Affiliate Marketing: The Good and Bad
- Plaintiffs Gone Wild: Two Recent Efforts to Expand Affiliate Liability
- Courts Weigh In - and Plaintiffs' Expansive Theories Don't Fare Well
This article discusses marketers' liability for the actions of their marketing affiliates (what I refer to as affiliate liability). The affiliate liability issue has become red hot recently because numerous plaintiffs have taken aggressive legal positions seeking to expand the boundaries of affiliate liability. In three recent rulings, courts have emphatically rejected these expansive liability arguments. Even so, it seems likely that plaintiffs will continue to look for ways to expand affiliate liability, and despite the favorable rulings, defendants often settle a lawsuit alleging affiliate liability instead of establishing their rights in court.
Marketers create affiliate programs to outsource marketing decisions to domain experts. For example, independent third parties may have better or cheaper access to subcommunities of potentially interested consumers than a marketer's employees. An affiliate marketing program compensates these local experts for the work and expertise involved to take the marketer's message to those consumer communities.
When they work properly, affiliate marketing programs can play an important role in the broad "invisible hand" economic phenomenon of allocating scarce resources to consumers who value them the most.
Affiliate marketing doesn't always have this salutary effect. Affiliate marketing programs create payoffs to motivate affiliate behavior, and inevitably some affiliates will try to obtain the payoff without doing the desired activity.
Thus, even if the marketer would prefer otherwise, some affiliates might do "whatever it takes" to get paid, including using false advertising or illegitimate marketing mechanisms. Further, the fact that the marketer outsources some choices to affiliates (a necessary part of any affiliate program) can lead to "diffuse responsibility," in which the marketer and affiliates point fingers at each other if something goes wrong. Sometimes, when there are multiple tiers of affiliates, it can become effectively impossible to assign responsibility for the wrongdoing.
To bypass these legal entanglements, plaintiffs have sought ways to hold marketers vicariously (automatically) liable for their affiliates' actions. However, these efforts "break" standard tort law by trying to treat independent contractors as if they are principal-agents without the requisite supervision or authority that typically triggers agency liability.
As a result, overexpansive theories of affiliate liability cause marketers to internalize too many costs, curtailing potentially socially beneficial marketing activities or leading to overinvestment in socially wasteful liability minimization schemes.
Plaintiffs Gone Wild: Two Recent Efforts to Expand Affiliate Liability
There have been countless affiliate liability enforcement actions, but I'll focus on two recent initiatives.
New York Sales Tax Law
State and local taxing jurisdictions have long coveted a way to impose sales tax–collection responsibilities on nonresident Internet vendors. In general, these efforts have been stymied by the Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which requires a vendor to have a physical presence in the jurisdiction before the taxing entity can impose sales tax–collection obligations on it.
New York, however, developed a nifty workaround. In April, it passed a law (Chapter 57, N.Y. Laws of 2008) declaring that a vendor's marketing affiliates in New York constituted a physical presence in New York by the vendor. If so, New York can impose sales tax–collection obligations on remote vendors due to their New York affiliates.
As part of its crafty plan, New York tried to induce compliance with a carrot — if remote vendors voluntarily agreed to collect and pay sales tax from New York residents going forward, then New York would grant them amnesty for any back sales tax–collection obligations.
Neat trick, but...a small problem: Affiliates are independent contractors of the vendor, so this effort to treat them as legally related entities surely doesn't comply with the Constitution.
I suspect a court will confirm this flaw because both Amazon and Overstock.com have sued New York over the law. At the same time, to minimize its risk, Overstock has also tossed all its New York affiliates overboard. One might question the wisdom of the New York legislators prompting marketers to cut off opportunities for New York online entrepreneurs.
Trademark Owners Claim Marketers Are Liable for Their Affiliates' Marketing
Another trend: trademark owners are trying to hold a marketer liable for the alleged trademark infringement committed by its affiliates, such as when affiliates purchase the third-party trademark as a keyword trigger for search engine ads. Plaintiffs have alleged affiliate liability in at least three lawsuits in the past couple of months:
- DSW v. Zappos.com (S.D. Ohio complaint filed May 12, 2008). For more, see SEOmoz.
- NameSafe v. LifeLock (M.D. Tenn. complaint filed June 26, 2008). For more, see Techdirt and News.com.
- Rosetta Stone v. Rocket Languages (C.D. Cal. complaint dated July 2, 2008). For more, see the WSJ Law Blog.