Advertisers Settle NY Anti-Adware Action

By Eric Goldman

Earlier this week, the New York Attorney General’s (NYAG) office issued a press release with the blazing all caps headline:

GROUNDBREAKING SETTLEMENTS HOLD ONLINE ADVERTISERS RESPONSIBLE FOR DISPLAYING ADS THROUGH DECEPTIVELY INSTALLED “ADWARE” PROGRAMS

Groundbreaking…or groundless? After all, as I’ve posited before, the argument that advertisers can be liable for the actions of their advertising venues has almost no legal support. So this settlement may be groundbreaking, but a cynic could argue that the settlement is also legally groundless.

So why settle if the advertisers didn’t break the law? Arguably, the settlements merely represent the logical decision by innocent parties under pressure by out-of-control prosecutors who impose massive costs on their targets just by initiating an investigation. I think the specific settlement terms provide some perspective on this. Each of the three advertisers (Priceline, Travelocity, and Cingular Wireless) agreed to three basic operative terms:

* checks in an amount ranging between $30-$35k–an amount vastly dwarfed by the cost of litigating an NYAG enforcement action. Basically, these checks are a small fraction of the nuisance value of the lawsuits.

* a promise to include certain covenants in downstream ad agency or advertising partner agreements restricting the placement of ads into impermissible adware. This is a little bit of a pain because the advertisers may get some pushback from their business partners on the specific terms, but for the most part, this is a meaningless provision. It’s easy for the settling advertisers to put the required language into their standard ad buy agreements (or some rider) and satisfy this burden.

* Knowing that talk is cheap, the NYAG added some bite to the previous obligation. Not only must the advertisers include language in their contract, but they must do quarterly audits to confirm that their ads aren’t showing up on adware. THAT sounds like a fun job for an employee. Not only does this obligation burn some employee time every quarter, but they will need to buy that employee a disposable computer!

So, what do we learn from this settlement? Not much. We learned a long time ago that if Spitzer’s office called with a baseless demand, generally the cheapest and most expeditious course of action is to strike a deal even if it makes your skin crawl. In this case, the decision was easy: settling cost a check that’s less than the cost of litigating the defense, plus the loss of a few hours of an employee’s time each quarter. Sounds like a pretty cheap way of getting out of prosecutorial cross-hairs.

But what should the advertising industry do in the wake of this enforcement action and settlement? One obvious solution is that every advertiser could contractually require that their ad agencies blacklist adware. This would be a nuisance, especially because it would impose extra burdens on advertisers who have never even used adware, and the value of proactively blacklisting depends in part on advertisers’ risk tolerances and predictions of how Cuomo will run the NYAG office now that Spitzer has moved on. (It remains to be seen if Cuomo has the same appetite for bringing dubious enforcement actions as Spitzer.)

Alternatively, advertisers may gravitate towards a standard like the Trusted Download program. Requiring that downstream ad partners adhere to the Trusted Download standards will give advertisers significant legal cover the next time prosecutors get frisky.

Meanwhile, from an academic standpoint, I’m troubled that the advertising industry might change its practices based on a legal theory that the NYAG didn’t prove in court and could be legally baseless. Therefore, I renew my call for anyone to articulate the legal doctrine on which advertisers should be liable for the behavior of their advertising venues (excluding spam, which is statutory), preferably with supporting caselaw precedent. I’m all ears.

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