New York-based affiliates to submit to the merchant annual certifications that the affiliates are complying with the prohibition and disclosure requirements.

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“Amazon” Sales Tax Challenge

Amazon and Overstock filed lawsuits in New York Supreme Court challenging law

Contends statute invalid under Quill - which requires a physical presence in state for nexus

Here NY law requires collection of tax even if there is no substantial nexus with company and NY

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NY Sales Tax Developments

Suits challenge the constitutionality of state’s interpretation and seek declaratory judgment that it is invalid

Vagueness and overly broad challenge Improperly targets Amazon Amazon.com now adding sales tax to orders

shipped to New York pending the outcome of the lawsuit

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Collection and Sharing of Data (Privacy Policies)

Datran Media: Gratis Internet (myfreeipod.com) represented that it would “never lend, sell or give out for any reason” the information provided by users

Gratis sold 7 million files to Datran Media

Datran sent millions of unsolicited e-mails to the list

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Datran Case

NY AG investigated Datran• Assurance of Discontinuance

• $1.1 million ($750 as penalty)

• Injunction Provisions

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Datran Case

Destruction of data from Gratis

Bar on acquiring personal consumer information without first independently confirming that such acquisition is permissible under relevant seller privacy policies; and

Appoint a Chief Privacy Officer or other employee to oversee privacy compliance efforts

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Datran Case

Injunctive Provisions: Independently review privacy policies in

effect at time of data collection Independently confirm that privacy policies

represented sharing or if no representation, there is opt in to permit sharing

Retain copies for 5 years of privacy policies Written representation from list owner

insufficient

Questions?

Andrew Lustigman, Esq.Partnerandy@lustigmanfirm.com

Bennet Kelley, Esq.Founderbkelley@internetlawcenter.net

Rudy SmithCEOrudy@jbrmediaventures.com