A recent Tenth Circuit Court of Appeals decision in 1-800 Contacts Inc. vs. Lens.com illustrates just one of the hazards marketers may encounter when utilizing online affiliate marketers to drive sales of their products and services. The trademark law decision highlights the recent trend, also found in other areas of law — such as Federal Trade Commission (FTC) false advertising law — of marketers being held liable for the conduct of their online affiliates, even though the marketers rarely if ever know the identities of those affiliates.
In this case, the plaintiff, 1-800 Contacts, alleged (among other things) that Lens.com should be held liable for the conduct of third-party online affiliates who had bid on the Google keyword "1-800 Contacts" or similar such keywords and then also used the trademark in the text of their advertisements. 1-800 Contacts relied on two theories of liability. The first was contributory trademark infringement; the other was that the affiliates were authorized agents of Lens.com .
Lens.com countered that it did not have a direct relationship with its online affiliates and did not even know their identities because the company did not work directly with affiliates, but with an affiliate network. In this arrangement, which is very common when using affiliate marketers, Lens.com paid the network, which, in turn, paid commissions to the affiliates.
The trial court ruled in favor of Lens.com on all claims, and the Court of Appeals largely affirmed — with one exception. It agreed that while the affiliates were authorized agents promoting Lens.com , there was no evidence that the company had authorized the affiliates to include the plaintiff's trademark in their ad text. Because the affiliates were not authorized to commit the trademark misconduct that they had committed, the court reasoned that Lens.com was not liable for their actions.
However, the court did allow one limited claim to continue: it held that there was sufficient evidence to state a claim that Lens.com had not taken sufficient steps to stop the third-party affiliates from displaying the plaintiff's trademark in their advertisements after Lens.com had received notice of the activity.
After receiving notice from the plaintiff, Lens.com communicated with the affiliate network over a period of three months in an effort to identify the culpable affiliates — but had done nothing more. The judges believed Lens.com could have had the network send out an E-mail to all its affiliates instructing them not use that trademark in their ads. Because that step was not taken, the judges allowed the case to move forward.
This extension of trademark liability from online affiliates to marketers parallels a recent trend in FTC enforcement whereby liability has been imposed on marketers for the misconduct of their online affiliates.
In 2011, the FTC brought an action against Legacy Learning Systems for the conduct of online affiliates that had promoted its learn-to-play-guitar DVDs through "independent" online reviews of the product. Many of the reviews failed to disclose that they were posted by affiliates that were paid for every sale generated for the Legacy Learning product.
In the Legacy Learning settlement, the FTC imposed a stringent monitoring program for the defendant, requiring it to monitor and verify that its online affiliates' future endorsements and ads properly disclosed the fact that they were paid affiliates. The FTC also required the company to identify, monitor and review each of its 50 top revenue-generating affiliates' websites on a monthly basis.
This monitoring must be performed at times not disclosed in advance and in a manner reasonably calculated not to disclose the source of the monitoring activity. The FTC also required the company to terminate and cease paying any affiliate that failed to disclose its connection to the company.
The 1-800 Contacts case, the Legacy Learning enforcement action and other recent similar cases send an unmistakable message: marketers that use online affiliates and that fail to monitor those affiliates' activities do so at their own peril. Experienced counsel can help marketers design proactive monitoring programs and navigate the other pitfalls that can arise while utilizing affiliate marketers.
Originally published in Response Magazine.
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