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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, [email protected]
Bennet Kelley, [email protected]
Rudy [email protected]
