Antitrust Law Daily Wrap Up, ADVERTISING—D. Conn.: FTC granted summary judgment against marketers using fake news sites to promote weight loss products, (Mar 6, 2015)

By Linda O’Brien, J.D., LL.M.

The FTC and State of Connecticut were entitled to summary judgment in a false advertising action against Internet marketers that used fake news sites to promote purported weight loss products, the federal district court in New Haven, Connecticut has decided. Thus, the marketers’ motion for summary judgment was denied (FTC v. LeanSpa, LLC, March 5, 2015, Hall, J.). 

LeanSpa sold purported weight loss and colon-cleanse products under various brand names. LeanSpa marketed its products through its own websites and also hired LeadClick so its products could be advertised on LeadClick’s marketing affiliate. LeadClick provides lead generation services and operates an affiliated marketing network for Internet advertising. Affiliates promote merchant goods and services in various ways, including a technical mechanism by which an interested consumer’s “click” on a publisher’s advertisement is tracked and routed to the merchant’s website.

In 2010, LeanSpa entered into a series of contracts with LeadClick where LeanSpa would pay LeadClick a set amount each time a consumer enrolled in LeanSpa’s free trial program after being directed to LeanSpa’s website by a LeadClick affiliate. Some affiliates used “fake news sites” to promote LeanSpa, which included claims of independent testing and analysis and comments that appeared to be offered by independent consumers regarding LeanSpa products.

In August 2011, after three U.S. banks terminated LeanSpa’s merchant accounts due to an excessive level of customer chargebacks, LeanSpa transferred its funds to a bank account held by customer information provider, CoreLogic, Inc. The transfers were related to LeanSpa’s participation in CoreLogic’s shared services program, which included a cash management program. After LeanSpa failed to pay amounts owed to LeadClick, LeadClick filed suit and the business relationship ended.

LeadClick also participated in the cash management program. Under the program CoreLogic would advance funds to pay LeadClick invoices and then collect LeadClick receipts to repay the funds advanced. From January to August 2011, CoreLogic advanced $16 million to LeadClick. By August 2011, LeadClick transferred $8 million back to CoreLogic.

In August 2013, the FTC and the State of Connecticut filed a complaint against LeanSpa, LeadClick, CoreLogic and several individuals, alleging violations of the FTC Act and Connecticut Unfair Trade Practices Act (CUTPA). Specifically, the FTC asserted that LeadClick falsely represented that objective news reporters had performed independent tests showing the effectiveness of LeanSpa products and comments following the news reports expressed views from independent consumers. The claims against LeanSpa and the individuals were resolved. The plaintiffs and remaining two defendants filed cross-motions for summary judgment.

FTC Act and CUTPA. The court determined that the fake news sites used to promote LeanSpa products were likely to mislead consumers acting reasonably under the circumstances. The plaintiffs presented evidence that the news sites showed logos of genuine news outlets, used photographs of purported reporters, and expressly claimed that the reporter was conducting independent tests of the products. Moreover, while there no express statements that the comments on the news sites were made by independent consumers, the implication was so clear that no reasonable jury could conclude otherwise. Therefore, there was no genuine dispute that the sites were making claims of independent testing and the comments were provided by independent consumers.

Additionally, although LeadClick did not create the fake news sites for the affiliates, it was undisputed that LeadClick employees knew that fake news sites were being used to promote LeanSpa products on the Internet advertising network. No reasonable jury could deny that LeadClick participated in the acts or had the authority to control its affiliated marketers since LeadClick affiliate managers solicited and hired affiliate marketers and had the authority to review the marketers’ websites. Furthermore, LeadClick bought advertising space on genuine news sites, sold it to affiliates advertising with fake news sites, and created a bridge so consumers could browse from a genuine news site to a fake one.

Immunity. The Communications Decency Act (CDA) provides that no provider or user of an interactive computer service shall be treated as the publisher of any information provided by another information content provider. The court found that no reasonable jury could deny that LeadClick was an information content provider. LeadClick solicited and hired affiliate marketers to advertise LeanSpa products knowing the affiliates used fake news sites, communicated with LeanSpa as to what products should be advertised on the fake news sites, and provided a bridge to direct consumers from genuine news sites to fake news sites.

Other remedies. The court found that the plaintiffs were entitled to the requested monetary relief. LeadClick’s argument that the genuine issues remained regarding consumer reliance was rejected. The court noted that the websites were disseminated over the Internet and thousands of customers were referred to LeanSpa’s websites. Moreover, LeadClick must disgorge the amount of consumer payments received from LeanSpa as a result of the affiliated marketing activities. LeadClick’s attempt to deduct money paid to affiliates was without merit since LeadClick actually and justly received consumer funds from LeanSpa.

CoreLogic’s liability. Finally, CoreLogic must disgorge the funds that it received from LeadClick as a result of the August 2011 transfer. The court noted that, because the plaintiffs were granted summary judgment as to LeadClick’s conduct, the funds CoreLogic received from LeadClick were ill-gotten as a matter of law.  Furthermore, the advances were not for valuable consideration since there was no bona fide creditor-debtor relationship, the court concluded.

The case is No. 3:11-CV-1715.

Attorneys:  Darren H. Lubetzky for Federal Trade Commission. Jonathan J. Blake, Connecticut Office of the Attorney General, for State of Connecticut. Bryan Charles Altman (The Altman Law Group), Edward Wood Dunham (Wiggin & Dana) and William I. Rothbard (Law Offices of William I. Rothbard) for LeanSpa, LLC, NutraSlim, LLC and NutraSlim UK Ltd. David A. Bateman (K&L Gates LLP) for LeadClick Media, Inc.

Companies:  LeanSpa, LLC; NutraSlim, LLC; NutraSlim UK Ltd.; LeadClick Media, Inc.

Cases: Advertising StateUnfairTradePractices ConnecticutNews