Affiliate programs have served as licenses to print money for many companies, both in the adult space and elsewhere. But affiliate programs are rife with traps for the unwary, mostly because of the inability to monitor the affiliates' behavior.
The reason for outsourcing, of which the affiliate program is a subcategory, is the same for everyone: Outsourcing can save money.
Take an example of outsourcing in another industry: Many operators of office buildings outsource cleaning services. They hire Joe's Janitorial Service, which sends a crew of people to clean the offices every evening. That makes sense for two reasons. First, large numbers of part-time employees are difficult to assemble. Second, even if they were easily found, Joe's Janitorial Service costs dramatically less than hiring a part-time janitorial staff.
But let's analyze why Joe's is cheaper. Is Joe paying minimum wage? Taxes? Is he carrying workers-compensation insurance? Most significantly, especially in places like Los Angeles, can all of Joe's employees legally work in the United States? Indeed, Joe's business may be totally underground. You write a check to Joe's Janitorial Service, and he goes to the bank and cashes it, rather than depositing it. He pays everyone in cash and pockets the balance. Joe thereby enjoys incredible tax savings. By comparison, if you were to hire only documented workers, withhold their taxes (of which your half approaches 20 percent) and pay your taxes, your net cost of cleaning would skyrocket.
Affiliate programs simply are outsourcings of sales and marketing, which offers many advantages. Inside sales people require an office, a telephone, mandatory benefits and withholding, workers-compensation insurance and a guaranteed minimum salary. Employees call in sick, sue you for discrimination and sexual harassment, and quit without notice. So affiliate programs are a bonanza. The affiliate gets a commission, and the affiliate may work at home, have no insurance, work sporadic hours and whatever else, but one thing is clear: no sales, no pay. That's the good side. But there is a dark side to affiliate programs.
A good starting point is what most prominently has caught the spotlight in recent years: spam. As this column has discussed before, the Federal Trade Commission has taken the position that an affiliate program is strictly liable for its affiliates' violations of the CAN-SPAM Act. While that position has not totally held water in the only two cases in point, it remains out there. [United States v. Impulse Media Group Inc. (2007) and United States v. Cyberheat Inc. (2007).] Recall that the FTC can slam you for up to $11,000 per CAN-SPAM violation. Since the law remains iffy and the cost of losing is dramatic, most affiliate programs on the wrong end of CAN-SPAM lawsuits from the FTC have settled instead of taking their chances in court.
The ones fighting are spending substantial money on their defense but leaving the outcome in doubt. We'll see.
The latest wrinkle arises from the spate of federal anti-telemarketing laws enacted in recent years. For example, the Telemarketing and Consumer Abuse Prevention Act ("The Telemarketing Act"), which brought us the popular Do Not Call Registry, recently slammed satellite television giant DirecTV. DirecTV outsourced its telephone sales activities - so-called "boiler room" sales - but the outsourcing companies apparently ignored the Telemarketing Act. DirecTV didn't place the calls that got the company sued, but it settled with the FTC for a whopping $5.3 million after the FTC sued under the Telemarketing Act.
Clearly, websites do not employ boiler-room sales. But some wise guys apparently have started using automated text messaging to garner commissions from affiliate programs. Those really tee people off, especially those who pay extra for each text message. If the text messages were generated automatically - invariably the case - they also violate one of those laws, this one under the Common Carrier Regulations, which, unlike CAN-SPAM, provide a private civil remedy of $500 per call. The court can triple that if the violation was willfully or knowingly accomplished. Thus, another cottage industry has developed, suing for violations of various components of those regulations.
Having covered the long-standing spam problem and the emerging text-message problem, it is time for what is on the horizon. And this covers a broader group than just affiliate programs; it also covers advertising on independent websites.
The future is copyright infringement. Content producers are at the end of their collective tether with piracy and are gearing up to do something about it.
The first targets in their crosshairs are "tube" sites. (See the February 2008 issue of AVN Online.) While Vivid and PornoTube.com slug it out over whether the tubes qualify for so-called "safe harbor" protection under section 512 of the Digital Millennium Copyright Act, there is another angle.
If you use, as examples, websites that infringe copyrights to generate traffic and the resulting advertising revenue, you will see that this problem comes in three flavors.
Scenario One: Let's assume the tubes have DMCA safe-harbor protection. Every time a user uploads a copy of copyrighted material to a tube site, an act of copyright infringement takes place, as is the case when a copy is downloaded. Advertisers capitalize on that traffic by profiting from the advertising. Aren't the advertisers profiting from copyright infringement?
Scenario Two: A website features ripped-off content. That content, in turn, generates traffic for the site. The traffic, of course, is monetized by advertising revenue, and the advertisers profit from the advertising. Aren't the advertisers profiting copyright infringement?
Scenario Three: Assume an affiliate has a site that features infringing material. Surfers visit the affiliate's site, looking for the featured infringing material. They also find banners that advertise the affiliate program's site, seeking to generate traffic to the affiliate program. Isn't the affiliate program profiting from copyright infringement?
In all three cases, the answer seems to be "yes." And it has long been the law that you do not need to be the one making the copy to be guilty of infringement. For example, if someone takes a copyrighted photograph to a camera store to be enlarged, both the camera store and the customer can be liable for infringement.
Since intentionally inducing or encouraging direct infringement gives rise to liability, the third parties are guilty in all of the previously described scenarios. And expect them to soon be the targets of copyright-infringement lawsuits from exasperated content producers, who know that if the advertising can be dried up, so will the infringing. And if the affiliate programs are sued, they will police the affiliates. Count on it.
(Clyde DeWitt is an attorney whose practice in Los Angeles and Las Vegas has focused on adult entertainment since 1980. He can be reached through AVN Online's offices or at [email protected]. Readers are considered a valuable source of court decisions, legal gossip and information from around the country, all of which is received with interest. Books, pro and con, are encouraged to be submitted for review, but they will not be returned. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.)
