ROSCA, individual liability, big fines and more:  An FTC case having nothing to do with affiliate marketing recently raised a parade of red flags that the Affiliate Marketing industry needs to pay attention to. 

Two related corporations* ran an illegal marketing scheme (hawking golf- and cooking-related products).  According to the FTC, the marketing scheme contained all of the big marketing no-no’s: deceptive “negative option” offers, hidden disclosures, undisclosed “data pass” transactions, deceptive upsells, and more.  The practices as described fit squarely within the FTC Act’s prohibitions against unfair and deceptive practices, as well as the prohibitions of the Restore Online Shoppers Confidence Act (“ROSCA”).

The FTC’s attack on this marketing scheme raises a parade of red flags for the Affiliate Marketing industry.  Each is worthy of its own article.  Here are the highlights you need to know right now:

  • FTC has become very aggressive. This year the FTC handled the second greatest number of ROSCA cases filed since ROSCA was passed.  That’s in addition to all of the other enforcement cases targeting marketing and advertising.
  • ROSCA is ROSCA now the big hammer in the FTC’s tool chest. The statute is intended to establish the standard procedure for how companies may legally run negative option and “data pass” operations.  ROSCA’s the rule, and FTC is enforcing it with gusto.
  • Individual liability continues: the FTC continues to sue individuals along with their companies. Here, the FTC blasted right through the “corporate shield” that used to protect corporate principals from liability for corporate actions to sue four individuals.  The suit described each as “an owner”—though each was technically a shareholder, officer or director.    The “corporate veil” is dead.  Corporations’ principals are squarely in the cross-hairs for individual liability.  Don’t count on any legal structure to protect you or your personal assets.
  • Big “Fines” ended the case. The individual defendants consented to these big “fines”**: $2 million against two defendants and $600,000 against another.  Several defendants “voluntarily” signed over their houses, despite California state “community property” protections.  That should give you an indication of the pressure that the target of an FTC action is under once they’ve been sued.
  • Deceptive Disclosures continue to be a focus: The FTC continues to fight deceptive placement of disclosures and “terms and conditions.”  Month after month, year after year, this issue continues to receive the greatest attention.  It’s astounding that it’s so easy for companies to get this right and so common for them to get it wrong.  There’s an easy rule of thumb to determine if disclosures are adequate:  if disclosures of terms and conditions are not easily visible to consumers and self-explanatory, the FTC will tag them as not being “clear and conspicuous.” Of course, complete compliance with federal advertising law is more complicated, but that rule of thumb is a good start.

Finally, a few words should be said about “common enterprise.”  Common enterprise is the legal theory that ties separate legal entities into one scheme:  think “civil conspiracy.”  In the current climate, “common enterprise” has gone from being an occasional weapon used by the FTC to an expected element of every enforcement action.

“Common enterprise” is particularly dangerous for people working in industries like Affiliate Marketing, where multiple separate organizations work together to get business done.  Unfortunately, while advertisers, networks, publishers and service providers all see themselves as separate entities, a “common enterprise” approach would bind them all together in a web of liability.  That’s not a good thing if some of the people in your business network aren’t living up to your high standard of compliance with the law.

What can Affiliate Marketers learn from this case?  Don’t assume that the FTC (and state regulators) aren’t paying attention.  Comply with ROSCA.  Make sure you comply with advertising law, including giving appropriate disclosures.  And do everything reasonably possible to make sure that the other companies you rely on are complying with the law.



*The conduct of the two corporations, AAFE and BNRI, are summarized here:

**Technically, FTC doesn’t levy “fines” but redress, disgorgement and civil penalties.  The effect on your checkbook, however, is the same.



Leave a Reply

Your email address will not be published. Required fields are marked *