United States: Affiliate Marketer Can Survive Motion To Dismiss On Breach Of Contract For Referrals

Last Updated: September 23 2014
Article by Richard Raysman

Richard Raysman is a Partner in Holland & Knight's New York office.

Affiliate marketers are a considerable cog in assisting companies, including search engines and online retailers, in guiding potential customers to click on sponsored links. In expediting the acquisition of potential customers, affiliate marketers receive a commission, generally on a per-click basis. A recent case in Massachusetts, Licensed 2 Thrill, LLC v. Rakuten, Inc., No. 13-11257-DJC (D. Mass. Sept. 15, 2014), epitomizes the lucrative potential of these arrangements both for the companies seeking customers via sponsored links, and the affiliates powering this engine. Unsurprisingly since this particular relationship made it to court, it illustrates exactly how the relationships can go wrong, particularly when an unwritten course of dealing between contracting parties complicates the obligations memorialized in the ostensibly governing written agreement.

Facts

Licensed 2 Thrill (L2T) is a company engaged in business development and marketing, primarily by using contacts to "produce business opportunities [and] develop sales channels." FreeCause is an affiliate marketing service that had developed software that allows Internet users to opt into loyalty/affinity programs for popular brands and charities. In 2008, FreeCause entered into a Referral Partner Program Agreement (RPP Agreement) with L2T in which L2T would introduce FreeCause to certain businesses, businesses to which FreeCause could promote its software. If such an overture resulted in FreeCause's software being downloaded (thereby creating revenue for FreeCause), L2T would receive a commission from those gross revenues.

L2T had facilitated an introduction between FreeCause and CBS Sports. CBS Sports and FreeCause thereafter consummated an agreement around 2008 or 2009. L2T alleged that in the first year subsequent to the agreement between FreeCause and CBS Sports, the former's software was downloaded in excess of 160,000 times. Therefore, pursuant to the RPP Agreement, L2T should have received over $500,000 in commissions from the CBS Sports lead alone. L2T alleged that FreeCause had only remitted roughly $50,000 for all of the leads created by its business development and marketing endeavors. Rakuten, a company that coordinates affiliate marketing businesses, purchased FreeCause in 2008.

L2T sued FreeCause and a number of its associated and successor corporations under a spate of causes of action, of which breach of contract and tortious interference of contractual relations will be discussed in this blog.

Legal Analysis/Conclusions

Breach of Contract

The defendants made a motion to dismiss all counts in the Complaint. In evaluating the motion to dismiss, the court concluded that L2T had sufficiently plead a breach of contract claim. The complaint plead the existence of a valid and binding agreement, a breach of the agreement by FreeCause, and damages suffered because of the breach. See also Michelson v. Digital Fin. Servs., 167 F.3d 715 (1st Cir. 1999). After the RPP Agreement was in force, according to L2T, the parties had verbally modified the terms, and it has been ratified by both. The modification resulted from a "more informal interaction" between the parties. Specifically, according to the Complaint, L2T had generated leads for FreeCause, but had not concomitantly adhered to the specified procedures within the RPP Agreement that required L2T to submit a Lead Activity Form and to receive written notice of FreeCause's acceptance of the lead.

L2T claimed that this modification was valid between the parties. FreeCause averred that the modification was barred by the Massachusetts Business Brokers Statute of Frauds since it was not in writing, and therefore, L2T was in breach of the RPP Agreement for failing to adhere to the notice and form procedures. See Mass Gen L. c. 259, §7 (relevant provision).

Though the court conceded that it was possible that this statute was applicable to the case, it provided insufficient grounds for a dismissal at that stage. Rather, since the breach of contract claims were based on the failure to abide by the RPP Agreement, and not the modification, the underlying facts led to the reasonable inference that the RPP Agreement was breached, irrespective of the conjectural allegations about the effect of subsequent modifications upon the original RPP Agreement. Therefore, the allegations that L2T failed to comply with the notice and form provisions of that agreement did not serve to gainsay the allegations of breach of contract with respect to the actions of FreeCause as it pertained to CBS Sports, but instead could be used as a defense by FreeCause.

Tortious Interference with Contractual Relations

L2T did not have similar success in sufficiently asserting its tortious interference with contractual relations claims against Rakuten, now the owner of FreeCause.

The elements of a tortious interference claim can be satisfied by the plaintiff (L2T) if it could show that: (1) it had a contract with a third party (FreeCause); (2) the defendant (Rakuten) knowingly induced the third party to break the contract; (3) the defendant's interference, in addition to being intentional, was improper in motive or means; and (4) (L2T) was harmed by defendant's actions. See Pierce v. Cotuit Fire Dist., 741 F.3d 295 (1st Cir. 2014).

L2T argued that Rakuten had knowingly interfered with the RPP Agreement by causing future software sales to L2T's clients through leads provided by L2T through Rakuten and its subsidiaries, and not through FreeCause. This obviously cost L2T commissions due from the terms of the RPP Agreement. This decision by Rakuten could be possible after it had, according to L2T, "fraudulently misrepresented facts to L2T for the purpose of inducing L2T to introduce FreeCause to L2T's contacts."

The court concluded that these allegations did not conform to the "short and plain statement showing the pleader is entitled to relief" to survive a motion dismiss mandated by Fed. R. Civ. P. 8(a)(2). See also Ashcroft v. Iqbal, 556 U.S. 662 (2009) (to survive dismissal, a claim must be "plausible on its face"). Such a "plausible on its face" claim against Rakuten was not proffered in the instant case, as the factual basis was insufficient, and the basis for an improper motive or purpose was absent, particularly given that a legitimate advance of a defendant's own economic interest is never improper in this context.

Conclusion

The breach of contract claim survived the motion to dismiss and the tortious interference claim did not.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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