When are you responsible for the actions of your affiliate marketers?  A recent decision in FTC v. Credit Bureau Center, issued by the United States District Court for the Northern District of Illinois, provides some helpful guidance.  

Credit Bureau Center ("CBC"), owned and operated by Michael Brown, runs several websites, including CreditUpdates.com, FreeCreditNation.com, and eFreeScore.com.  For a monthly subscription fee, these sites provide credit scores, credit reports, and credit monitoring.  One of the ways that CBC generates business is through affiliate marketers who receive commissions for referring customers to the sites.  This case focuses on whether CBC and Brown are responsible for the actions of two of CBC's affiliates, Danny Pierce and Andrew Lloyd (who had already settled with the FTC).  

Several months after Pierce became a CBC affiliate, he asked CBC to create specific websites to which he could direct the customers he referred.  The websites created by CBC advertised that customers could obtain a "free credit score and report."  In smaller type, the websites disclosed that by signing up for the "free" service, customers would be enrolled in a monthly credit monitoring service for $29.94 per month. 

Pierce then engaged Lloyd to post Cragislist ads that promoted the availability of rental properties. However, in order to get information about those properties, customers had to first obtain a credit report through CBC.  There were no rental properties available, however -- which, as you can imagine, created a lot of unhappy customers.  The court wrote, "Customers complained that they were never connected with a landlord after obtaining a credit report and that they did not realize that they had been enrolled in CBC's credit monitoring service."  

After settling with Pierce and Lloyd, the FTC sued CBC and Brown, alleging violations of the FTC Act, ROSCA, and the Free Credit Reports Rule, and soon thereafter obtained a preliminary injunction.  In a decision issued in late June, the court granted summary judgment to the FTC. 

The court held that the Craigslist advertising campaign violated the FTC Act, writing that "No reasonable jury could find that the Craigslist scheme did not involve unfair or deceptive practices, as it was rife with material misrepresentations that were likely to deceive a reasonable consumer."  In particular, the court pointed to the fact that the defendants advertised rental properties that didn't exist or that they didn't have the authority to rent.  The court also found that CBC is liable for the affiliates' actions here, since "Principals are liable for the misrepresentations of their agents under the FTC Act."  

Although there was originally a dispute about whether the affiliates acted with actual authority, the defendants ultimately conceded that point, acknowledging that they ratified the conduct by "accepting the benefits of their efforts while aware of their misconduct."  The court said that, even if the point had not been conceded, it would have made the same finding.  To establish that CBC ratified the affiliates' conduct, the FTC must demonstrate that CBC knew of the conduct and provided "long term acquiescence" by accepting the benefits of the conduct.

The court also held that the websites to which interested renters were directed also violated the FTC Act.  The court found that consumers would not understand that the "free" offer included being signed up for a $29.94 per month credit monitoring service.  The court also held that the websites violated ROSCA (since consumers hadn't given their express informed consent to the transaction) and the Free Credit Report Rule (since consumers didn't receive proper notice that they were entitled to annual free credit reports). 

The court also held that CBC's owner is personally liable for CBC's conduct.  To establish an individual's personal liability for the conduct of a company, the FTC must show:  (1) the company's liability; (2) the individual's knowledge of the practices; and (3) the individual's control over or direct participation in the practices at issue.   To establish an individual's knowledge, the FTC can present "evidence that the individuals had actual knowledge of material misrepresentations, reckless indifference to the truth or falsity of such representations, or an awareness of a high probability of fraud along with an intentional avoidance of the truth." 

Here, the court found that Brown was personally liable because not only did he create the deceptive websites, but he was aware of enough information about the deceptive Cragislist marketing scheme to make him "at the very least, recklessly indifferent toward or intentionally ignorant of the truth."  For example, Brown received "voluminous consumer complaints" an credit card chargebacks. 

This case should serve as an important reminder to marketers to pay close attention to what your affiliates are doing -- and to act quickly when there are red flags that suggest that they may be engaging in deceptive marketing pratices.  Just because they operate their own businesses doesn't mean that you won't be held responsible for their conduct.