Affiliates are advertiser's agents

American Bullion, Inc. v. Regal Assets, LLC, 2014 WL 7404597, No. CV 14–01873 (C.D. Cal. Dec. 30, 2014)

 

Regal sought reconsideration of the court’s grant of a preliminary injunction on false advertising claims, which was granted in part.  American Bullion and Regal compete in selling gold and other precious metals for individual retirement accounts.  AB argued that Regal’s affiliate marketers falsely disparaged AB, misdirected potential customers to Regal, and failed to disclose financial relationships between Regal and the affiliates. The court concluded that Regal’s affiliates were likely its agents, that the relevant acts fell within the scope of their agency, and that AB was entitled to a preliminary injunction.

 

Regal argued that Winter’s preliminary injunction standard was inappropriate for speech cases, and that the injunction was an unconstitutional prior restraint.  The cases Regal cited didn’t stand for the proposition that courts couldn’t enjoin any commercial speech; false and misleading commercial speech isn’t protected by the First Amendment, and preliminary injunctions regularly issue in false advertising cases even in the face of First Amendment arguments.

 

If Regal was arguing that there wasn’t yet evidence of falsity, the evidence before the court was otherwise; “there appeared to be little dispute that false statements were disseminated by some Regal affiliates.” Regal apparently acknowledged that “some Regal affiliate sites displayed images appropriated from obituaries as if to suggest that the deceased individual pictured endorsed Regal, contained completely fabricated personas and backgrounds of nonexistent endorsers, and explicitly and falsely stated that Plaintiff was found guilty in a fraud suit and was later sued by the U.S. Commodities Futures Trading Commission.”  Even at the preliminary injunction stage, these statements were false and unprotected by the First Amendment.

 

However, the court modified the injunction in some respects to limit its burden and increase its clarity.

 

Regal also argued that the court wrongly entered a preliminary injunction based on a negligence theory, since AB argued only intentional acts.  The court found this characterization questionable.  Principals can be liable for their agents’ negligent actions within the scope of the agency, and also for other intentional acts, even those outside the scope of the agency, that are subsequently ratified by the principal.  The court’s previous ruling focused on agency, and not negligent versus intentional acts, a distinction that wasn’t very important here. 

 

Principal liability attaches where an intentional tort is a foreseeable “outgrowth” of the employment, “in the sense that the employment is such as predictably to create the risk employees will commit intentional torts of the type for which liability is sought.”  Intentional acts outside the scope of agency create principal liability only if authorized or ratified; but even if ratification were required, Regal arguably ratified the acts “by paying affiliates for their lead and sales generating efforts, even when those efforts included dissemination of false and disparaging statements.”

 

Regal also argued that circumstances had changed.  It retained an outside monitoring firm, hired a new, experienced General Counsel, and terminated 2100 affiliates. It also changed the provisions of the agreement between Regal and its affiliates.  This last was the most significant, because the locked-in nature of Regal affiliates was a major factor in the court’s prior agency finding.  Regal argued that it now encouraged affiliates to work for multiple companies, and that 12% did so.  The court welcomed the changes, but found that the new agreement didn’t change the “fundamental nature” of the relationship between Regal and its affiliates. Regal affiliates were, “in essence, sales agents working on commission,” which was earned for generating sales and providing certain leads even if the leads didn’t result in sales. “No matter whether Regal has 2,000 affiliates or 200, so long as Regal pays affiliates to generate sales, it cannot avoid liability for affiliates’ actions in pursuit of that goal.”

 

Plus, if Regal allowed its agents to continue to disseminate false or misleading information, “such as by allowing agents who post to remain in the affiliate program and/or continuing to pay those agents for generating leads and sales for Regal,” Regal could be liable for punitive damages.