7 Legal Pitfalls Affiliate Marketers Should Avoid

7 Legal Pitfalls Affiliate Marketers Should Avoid

Troy F. Meyerson
Fraser Stryker PC LLO
Internet Law Group Chair

© 2013 FRASER STRYKER PC LLO
tmeyerson@fslf.com
@InternetAttys

Affiliate Summit West 2013
2

Affiliate Marketing’s Legal Pitfalls:
I. Entity Formation
II. Analyzing Affiliate Contracts
III. Terms of Service
IV. Privacy Policies
V. FTC Regulations and Truth in Advertising
VI. Trademark Infringement

VII. Copyright Infringement

3

I. Entity Formation

4


Entity Formation Overview
Sole Proprietorship – Default; 100% personal liability
Should you form a business entity at all?
Which entity is right for your business?
Partnership
Corporation
•C Corporation

•S Corporation
Limited Liability Company (LLC)

5

Should you form a business entity at all?

Affiliate Marketing Businesses can gain several benefits
from forming an entity.
Asset Protection
Limited Personal Liability
Potentially Favorable Tax Treatment
Easier to Raise Capital and Transfer Ownership Interests.
However, determining which entity is right for your

business requires an analysis of the costs and benefits
of each option.

6

Limited Liability

Choosing an entity with limited liability protects your
personal assets.
Personal liability limited to amount invested.
Personal assets generally out of creditors.
Especially important for businesses operating in riskier
areas.

7

Limited Liability

Entities with UNLIMITED Liability
General Partnership (Default)
Sole Proprietorship (Default)
Entities with LIMITED Liability
S Corporation
C Corporation

Limited Liability Company (LLC)

8

Tax Implications

C Corporation
Double taxation (Corporate Level and Personal
Level)
S Corporation and LLC
“Pass-Through” Entities - Income flows straight to
the individual

LLC Members must pay self-employment taxes

9

Ownership and Transferability

Ownership
LLC – One or more members
S Corporation- Up to 100 shareholders
C Corporation – Unlimited number of shareholders
Transferability
LLC – Depends on the operating agreement

S and C Corporation – Generally, easier to transfer
ownership

10

Bottom Line on Entity Formation

Upfront costs.
LLCs and Corporations provide limited liability.
LLCs and S Corporations provide single, pass-through
taxation.
LLCs offer flexible management options with less formal
requirements.

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II. Analyzing Affiliate Contracts

12

Affiliate Contracts
Never work with an Advertiser or affiliate program without a
contract.
An Advertiser or affiliate program should have a standard
affiliate marketer contract.
It is very important to read the contract.
Legal consultation is recommended for complicated
contracts.

Taking the time to understand the contract will pay off.

13

Important Provisions in Affiliate Contracts
How is compensation determined –
 “per click” or “per lead” basis or
 “per sale/action” basis.
Lead Volume – Has the Advertiser or Network included a
cap on the lead volume in your contract?
For example – if an Advertiser or Network sets a lead
volume cap at 1,000 leads per month and you exceed that

volume, you may not be paid for the excess volume.

14

Commission Step-up – Are there two tiers of payouts?
 Do you think you can achieve the second tier?
 Does the lower tier adequately compensate you?
Termination Provisions – Are you allowed to terminate the
arrangement without penalty?
 How much notice must be provided to the
Advertiser/Network?

 What payments are required to be made to you upon
termination?

15

Leads/Actions – what qualifies as an Action?
 Whose data is used to determine the commissions owed?
 What time frame is required in order to protest?
Limitation of Liability –
 Is there one?
 Is it mutual?

 Are consequential damages disclaimed?
Indemnity Obligations?

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Bottom Line on Analyzing Affiliate Contracts
 Read the affiliate contract.
 Make sure you understand your obligations.
 Structure your websites and marketing efforts to
comply with the contract’s terms.

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III. Terms of Service

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Terms of Service
Businesses are advised to protect their interests by entering
into transactions using a contract.
The interaction between a website operator and a website
user is essentially a business transaction.
Thus, website operators should implement terms of service
to protect their interests.

19

Common Terms of Service Provisions
Digital Millennium Copyright Act (“DMCA”) Notice
Privacy Policy Reference
Disclaimers – provisions stating the website’s
information or services are provided “as is”.
Such a provision might be particularly important if
your website contains a blog which provides

personal (un-compensated) opinions.

20

Common Terms of Service Provisions
Limitations of Liability.
Potential liabilities to be averted:
•Copyright infringement
•Defamation and obscenity torts
Terms Governing the Submission of User Content.
Choice of Law and Venue Provisions.

21

Terms of Service Enforceability
Assuming the contract is otherwise enforceable, courts
should enforce terms of service if the user continues to use
the website after having reasonable notice of the terms.
Thus, enforceability is often a fact sensitive analysis.
To ensure the enforceability of key terms, website operators
should make such terms highly visible to the user.

22

Terms of Service Enforceability Considerations
Does the user have to scroll down to see the terms of use
…………………………………………………….....are they initially hidden?
Are the terms (or a link thereto) visible when the user registers?
Does the website implement its terms of service through a browsewrap
contract?
Do not proceed to the next slide unless you agree with the
terms of this presentation.
Does the website utilize a click-through contract?

□ Click this box to proceed to the next slide, and by doing so
you expressly agree to the terms of this presentation.

23

IV.
Privacy Policies

24


Privacy Policy Overview
Privacy Policies are sometimes required, but should
always be considered.
There is no blanket federal law mandating privacy
policies for all websites.
Some states require privacy policies.
If an affiliate website is going to collect any user

information, a privacy policy is probably appropriate.

25

When is a Privacy Policy Legally Required?
Children’s Online Privacy Protection Act of 1998 (“COPPA”)
 Who is Affected?
•Websites directed at children and operators with actual knowledge that they
are collecting personal information from children under 13 years old.
 What is Required?
•Post a clear privacy policy describing the information (collection and use)
practices for children’s information.
•Provide notice to parents and obtain verifiable parental consent before
collecting personal information from children.
•Allow parents to review, delete, or prohibit the disclosure of their children’s

information to third parties.
•Cannot condition a child’s use of a website on the disclosure of more
information than is necessary.
•Maintain the confidentiality, security, and integrity of children’s information.

26

FTC’s Revised COPPA Rule
 Last month, the FTC promulgated new rules interpreting COPPA, effective July 1,
2013.
 The new rules broaden the websites and services covered by COPPA.
 Requires websites that allow plug-ins or third-party advertisers to collect children’s
personal information to follow the COPPA notice and consent rules, even if the
website itself does not collect any personal information.
 Operators of plug-ins or third-party ad networks that have actual knowledge that
they are collecting personal information through a child-directed website must
follow the notice and consent rules.
 Websites that only target children as a “secondary audience” and do not collect

information prior to obtaining age information need only comply with the notice
and consent rules for those users that self-identify as being under age 13.

27

FTC’s Revised COPPA Rule
 Covered personal information now includes any of the following:
 First and last name
 Physical address
 Phone number
 Screen name
 Photos, videos, or audio files that contain a child’s image or voice
 Geolocation Data
 Persistent identifiers (IP address or mobile device ID)
 Must take reasonable steps to ensure you only give collected information to third

parties who are capable of maintaining the data’s security and confidentiality.
 Must delete information when it is no longer necessary to fulfill its purpose.

28

California Online Privacy Protection Act
Who is Affected?
•The Act applies to any website or service which collects
personally identifiable information from California
consumers.
What is Required?
•All affected websites must post a conspicuous privacy
policy.

Enforcement
•Private plaintiffs can bring suit.
•State can bring suit under California Unfair Competition Law.

29

Delta Airlines operated a mobile app that collected personal
information (name, telephone number, email address, credit card
number…), but the app did not have a privacy policy.
The California Attorney General sent a non-compliance letter to
Delta on October 26, 2012.
Delta did not post a privacy policy on its app within 30 days.
California brought suit against Delta Airlines on December 6, 2012.
The Attorney General is seeking a $2,500 fine for each copy of the

app downloaded by California residents.

30

Private Agreements Requiring Privacy Policies:
Merchants or affiliate networks may require an affiliate website to have
a user privacy policy.
For example: Google AdSense
•The Google AdSense Online Standard Terms and Conditions
require all participating websites to post privacy policies.
•“You must have and abide by an appropriate privacy policy that
clearly discloses that third parties may be placing and reading
cookies on your users’ browser, or using web beacons to collect

information, in the course of ads being served on your website. Your
privacy policy should also include information about user options for
cookie management.”

31

FTC Enforcement of Posted Privacy Policies
 Websites may be required to post a privacy policy
for several reasons.
To fulfill this requirement, many websites copy
existing privacy policies without considering the
policy’s full implications.

32

FTC Enforcement of Posted Privacy Policies
Under Section 5 of the FTC Act, the FTC will enforce posted
privacy policies, regardless of whether the website operator
put any thought into the terms.
The violation of a website’s posted privacy policy constitutes
“deceptive acts or practices in or affecting commerce.”
As a result, posting a poorly written or otherwise inaccurate
privacy policy may result in FTC imposed penalties.

33

What to Include in a Privacy Policy
1. Above all else – outline your ACTUAL data collection practices!
2. If you plan to sell or distribute a user’s email address, say so.
3. Explain what information is collected and for what purpose.
4. Address websites to which you link.
5. Specify a way for users to contact you.
6. Consider disclosing how users can deactivate cookies in their web
browser.
7. Do not guarantee absolute security of personal information.

34

V. FTC Regulations and Truth in Advertising

35

FTC Overview
Section 5 of the FTC Act prohibits “unfair or deceptive acts
and practices in or affecting commerce.”
Enacted in 1914, and substantially unchanged since 1927
Important general concepts for ensuring advertisements
comply with FTC regulations
Truthful vs. False or Misleading
Substantiating Claims with Reasonable Evidence

Using Clear and Conspicuous Disclaimers
(Reminder) Abiding by Posted Privacy Policies

36

Business Opportunities Disclosures
Effective March 1, 2012, “Business Opportunity”
advertisements must make certain disclosures.
“Business Opportunities” include offers to sell a business
where the seller also promises to:
Provide the buyer with customers, accounts, or outlets; or
Provide locations for displays, vending machines, or
equipment; or

Buy back the merchandise the buyer produces (i.e. work-
at-home, envelope stuffing, or product assembly)

37

Business Opportunities Disclosures
If an offer is considered a “Business Opportunity,” then the seller
must provide to customers a one-page disclosure document.
If the offer also makes an earnings claim (“You can earn $10,000
per month!”), then the seller must provide an additional disclosure
document.
The bottom line for affiliates:
Do not advertise business opportunities without seeing the
disclosure documents.
Don’t make any earnings claims unless you or the seller have

created the required disclosure document.
Do not contradict the information contained in these disclosure
documents.
38

Consumer Endorsements
What is a consumer endorsement?
Any advertising message that consumers are likely to
believe reflects the opinions, beliefs, or experiences of a
person other than the sponsoring advertiser.
What is not an endorsement?
Statement by an identified company representative.

39

Requirements for Consumer Endorsements
Does the ad feature a consumer explaining their own experience with the
product?
Is their experience common?
Can the advertiser support the claim that everyone should expect those
same results?
If not, then the advertisements must clearly disclose the results that
consumers can generally expect.
Under the 1980 version of the Guidelines, advertisers could describe
unusual results in a testimonial, so long as they included a disclaimer

such as “results not typical." Such a disclaimer no longer creates a
safe-harbor.

40

Example -- Jared

The original Jared commercial aired in
2000 with the disclaimer:
 “The Subway diet, combined
with a lot of walking, worked for
Jared. We're not saying this is
for everyone. You should check
with your doctor before starting

any diet program. But it worked
for Jared.”

41

Example – Jenny Craig
 The FTC Guidelines now require advertisers to explain just how
“untypical” a consumer’s results are.

42

Disclosing Connections between Endorsers and Sellers
 Connections between an endorser and a seller that might materially affect the
weight or credibility of an endorsement (i.e., the connection is not reasonably
expected by the audience), the connection must be fully disclosed.
 The FTC has deemed all connections involving consideration in return for a
review to be material.
What to look for:
 “Advertorials” -- advertising that appears as a news article, sometimes referred to
as a “flog” or “fake news site.”
 Advertising blogs -- blogs that are, or include, advertising.

 Message boards -- are employees posting messages about employer’s products?
 Key issue: Is it clear to consumers that these are advertisements and not
unbiased opinions?

43

Examples
 Consumer buys expensive dog food, and then blogs that it made her dog’s coat shinier, and is worth the
extra money.
(NOT AN ENDORSEMENT)

 Consumer receives free dog food at the pet store because the store tracks her purchases and gives free
dog food based on her purchase history. Then she blogs that it made her dog’s coat shinier, and is
worth the extra money.
(NOT AN ENDORSEMENT --- no relationship with dog food manufacturer)

 Consumer joins a network marketing program and periodically receives products about which she can
write reviews on her blog. Then she blogs that it made her dog’s coat shinier, and is worth the extra
money.
(THIS IS AN ENDORSEMENT, THEREFORE DISCLOSURE OF THE RELATIONSHIP IS
REQUIRED).

44

Disclosure Requirements Applied to Bloggers
 Reviewers in “traditional media” do not have to disclose that they received free
books, movie tickets, etc., because the FTC does not consider reviews published
in traditional media (newspapers, magazines, etc.) to be sponsored advertising.
The FTC does not believe that knowing whether the media entity that published
the review paid for the item in question would affect the weight consumers give to
the reviewer’s statements.

 The FTC believes that consumers’ opinions about a blogger’s endorsement will

be affected by knowing that the blogger has a relationship with the company
whose product it reviews.

45

VI.
Trademark Infringement

46


Trademark Infringement Overview
Protects words, names, or symbols used in trade to indicate
the source of the goods or services, i.e., brand names and
logos.
Prevents other parties from using confusingly similar marks.
Can last forever if renewed appropriately.

47

Trademark Infringement Exposure

Trademark owner’s actual damages and your profits
attributable to the infringement.
Trademark owner’s attorney fees.
Litigation in a foreign state.
Injunction against future use of the mark.

48

How to Protect your Brand - Trademark Registration
Trademark registration is not mandatory; however, the law
strongly incentivizes registration.
Presumption of Ownership in the Mark
Ability to Bring Suit in Federal court
Ability to Obtain Registration in Foreign Countries

49

Infringing Advertisement Issues
Two common types of online advertising:
Keyword Advertisements: Purchasing keywords that trigger
ad placement on search engine (Google AdWords)
Website Banner Advertisements: Placing advertisements
on your or other websites
When your advertisements utilize someone else’s trademark,
potential liability arises.

The key question is whether your use of their trademarks is
likely to cause confusion.

50

Infringing Advertisement Issues
Keyword triggers still present some risk, but only a slight risk
if you follow these rules.
How to reduce your risk of liability for infringement:
Don’t use the trademarks in the text of your advertisement
Make sure the ads are separated and labeled as
advertisements (especially important for banner
advertisements)

Identify the source of the advertisement (your company or
website)

51

VII. Copyright Infringement

52

Copyright Overview
Protects “original works or authorship,” i.e., literary,
dramatic, musical, and other intellectual works.
•Photographs
•Essays
•Videos
•Anything original and minimally creative
Exclusive right to reproduce, distribute, or display the work,

subject to fair use.
Lasts for 70 years after the author’s death.

53

Copyright Misconceptions

Copyrighted material is NOT in the public domain
merely because it is placed on the internet!
Material may be copyrighted even if it does not
display a copyright mark - ©

54

How to Protect your Content – Copyright Registration

Similarly to trademark registration, copyright protection is
secured automatically upon creation; however, registration is
strongly encouraged to take advantage of the following
incentives:
Ability to Bring Suit
Presumption of Validity
Damages; Attorney’s Fees

55

Copyright Infringement Exposure
Copyright owner’s “actual damages” and your profits that are
attributable to the infringement.
Injunctive Relief
Litigation in foreign state
Copyright owner’s attorney fees
Statutory damages from $750 up to $150,000

56

Digital Millennium Copyright Act (DMCA)
The DMCA is meant to prevent illegal use of copyrighted recordings,
videos, and other content.
Notable Provisions:
Prohibits circumvention of technologies designed to protect copyrighted
works.
Limits copyright infringement liability for online service providers.
Streamlines the notice and takedown procedure for handling infringing
works.

Establishes a procedure for copyright owners to discover the identity of
infringing internet subscribers.

57

58


Eligibility for DMCA Protection
“Service Provider”
Adopt and implement a policy of terminating the accounts of
repeat infringers
Must not interfere with standard technical measures used by
copyright owners to identify or protect copyrighted works
Comply with take-down procedures
Register with the U.S. Register of Copyrights

59

60


The Bottom Line on Copyright
Do have a good set of Terms and Conditions / User
Agreement on your website.
Don’t use pictures, articles, videos, etc. without the author’s
permission.
Do buy licenses for images you use on your website.
Do register with the DMCA if you allow third parties to post
content on your website.

Do protect your own content by registering your copyrights
and pursuing those who infringe on your rights.

61

Resources for More Information
http://business.ftc.gov/advertising-and-marketing/
 FTC Guide: “Advertising and Marketing on the Internet”
 FTC Guide: “Dot Com Disclosures; Information About Online Advertising”
 FTC Guide: “The FTC’s Revised Endorsement Guides: What People are
Asking”
http://business.ftc.gov/privacy-and-security
 Data Security and Privacy Policies
http://business.ftc.gov/selected-industries/franchises-and-busine

 Business Opportunities Disclosures
http://www.copyright.gov/onlinesp/
 Register for the DMCA

62

7 Legal Pitfalls Affiliate Marketers Should Avoid

Troy F. Meyerson
Fraser Stryker PC LLO
Internet Law Group Chair

tmeyerson@fslf.com
@InternetAttys

Affiliate Summit West 2013
63

500 Energy Plaza | 409 South 17th Street | Omaha, NE 68102-2663

P (402) 341-6000 F (402) 341-8290

www.fraserstryker.com

7 Legal Pitfalls Affiliate Marketers Should Avoid

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