THE RISING LIABILITY OF SERVICE PROVIDERS

Liable for just providing services?  Oh, yes.A year ago, the FTC filed a case against a company committing fraud on the internet.  There’s no reason you should know about the case.*  But rising out of that case like mushrooms out of leaf litter was a case that spells danger for the Affiliate Marketing industry.

The case you should know about is FTC v. G2 Consulting, LLC (“G2”).**   The FTC did not allege that G2 defrauded consumers: in fact, it seems that the company never talked to a consumer.  G2 only provided a necessary service: payment processing.  Nevertheless, the FTC slammed G2 and its owner.  They shut the company down, obtained a $3 million judgment against the owner, and permanently banned the owner from conducting this business.  And by the way, Federal prosecutors put G2’s owner in jail for related criminal charges.

To be clear, G2 Consulting, LLC wasn’t innocent.  To hear the FTC tell it: “[G2] created straw companies to hide [their client telemarketers’] identities and practices, allowing them to circumvent the financial institutions’ standards.”  In other words, G2 lied to ISOs and banks, created straw companies and even forged their own strawmen’s signatures.

But what G2 did not do was to defraud any consumers.  The FTC’s primary focus was that the service provider assisted and facilitated the scheme of another unrelated company who was defrauding consumers.  Even if G2 had not engaged in the bad conduct I’ve outlined, by the FTC’s logic they could still have been held liable for providing services that assisted and facilitated the other company’s fraud.

That’s right: liable for providing services.  So, if you’re a service provider, don’t think that you’re immunized by avoiding direct responsibility for the fraud committed by someone else.  The FTC will hold service providers liable even if they didn’t directly participate in the illegal activity against consumers.  (And CFPB recently spent more than a year in federal court in Atlanta prosecuting a service provider that took no part in their client’s fraud.)

The G2 case teaches a more subtle lesson, too.  The liability doesn’t just flow from a company commiting fraud to a service providers working for them: it also flows the other way.  The bad acts of a service provider can infect the companies they are servicing.

The FTC’s use of “common enterprise” accomplishes this.  “Common enterprise” can tie every player in a network of business relationships to every other one. ***  It’s beginning to look like both FTC and CFPB are coming to the position that merely “helping make the fraud possible” is sufficient to justify a common enterprise claim.  That means that companies that employ service providers of any kind can be held liable for their service provider’s bad conduct.   Even if the companies themselves are innocent.

In affiliate marketing, the danger is most acute with merchant accounts.  Let’s face it:  everyone needs merchant processing.  And sometimes affiliate marketing industry participants get desperate to find someone who will provide that service so they can get started making money.  An ISO claiming to be able to provide payment processing when no one else will, may seem like the answer to a prayer.  It’s tempting for desperate affiliate marketers to just not ask too many questions.  After all, everyone else is doing it …

But if the FTC or CFPB ends up taking down one element of your network, you shouldn’t count on them making fine distinctions between producer, advertiser, publisher or network or service provider.  Not when “common enterprise” allows them to rope everyone together in one big network of liability.  So no matter where you are in the Affiliate Marketing universe, if someone in your affiliate marketing chain is defrauding consumers there can be hell to pay.

What can you do to protect yourself?  Start by recognizing that no one in the network will be safe from liability if anyone in the network is playing fast and loose with the law.

Then proceed accordingly.

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*The case was called Blue Saguaro Marketing: https://www.ftc.gov/system/files/documents/cases/161028maxresultscomplt.pdf.

**https://www.ftc.gov/enforcement/cases-proceedings/172-3146-x170046/federal-trade-commission-v-g2-consulting-llc

***”Common enterprise” requires a complicated, multi-variable analysis very dependent on individual facts.  In theory, an “innocent” participant in a fraudulent scheme will not be charged.  In practice, “innocence” looks a lot different from the government’s side of the court room.

 

 

 

 

 

 

 

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