Perils of Affiliate Marketing - PMA 2008

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  • WHILE THE ACT AND THE FTC DETAIL WHAT CONSTITUTES WHEN AN EMAIL TRIGGERS THE PRIMARY PURPOSE RULE, THE EASIEST THING TO DO IS TO ASSUME CAN-SPAM APPLIES BECAUSE ITS REQUIREMENTS ARE SIMPLE DON’T BE DECEPTIVE IN YOUR SUBJECT LINES OR HEADERS HAVE A WORKING OPT-OUT METHOD IRONICALLY ENOUGH, THE ADVERTISER IS REQUIRED TO HAVE AN OPT-OUT LINK, BUT NOT THE MARKETER – ALTHOUGH THIS IS COMMON PRACTICE TO INCLUDE BOTH.
  • THE FTC CONTINUED TO SUFFER SETBACKS ON ITS VIEW OF STRICT LIABILITY FOR SENDERS INSTEAD – QUITE A PERMISSIVE STANDARD HAS DEVELOPED – SINCE THERE IS NO DUTY TO INVESTIGATE.
  • Hypertouch v. Kennedy-Western University S trict anti-spam policies and policing of affiliates defeated allegation of intent. ASIS Internet Services v. Opt-In Global, Inc. No duty to investigate
  • THIS PROPSAL EVOLVED AS IT WAS FORMULATED – BUT IT STEMS FROM THE FACT THAT AS WRITTEN – EMAIL AD NEWSLETTERS WOULD REQUIRE ALL ADVIERTISERS TO COMPLY THE SOLUTION – DESIGNATED SENDER. BUT IT HAS TO BE A SENDER – WHICH IS THE ADVERTISER.
  • BASIC RULE FOR OPT-OUTS YOU CAN GIVE A CHOICE, BUT NOT CONDITIONS OPT-OUT IS FOREVER
  • THIS IS A FACT BASED DETERMINATION IF YOU MERELY PERMIT/ENCOURAGE FORWARDING – NOT CAN-SPAM ISSUE IF YOU DO ANYTHING MORE – YOU’RE A SENDER
  • A CRITICAL ELEMENT OF CAN-SPAM WAS THAT IT HAD NO PRIVATE RIGHT OF ACTION . . . OR DID IT BACKDOOR ATTEMPTS B SPAMIGATORS TO CLAIM THEY ARE IASP HAVE BEEN SHUT DOWN FOR LACK OF SUBSTANTIAL HARM
  • AN OVERLOOKED, BUT NOT INCONSEQUENTIAL FACT, IS THAT THE FCC ALSO HAS JURISDICTION OVER CAN-SPAM. THE ONLY OPT-IN REQUIREMENT UNDER CAN-SPAM IS FOR WIRELESS EMAIL FCC REGS SPECIFY HOW CONSENT IS TO BE OBTAINED – IT REQUIRES SPECIFIC DISCLOSURES AND CANNOT BE LUMPED IN WITH OTHER CONSENT LANGUAGE.
  • ONLINE GAMBLING REMAINS ILLEGAL AND ADVERTISING ONLINE GAMBLING – EVEN QUASI GAMBLING SITES CAN SUBJECT YOU TO ACCESSORY LIABILTY NO SIGNS OF CHANGE IN CONGRESS – ALTHOUGH LEGALIZATION WOULD NET $40 BILLION IN TAX REVENUE OVER TEN YEARS THERE IS LIBERALIZATION IN EUROPE, BUT IT IS HIGHLY REGULATED, SO LOOK BEFORE YOU LEAP
  • WHAT COULD FORCE A CHANGE ARE DEVELOPMENTS AT THE WTO. IP RIGHTS HOLDERS MAY NOT BE VERY PLEASED IF ANTIGUA BECOMES THE PIRATE OF THE CARIBBEAN A MULTI-BILLION DOLLAR BATTLE WITH THE EU OVER ONLINE GAMBLING COULD FORCE THE US TO CHANGE ITS POSITION. BUT UNTIL THEN WE CAN THINK OF WHAT ELSE ANTIGUA HAS TO OFFER
  • FREE CAN BE VERY VERY EXPENSIVE THIS REPRESENTS THE $3.5 MILLION AT&T PAID TO THE FLORIDA AG
  • THE STATE OF FLORIDA HAS BEEN ACTIVE IN CRACKING DOWN ON FREE RINGTONE OFFRS.
  • SETTING CLEAR STANDARDS FOR EACH ELEMENT OF THE REQUIRED DISCLOSURES
  • EVEN ADDRESSING THE LEVEL OF COLOR CONTRAST REQUIRED
  • THE FTC HAS SET CLEAR STANDARDS FOR FREE OFFERS IN ITS CONSENT DECREES THAT ADDRESS COLOR, FONT, SIZE AND DISCLOSURE I ASKED THE FTC WHY DIDN’T THEY SUGGEST SELF REGULATORY GUIDELINES IN THIS AREA – IT MIGHT HAVE HELPED GIVEN
  • Perils of Affiliate Marketing - PMA 2008

    1. 1. Perils of Affiliate Marketing Andrew Lustigman, Esq. Partner Bennet Kelley, Esq. Founder Rudy Smith CEO November 21, 2008
    2. 2. What is Affiliate Marketing? <ul><li>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. </li></ul>WHAT?
    3. 3. Who uses Affiliate Marketing? <ul><li>Currently the most active sectors for affiliate marketing are the adult, gambling, and retail industries </li></ul>WHO? <ul><li>The three sectors expected to experience the greatest growth are the mobile phone, finance, and travel sectors </li></ul><ul><li>Source: Internet Statistics Compendium 2007 </li></ul>
    4. 4. Benefits of Affiliate Marketing <ul><li>Performance marketing / pay for results </li></ul><ul><li>Ability to track actions for compensation </li></ul>
    5. 5. Players in Affiliate Marketing <ul><li>Affiliate Networks – Provide services to merchants such as aggregation of affiliates and tracking </li></ul>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 $$$$$ Ad Ad $$$$$
    6. 6. Methods of Compensation <ul><li>C ost P er A ction – A fee for each registration / lead who registers </li></ul><ul><li>C ost P er C lick – a fee for each user that click through to visit a website </li></ul><ul><li>C ost P er S ale – A commission on a sale </li></ul>
    7. 7. Types of Affiliate Sites <ul><li>Content and niche market websites, including product review sites </li></ul>Comparison shopping websites and directories Coupon and rebate websites that focus on sales promotions
    8. 8. 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
    9. 9. Acquisition Creatives <ul><li>Banners </li></ul>
    10. 10. Acquisition Creatives (con’t ) <ul><li>Emails </li></ul>
    11. 11. <ul><li>Full Page Pop Under </li></ul>Acquisition Creatives (con’t)
    12. 12. Conversions
    13. 13. Different Types of Networks <ul><li>There are many different sources </li></ul><ul><li>Do your homework and find the right solution provider </li></ul>
    14. 14. Large Networks <ul><li>LinkShare </li></ul><ul><li>Performics/Google Network </li></ul><ul><li>Commission Junction </li></ul>
    15. 15. Third Party Technology Providers <ul><li>HitPath </li></ul><ul><li>Direct Track </li></ul><ul><li>Link Trust </li></ul>
    16. 16. Risks of Affiliate Marketing <ul><li>Compliance with CAN-SPAM </li></ul><ul><li>Online Gambling </li></ul><ul><li>False Advertising / Changing Advertisements </li></ul><ul><li>New York Affiliate Sales Tax – “Amazon Tax” </li></ul><ul><li>Collection and Sharing of Data (Privacy Policies) </li></ul>
    17. 17. Spaminess
    18. 18. 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-Out Mechanism for Advertiser UCE must be identified as “advertisement ”
    19. 19. CAN-SPAM Act Advertiser Liability <ul><li>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) </li></ul><ul><li>§ 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. </li></ul>
    20. 20. FTC FAILS TO WIN STRICT LIABILITY Impulse Media Group Verdict Follows Summary Judgment Denial in Cyberheat <ul><li>COURTS SET HIGH THRESHOLD FOR INTENT </li></ul><ul><li>Spamigators Lose On Summary Judgment in </li></ul><ul><li>Kennedy-Western Univ. and Opt-in Global </li></ul>CAN-SPAM NEWS Strict anti-spam policies and policing of affiliates sufficient to defeat allegation of intent. Friday Nov. 21, 2008 TOP STORIES SPAM-DAMONIUM Audience 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
    21. 21. Regulatory Timeline <ul><li>2004: FTC Final Rule on Adult Labeling </li></ul><ul><li> FCC CAN-SPAM Rules </li></ul><ul><li>2005: FTC (1) Final Rule on Primary Purpose of Email; and (2) Proposed Discretionary Rules </li></ul><ul><li>2006: </li></ul><ul><li>2007: </li></ul><ul><li>2008: FTC Final Discretionary Rules </li></ul>
    22. 22. <ul><li>Name must be in the “From” Line </li></ul><ul><li>Must be Responsible for CAN-SPAM compliance </li></ul><ul><li>Dropped requirement that Designated Sender be in control of the content or the mailing list used </li></ul>Must Be a Sender Under CAN-SPAM Cannot designate Non-Sender Designated Sender Rule
    23. 23. Opt-Out Mechanism <ul><li>Opt-Out Basics </li></ul><ul><ul><li>May offer opt-out options, but total opt-out must be one of them </li></ul></ul><ul><ul><li>No further use of email address after opt-out </li></ul></ul><ul><ul><li>Separate Business Units: Opt-out for Saab not opt-out for all GM </li></ul></ul><ul><li>Discretionary Regs </li></ul><ul><ul><li>Cannot impose any conditions on opt-out requests (e.g, fee or provide information) </li></ul></ul><ul><ul><li>Abandons proposal to reduce processing time to 3 days </li></ul></ul><ul><ul><li>Rejects call for expiration period for opt-out </li></ul></ul>
    24. 24. Forward to a Friend Rule
    25. 25. CAN-SPAM Plaintiffs <ul><li>No Consumer Private Right of Action </li></ul><ul><li>FTC & State AGs </li></ul><ul><li>Internet Access Service Provider (IASP) </li></ul><ul><ul><li>Adversely Effected by Violation </li></ul></ul><ul><ul><li>Must demonstrate substantial harm </li></ul></ul><ul><li>Civil Penalties </li></ul><ul><ul><li>$25 – $250 per email </li></ul></ul><ul><ul><li>$2 million maximum </li></ul></ul><ul><li>Damage Adjustments </li></ul><ul><ul><li>Treble damages if willful </li></ul></ul><ul><ul><li>Reduction if violation occurred despite commercially reasonable efforts to maintain compliance” </li></ul></ul>
    26. 26. CAN-SPAM Wireless Rules Toe-may-to Ta-mah-to Commercial Email Mobile Service Messages Recipient Consent No Express Consent Required Do Not Send Registry No Wireless Domains List Enforcement FTC FCC
    27. 27. Online Gambling <ul><li>US: Online gambling/ads are illegal </li></ul><ul><li>2007: Google, Microsoft & Yahoo: $31.5 MM Fine 2006: </li></ul><ul><li>BetOnSports indictment included Ad Agencies and their execs </li></ul><ul><li>DotNet sites are illegal unless </li></ul><ul><ul><li>there are no web links to an online gambling site; and </li></ul></ul><ul><ul><li>Home page has disclaimer stating the site is purely educational </li></ul></ul><ul><li>Online Gambling Liberalization in Europe </li></ul><ul><li>Still highly regulated </li></ul>
    28. 28. Antigua v. United States WTO Battle over Online Gambling <ul><li>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 </li></ul><ul><li>Awarded $21MM/yr in damages which may be recouped by suspending IP protection for US goods </li></ul><ul><ul><li>US-Antigua negotiations ongoing </li></ul></ul><ul><li>EU may bring similar claim </li></ul><ul><ul><li>Damages in billions </li></ul></ul><ul><ul><li>Decision expected by end of the year </li></ul></ul><ul><li>Dim prospects for efforts to repeal US ban </li></ul>ANTIGUA FRIDAY FORECAST 84 ○ AND SUNNY
    29. 29. The High Cost of Free*
    30. 31. Tallahassee Three Step Ringtone Offer Landing Page Requirements <ul><li>Zone 1 – Price and Term ($9.99 per month) </li></ul><ul><li>Must be disclosed entirely within 125 pixels in any direction from the cell submit field and the P.I.N. code submit field. </li></ul><ul><li>12pt. minimum font size </li></ul><ul><li>Must be disclosed in numerical format 0-9 and include $ and without any other text except price/term </li></ul><ul><li>Zone 2- Types of Content (Ringtones and Other Text Services) </li></ul><ul><li>Must be disclosed no greater than 20 pixels from the Offer Description (Get 10 Bonus Ringtones) </li></ul><ul><li>Other Text Services can be no smaller than 50% of the font size of the Offer </li></ul><ul><li>Description (Get 10 Bonus Ringtones) Minimum font size is 20pt. </li></ul><ul><li>Zone 3 – Age / Other T’s and C’s </li></ul><ul><li>Age description must be above T’s and C’s. Minimum 12pt. font size. </li></ul>
    31. 33. Internet Marketing FTC v. Adteractive <ul><li>Co-reg sites </li></ul><ul><ul><li>FreeGiftWorld.com </li></ul></ul><ul><ul><li>SamplePromotionsGroup.com </li></ul></ul><ul><li>Used allegedly deceptive spam and online advertising to lure consumers to co-reg sites </li></ul><ul><li>Subject lines such as, &quot;Test and keep this Flat-Screen TV,&quot; &quot;Test it – Keep it – Microsoft Xbox 360,&quot; and &quot;Congratulations! Claim Your Choice of Sony, HP or Gateway Laptop.&quot; </li></ul>$650,000 Penalty
    32. 34. FTC Consent Decrees <ul><li>QUALIFICATIONS TO “FREE” OFFERS MUST: </li></ul><ul><li>Be in the same color , font , and size and within close proximity </li></ul><ul><li>Disclose if purchase required </li></ul><ul><li>Disclose all monetary and non-monetary (e.g., credit card application) obligations a consumer is likely to incur to obtain the advertised gift. </li></ul>
    33. 35. New York Affiliate Sales Tax “Amazon Tax” <ul><li>New legislation requires certain out-of-state online retailers to start collecting New York sales tax </li></ul><ul><li>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 </li></ul>
    34. 36. New York Affiliate Sales Tax “Amazon Tax” <ul><li>Effective June 2008 </li></ul><ul><li>Legislation expands “nexus” connection to the state to trigger sales tax liability to include NY Internet-based affiliate marketing programs </li></ul><ul><li>Dubbed “Amazon Tax” because target seen as online retailer </li></ul>
    35. 37. <ul><li>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 </li></ul><ul><li>$10,000 in overall sales by retailer </li></ul><ul><li>Impact on having New York-based affiliates </li></ul><ul><li>Law requires registration and collection beginning June 1 st </li></ul>New York Affiliate Sales Tax “Amazon Tax”
    36. 38. <ul><li>Possible to defeat that presumption under certain circumstances </li></ul><ul><li>Contracting/Technical Service Bulletins </li></ul>New York Affiliate Sales Tax “Amazon Tax”
    37. 39. <ul><li>New York Department of Taxation issued a Technical Service Bulletin TSB-M-08(3)S on May 8, 2008 </li></ul><ul><li>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 </li></ul><ul><li>Relying on the 5/8 TSB, marketers have been modifying their affiliate agreements to limit New York-based affiliates to links alone </li></ul>TT New York Affiliate Sales Tax “Amazon Tax”
    38. 40. <ul><li>June 30, 2008 Department of Taxation issued a second bulletin-- TSB-M-08(3.1)S </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>Remember to call my accountant New York Affiliate Sales Tax – “Amazon Tax”
    39. 41. 6/30 TSB <ul><li>Proof of compliance condition – includes </li></ul><ul><li>Resident representative must submit annually certification of compliance with marketing limitations to retailer </li></ul><ul><li>If organization, representation that Website includes notification prohibiting members from engaging in marketing activities described above. </li></ul><ul><li>Representation as to awareness of auditing </li></ul>
    40. 42. Exemption Summary <ul><li>Prohibit marketing activities other than linking </li></ul><ul><li>Require affiliates that are clubs or not-for-profit organizations to place the information about the prohibition on their Web sites </li></ul><ul><li>Require all New York-based affiliates to submit to the merchant annual certifications that the affiliates are complying with the prohibition and disclosure requirements. </li></ul>
    41. 43. “ Amazon” Sales Tax Challenge <ul><li>Amazon and Overstock filed lawsuits in New York Supreme Court challenging law </li></ul><ul><li>Contends statute invalid under Quill - which requires a physical presence in state for nexus </li></ul><ul><li>Here NY law requires collection of tax even if there is no substantial nexus with company and NY </li></ul>
    42. 44. NY Sales Tax Developments <ul><li>Suits challenge the constitutionality of state’s interpretation and seek declaratory judgment that it is invalid </li></ul><ul><li>Vagueness and overly broad challenge </li></ul><ul><li>Improperly targets Amazon </li></ul><ul><li>Amazon.com now adding sales tax to orders shipped to New York pending the outcome of the lawsuit </li></ul>
    43. 45. Collection and Sharing of Data (Privacy Policies) <ul><li>Datran Media: Gratis Internet (myfreeipod.com) represented that it would “ never lend, sell or give out for any reason ” the information provided by users </li></ul><ul><li>Gratis sold 7 million files to Datran Media </li></ul><ul><li>Datran sent millions of unsolicited e-mails to the list </li></ul>
    44. 46. Datran Case <ul><li>NY AG investigated Datran </li></ul><ul><ul><li>Assurance of Discontinuance </li></ul></ul><ul><ul><li>$1.1 million ($750 as penalty) </li></ul></ul><ul><ul><li>Injunction Provisions </li></ul></ul>
    45. 47. Datran Case <ul><li>Destruction of data from Gratis </li></ul><ul><li>Bar on acquiring personal consumer information without first independently confirming that such acquisition is permissible under relevant seller privacy policies; and </li></ul><ul><li>Appoint a Chief Privacy Officer or other employee to oversee privacy compliance efforts </li></ul>
    46. 48. Datran Case <ul><li>Injunctive Provisions: </li></ul><ul><li>Independently review privacy policies in effect at time of data collection </li></ul><ul><li>Independently confirm that privacy policies represented sharing or if no representation, there is opt in to permit sharing </li></ul><ul><li>Retain copies for 5 years of privacy policies </li></ul><ul><li>Written representation from list owner insufficient </li></ul>
    47. 49. Questions? Andrew Lustigman, Esq. Partner [email_address] Bennet Kelley, Esq. Founder [email_address] Rudy Smith CEO [email_address]

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