False Advertising Liability for Affiliate Marketing

27 September 2016 IP Litigation Current Blog

The proliferation of e-commerce websites along with the rise of social media, blogging, and online communities has greatly increased the importance of affiliate marketing.  Affiliate marketing allows an affiliate to earn a commission by directing a customer to a company’s website to purchase a product.  Websites providing information, reviews, advice, and resources about particular types of products can earn substantial revenue by embedding affiliate links in webpages.  Affiliate marketers should be aware of a recent expansion in false advertising liability in the courts premised on negative reviews, rankings, and product comparisons.  Meanwhile, product manufacturers feeling aggrieved by statements made on product review websites now have a possible false advertising cause of action for seeking redress.

It has been a little more than two years since the Supreme Court rendered its decision in the Lexmark case clarifying the standing requirements for false advertising claims brought under the Lanham Act.  Just after the decision was rendered commentators began to warn that the decision changed the law in a way that would expand the scope of potential plaintiffs for false advertising claims to non-direct competitors.  Before the Lexmark decision various lower court decisions had limited false advertising causes of action to only situations in which the allegedly false representations were made by someone in direct competition with the plaintiff.  The Supreme Court eliminated that requirement and held that a plaintiff could have standing to sue for false advertising even if the parties were not direct competitors.  Lexmark International, Inc. v. Static Control Components, Inc., 134 S. Ct. 1377, 1393-95 (2014).  The elimination of the direct competitor requirement by the Supreme Court has now opened the door to false advertising suits against affiliate marketers.

Claims for false advertising are premised on § 43(a)(1) of the Lanham Act, which is codified at 15 U.S.C. § 1125(a)(1) as follows: “Any person who, on or in connection with any goods or services . . . uses in commerce . . . any . . . false or misleading description of fact, or false or misleading representation of fact, which . . . in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities, shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.”  The Supreme Court established a new test in Lexmark for standing that requires a plaintiff suing for false advertising to (1) allege an injury to a commercial interest in reputation or sales; and (2) show that such injury was proximately caused by defendant’s misrepresentations.  Lexmark, 134 S. Ct. at 1388-91.

Two recent district court opinions from the Southern District of New York demonstrate that courts are now willing to proceed with false advertising claims against affiliate marketers.  Casper Sleep, Inc. v. Mitcham, 2016 U.S. Dist. LEXIS 118771 (S.D.N.Y. Sept. 1, 2016); Enigma Software Grp. USA, LLC v. Bleeping Computer LLC, 2016 U.S. Dist. LEXIS 89160 (S.D.N.Y. July 8, 2016).  Both decisions note that Lexmark eliminated the direct competitor requirement for asserting claims of false advertising.

In Casper Sleep, the plaintiff Casper Sleep, Inc. sells mattresses over the Internet while the defendants Jack Mitcham and Mattress Nerd LLC operate a website that reviews mattresses.  According to the court, Mitcham has direct affiliate marketing relationships with Casper’s competitors but not with Casper, meaning that Mitcham collects sales commissions from those competitors when his readers purchase products through affiliate links on his website or with coupon codes that he provides.  Casper alleged that Mitcham’s reviews of the Casper mattress repeatedly recommend Casper’s competitors over Casper and contain affiliate links to various of Casper’s competitors’ products, along with an Amazon.com link to Casper’s product, but that in his “Disclaimer” at the bottom of the review Mitcham groups his relationships with everyone together, stating that “[t]his article includes ‘affiliate links,’ meaning that I’d get paid a commission if you purchased anything from them.”  Casper alleged that Mitcham’s statements suggesting that Mitcham has the same financial interest in sales of Casper products as he does in sales of competitors’ products caused Casper lost sales and diminished its goodwill in the marketplace.

Mitcham filed a motion to dismiss the false advertising claim brought by Casper, but the motion was denied in part.  The court reasoned that Mitcham’s “Disclaimer” plausibly materially misleads consumers by directly suggesting that Mitcham has the same pecuniary interest in pushing sales of Casper that he does in pushing sales of each of the other mattress companies mentioned in the review.  The court also reasoned that given that the reviews recommend Casper’s competitors’ mattresses over Casper’s mattresses, it is perfectly plausible that the alleged deception caused consumers to withhold trade from Casper, such that Casper suffered economic or reputational injury flowing directly from the alleged deception.  Mitcham argued that the false advertising claim should fail because Mitcham does not directly compete with Casper, but the court stated that such an argument is foreclosed by Lexmark, which explained that a direct-competition requirement is not required for a false advertising cause of action.

In Enigma Software, the plaintiff Enigma Software Group USA, LLC develops and markets computer security products including the anti-malware program SpyHunter, while defendant Bleeping Computer LLC owns and operates a computer support website.  According to the court, Bleeping generates profits through its affiliate program, under which it receives commissions from designated affiliate software companies for promoting their products on its website and, under that program, Bleeping posts affiliate links throughout its website which redirect users to third-party webpages where they can buy affiliate products.  The court noted that Bleeping does not receive commissions from Enigma on sales of SpyHunter, but it does have an affiliate arrangement with Malwarebytes, a competitor of Enigma.

According to the court opinion, the Bleeping website includes a “Forums” section where Bleeping offers advice and answers users’ questions about topics related to computer security and technology.  Enigma alleged that Bleeping has adopted and employed a pattern of making, in its Forums posts, false, inaccurate, misleading and disparaging statements about Enigma and SpyHunter while simultaneously recommending Malwarebytes’ anti-spyware product.  Enigma further alleged that Bleeping had a staff member with the handle Quietman7 who, in various posts on the Forums, both disparages Enigma’s product and encourages the purchase of Malwarebytes’ product as an alternative.  Bleeping filed a motion to dismiss the false advertising claim brought by Enigma, but the motion was denied in part.  The court reasoned that by holding Quietman7 out as a staff member who could be “trusted to give correct . . . answers” to users’ questions, users could have reasonably relied on this representation.  Bleeping argued that the false advertising claim should fail because Enigma and Bleeping are not direct competitors, but the court noted that, after Lexmark, a plaintiff need not allege that the parties are direct competitors.

Given the willingness of courts to proceed with false advertising claims against affiliate marketers, anyone involved in affiliate marketing should make sure that any reviews, rankings, and product comparisons are not falsified to improperly promote the products of affiliate companies while unfairly disparaging the products of other companies.  Product manufacturers feeling aggrieved by false statements made by affiliate marketers now have a potential false advertising cause of action to consider for seeking redress.  The prediction of expanded false advertising liability in view of the Supreme Court’s Lexmark decision is now ringing true for affiliate marketers.

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