Affiliate marketing can be particularly risky in terms of liability exposure. There are a number of concerns, ranging from liability for affiliate spam under the CAN-SPAM Act, violations of disclosure responsibilities under the FTC Act and even affiliate trademark infringement. In fact, this list is quite expansive.
However, it is possible for businesses to manage this risk by taking simple steps and by always using a comprehensive affiliate marketing agreement. The legal issues surrounding affiliate marketing can and should be addressed through the use of a comprehensive affiliate agreement. Of course, I recommend that every business consult its Internet attorney to draft this since the laws are constantly changing and the nature of affiliates may present some unique issues. But, the following discussion is a basic laundry list of some of the issues that any business using affiliates should specifically address.
1. Affiliate CAN-SPAM Act & Anti-Spam laws Compliance
The penalties for violating the CAN-SPAM act are stiff and businesses will want to comply with the Act. This means your business should absolutely address email marketing in its affiliate agreement and, specifically, the CAN-SPAM Act. Your business can get into trouble for affiliate emails under the CAN-SPAM Act if your business is actually considered to be the original “sender”. The easiest way to limit liability is to completely restrict any affiliates from sending commercial emails. But, since this is not really practical, businesses should be certain to include a detailed clause in the affiliate agreement forcing the affiliate to comply with the CAN-SPAM Act and applicable state laws related to deception and fraud at all times.
TIP! A list of all the CAN-SPAM requirements along with other state law requirements should be included in an affiliate Anti-Spam Policy. Businesses should provide the policy to each of its affiliates and require them to comply with it by incorporating the policy in the affiliate agreement.
2. Failure to Disclose Material Connections
Also, affiliates can get your business in trouble for not disclosing their affiliate status and the fact they are being paid to promote or endorse products or services. Affiliates must do so in conjunction with any endorsements or positive reviews they make, including in any emails they send. Both your business and the affiliate can be liable since the affiliate will be considered as a “sponsored endorser” and a material connection with your business, which must be disclosed.
An affiliate who receives any type of compensation or consideration and provides a review or endorsement of any of your business’s products or services will be considered to have a “material connection” to your business. All material connections must be disclosed by the affiliate. It should absolutely be stated in writing that affiliates must disclose the fact they are receiving some form of compensation whenever someone clicks on the affiliate link to purchase one of your business’s products or services.
TIP! Businesses should always include an indemnification provision in the affiliate agreement. This type of provision will require the affiliate to reimburse and more or less be responsible for all costs your business incurs for their actions. They could even be required to defend the business in such case. Of course, this isn’t something your business can really fall back on if it incurs liability since it will be liable. But, at least a contractual right will be created causing the affiliate to have to cover any damages your business incurs as a result of their actions. This is far better than not having such a provision at all.
3. Restrict the Use of Adware
Business’s should also restrict affiliates from using any type of adware in the affiliate agreement. Adware usually supplies a user’s computer with advertisements, or monitors the user’s internet shopping and consumer activities. It is a privacy violation to download these types of applications on a user’s computer without permission. If one of your business’s affiliates uses unauthorized adware, the fines and penalties will be extremely stiff. Affiliate marketing agreements should include a provision stating that the affiliate will not install or use any type of application or program that delivers ads to a user’s computer or monitor’s a user’s activities. The customer can only agree to such an installation on his or her computer after a conspicuous and clear explanation of the application’s purpose is provided first.
4. Keyword advertising Concerns
Keyword advertising is essentially bidding upon certain targeted buyer related “keywords” to use in an affiliate’s Google AdSense or other pay-per-click search engine campaigns. However, for affiliate marketing purposes, an affiliate marketing agreement should state that affiliates are liable for all claims of infringement, including trademark and copyright violations, arising from the content they use to market your business’s products or services. The content to be specifically worried about here is keywords they use that actually infringe upon some third-party intellectual property rights-specifically trademark rights.
TIP! Affiliates should be required to carry errors and omissions insurance where practical. Without this type of insurance, your business is taking a risk that any of its affiliates will have sufficient assets that you will able to liquidate to satisfy any judgment you should obtain against them. More often than not, they won’t have very many assets and you’ll be stuck without any real recourse. An affiliate marketing agreement should still cover this type of risk though, at a minimum.
5. Click Fraud
Click fraud is a great concern in dealings with affiliates. Click fraud basically occurs when affiliates cause clicks to occur to the link being promoted, other than by genuine search engine generated traffic.
Some basic activities that are generally considered to constitute click fraud and that should be avoided are as follows:
Using only “click programs” that generate clicks to an affiliate link with insufficient or no site traffic that could possibly indicate that the affiliate website could produce the clicks reported;
Providing fraudulent leads;
Using fake redirects, automated software, and/or fraud to generate clicks on an affiliate link;
Typically, you see click fraud where click-through rates are much higher than industry averages and where the website traffic does not justify such high conversion rates. This practice usually come down to whether a breach of the affiliate marketing has agreement occurred. So, if you are a merchant or advertiser, it is very important that the affiliate marketing agreement you use specifies the payment mechanism, prohibits fraud and deception, and details a remedy for a violation.
6. Steal Ware
Any type of software that modifies affiliate tracking codes or replaces affiliate cookies on a user’s computer and that diverts advertising commissions to another is known as “steal ware.” Your business should always describe these activities in detail and restrict them in your affiliate marketing agreement. Of course, be sure to provide a remedy for any violations of this provision in the affiliate agreement.
7. Avoiding Brand Dilution
Businesses should be concerned with affiliates potentially diluting its brand identity. New or growing businesses should be interested in building a brand for its goods or services. Like any other brand, it takes time to build an identity and have it resonate in the minds of customers. Any type of dilution of the brand will undoubtedly slow down this process.
With that in mind, business’s should never allow affiliates to purchase keywords with an existing brand name for any of their marketing (PPC) campaigns. The goal is to have affiliates promote your business brand in previously un-chartered territory. But, if any affiliate obtains a conversion from your business’s brand name in a PPC campaign, they are essentially doing what the business could have done without an affiliate. Businesses want affiliates to drive traffic (and sales) through their own separate efforts. This means affiliates are supposed to create and monetize their own content.
If your business allows its affiliates to bid and use keywords that reflect its brand identity, your business will essentially be paying them for the work previously done by the business. Affiliate marketing agreements should restrict affiliates from bidding on brand names in any of their PPC campaigns. Additionally, affiliates should not be allowed to operate country-specific TLDs that include any business brand names. The customers who find you on country-specific TLDs and domains with typographical errors should be considered customers of the business anyways. Your business shouldn’t pay someone else for the work the business has already performed to brand itself!
TIP! Businesses should always claim business profiles and prohibit affiliates from marketing on all local search engine directories. Some affiliates practice what amounts to “spamming” Yahoo local search directories and Google Maps by embedding their affiliate links in those directories. Any potential customer who finds your business via local search engine directories was a customer of your business from the beginning. This is another form of brand dilution and should be prohibited in an affiliate agreement.
8. Using Sub-affiliates
If your business is going to allow affiliates to subcontract out some work, it is important to require that affiliates identify in writing any and all sub-affiliates. Businesses may be held liable for the sub-affiliate’s conduct, so your business should incorporate a way to identify any sub affiliates in the affiliate agreement. I also recommend that businesses include a provision in the agreement where affiliates indemnify the business and hold it harmless from any liabilities it may incur due to the actions of any sub-affiliates.
9. Unique Content
Affiliates should generate their own content! There are at least two reasons for this: (1) businesses are paying them to expand their brand into new space and enhance brand presence by identifying and expanding into new markets. Businesses don’t pay affiliates to regurgitate pre-packaged material into old markets and attract the same clients; (2) restricting affiliates from copying existing content will help minimize any duplicate content issues. Provide samples for affiliates to view, but insist that the marketers add value to the products or services being promoted by creating their own marketing content.
10. Uniform Quality Control
Another measure I recommend to businesses is to create uniform guidance and provide accurate information about their products. A single, uniform standard setting forth expectations in terms of affiliate’s quality of delivery and presentation and providing a single source of information about your business’s products (or services) will minimize issues. Every business should ensure some means of quality control over the sale and promotion of its products.
This article was written by Philip A. Nicolosi, J.D. Mr. Nicolosi provides legal services through his law firm, Phil Nicolosi Law, P.C., focusing on startup and small business law, Internet & technology law and commercial transactions.
Mr. Nicolosi serves as a trusted advisor to numerous startups and small to medium sized businesses. This includes representation for a wide range of business law matters including business organization, corporate/LLC governance, regulatory law, contracts and transactions and most other matters outside of litigation. Mr. Nicolosi provides guidance with e-commerce, Internet marketing and technology-related legal matters. He also assists startup technology companies with seed financing, venture capital and exit transactions.