The document discusses various risks and regulatory issues related to affiliate marketing. It outlines what affiliate marketing is, who uses it, and the key players involved. Some risks discussed include compliance with anti-spam laws, dealing with online gambling regulations, and New York's "Amazon tax" which expanded sales tax collection requirements for out-of-state online retailers based on in-state affiliate marketing activities.

1. Perils of Affiliate Marketing Andrew Lustigman, Esq. Partner Bennet Kelley, Esq. Founder Rudy Smith CEO November 21, 2008

2. 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. WHAT?

3. Who uses Affiliate Marketing? Currently the most active sectors for affiliate marketing are the adult, gambling, and retail industries WHO? The three sectors expected to experience the greatest growth are the mobile phone, finance, and travel sectors Source: Internet Statistics Compendium 2007

4. Benefits of Affiliate Marketing Performance marketing / pay for results Ability to track actions for compensation

5. 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 $$$$$ Ad Ad $$$$$

6. Methods of Compensation C ost P er A ction – A fee for each registration / lead who registers C ost P er C lick – a fee for each user that click through to visit a website C ost P er S ale – A commission on a sale

7. 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

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. Acquisition Creatives Banners

10. Acquisition Creatives (con’t ) Emails

11. Full Page Pop Under Acquisition Creatives (con’t)

12. Conversions

13. Different Types of Networks There are many different sources Do your homework and find the right solution provider

14. Large Networks LinkShare Performics/Google Network Commission Junction

15. Third Party Technology Providers HitPath Direct Track Link Trust

16. 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)

17. Spaminess

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. 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.

20. FTC FAILS TO WIN STRICT LIABILITY Impulse Media Group Verdict Follows Summary Judgment Denial in Cyberheat COURTS SET HIGH THRESHOLD FOR INTENT Spamigators Lose On Summary Judgment in Kennedy-Western Univ. and Opt-in Global 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. 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

22. 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 Must Be a Sender Under CAN-SPAM Cannot designate Non-Sender Designated Sender Rule

23. 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

24. Forward to a Friend Rule

25. 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”

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. 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

28. Antigua v. United States WTO 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 ANTIGUA FRIDAY FORECAST 84 ○ AND SUNNY

29. The High Cost of Free*

31. Tallahassee Three Step Ringtone 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.

33. 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." $650,000 Penalty

34. 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.

35. 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

36. 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

37. 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 1 st New York Affiliate Sales Tax “Amazon Tax”

38. Possible to defeat that presumption under certain circumstances Contracting/Technical Service Bulletins New York Affiliate Sales Tax “Amazon Tax”

39. 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”

40. 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 accountant New York Affiliate Sales Tax – “Amazon Tax”

41. 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

42. 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.

43. “ 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

44. 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

45. 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

46. Datran Case NY AG investigated Datran Assurance of Discontinuance $1.1 million ($750 as penalty) Injunction Provisions

47. 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

48. 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

49. Questions? Andrew Lustigman, Esq. Partner [email_address] Bennet Kelley, Esq. Founder [email_address] Rudy Smith CEO [email_address]