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This article is written by Tejas Geetey, pursuing a Diploma in Business Laws for In House Counsels from LawSikho.com.

Introduction

Any emerging start-up or enterprise to create a brand for its product and services involves itself in various types of promotional activities. These include advertisements, campaigns, and other promotional gimmicks. Enterprises often invest and enter into agreements with intermediaries to promote and sell their products.  

These intermediaries are affiliates that promote and attract potential consumers to buy the company’s products and services and earn a commission for that marketing. Lately, many fraudulent activities and scams are happening in the form of affiliate marketing. This article aims to provide a starting point to the intermediaries as to how to negotiate an affiliate agreement so as to reduce the chances of being scammed.   

Essentials of affiliate agreements  

An affiliate agreement is a marketing agreement signed between the affiliate, an independent individual, and the promoting/host company. The host company affiliates with another party to sell its goods and services.  The agreement describes the relationship where the affiliate accepts the company’s regulation for promoting the company. 

The affiliate, by promoting the host’s products, pursues potential consumers to buy the products thereby increasing sales of the products. The seller in return for the services pays commission to the affiliate depending on the sales he/she has generated. The host company hires many affiliates with this purpose to make a network among sellers and consumers. This helps the company in improving its customer base and long-term sustainability.

Important points to keep in mind while negotiating an affiliate agreement

An affiliate agreement is a legally binding arrangement between two parties in which one the affiliate is compensated for advertising the company to the potential customers of the affiliate’s website or app. The agreement defines and governs the terms and conditions under which the association is made. 

In a standard affiliate agreement, the affiliate receives commission/remuneration in many ways which includes when a customer makes a purchase on the company’s website or pays through the company’s website for its services. The agreement spells out both parties’ responsibilities, confidentiality, payment periods, and conversion commissions to be given to affiliates based on purchases or visits to the company’s website. An affiliate agreement generally includes terms of the agreement, representations, and warranties, governing laws, necessary licenses needed by both affiliate and company, ownership over Intellectual property, non-disclosure clauses, and termination.

The purpose of entering into an affiliate arrangement is not always for financial gain. Institutions and non-profit entities could also form an affiliate relationship to promote any form of volunteer activity. Both the parties should therefore properly define the role and responsibilities to be fulfilled to avoid any future conflicts. Following are the clauses that should be negotiated properly while executing the affiliate agreements:

  • Remuneration clause

Remuneration is one of the important clauses in the agreement. The affiliate must negotiate the commission depending on the sales and traffic on the company’s website. The affiliate should be remunerated in accordance with sales he/she has facilitated. For illustration, For sales of 10 items, the affiliate shall receive a remuneration of at least 10% of the total cost. The affiliate should also check how much other firms/competitors are offering the same services. Additionally, the affiliate should analyse the current market conditions to determine whether the commission can be increased or not.    

  • Confidentiality and non-disclosure 

The parties should negotiate the confidentiality and non-disclosure of sensitive information. Confidential information shall mean such information which the company has marked as not to be disclosed or which is not in the public domain. The company should properly negotiate this part with the affiliate as he/she will act as the representative of the company. The code of conduct and regulations to be followed should be negotiated properly by the company.

  • Indemnification

Indemnification protects the affiliate from any action performed in the course of employment. The indemnification clause provides that the company shall be responsible for the actions taken by the affiliate in relation to the services provided while performing the agreement. Accordingly, if an act is performed lawfully in the course of employment, then any loss shall be indemnified by the company.

  • Dispute resolution

Both parties should properly negotiate as to how disputes shall be resolved.  In case of disputes arising in connection with any provisions of this agreement for whatsoever reason, the company should resolve it first through amicable settlement. In case a fruitful discussion did not take place, then the companies can refer to other options. The parties must decide which action shall be considered a breach of the agreement. In the matter of Greenhouse vs. Paysafe Financial Services Ltd, it was decided that merchant exclusions were a breach of contract by the party and the claimant is entitled to damages for that breach and provided that for any exclusion, declaration/communication has to be provided to the other party.    

How to identify fraudulent deals/arrangements?   

Affiliate marketing is based on the principle of networking. The affiliate by sharing his/her opinion on the products and services convinces the potential consumer to purchase the products. Affiliate agreements made between company and affiliate are therefore based on sharing of information. Any misuse or misrepresentation of information, therefore, leads to affiliate frauds.  

Affiliate fraud can occur in almost every company. It is for the company to ensure that a mechanism is in place to identify the same. For ex- Flipkart faces various ad frauds. Ad frauds show exaggerated views leading to inaccurate representation of digital traffic. This led to misrepresented figures and fraudulent sales thereby affecting the long-term growth of the company. Misrepresented information goes through a recurrent process by first going through the company to internal and external tools and then to the publisher. Both the parties should, therefore, build solutions to stop this recurrent process. The parties should keep in mind the following points while entering into an agreement:

  • Analysis of past records

The affiliate must analyse the company’s financial position and business operations. Sometimes, the companies offering affiliation deals are either frauds or are providing adulterated and bad-quality products. The affiliate should therefore analyse the customer satisfaction and reviews provided, see if any malpractices are followed by the company, and whether a proper work environment is given to the affiliates or not.  

  • Defining the nature of the association

It is also essential that both parties clearly define their term of association. Both the parties should clearly define their interests for entering into an association as the same shall enable the affiliate to make better decisions while promoting and selling the company’s products.  In the matter of  Den Network Limited vs. Multi Vision Network, the parties were in dispute regarding the terms of their associations. The court in this case dealt with the issue of whether an affiliate or associate agreement was entered or not. The court observed that the respondent was fraudulently representing that service of acting as local operator shall be considered as a business associate agreement.  

  • Association should be based on trust

Customer relations are built on trust and faith. The company, therefore, should not be a spreader of fake information about its products as that will affect its relationship with the consumers. The parties should have proper negotiation to identify their interests from the agreement. The affiliate should take reasonable precautions to identify if the company is involved in fraudulent activities. The parties to reduce these fraudulent activities can execute a data protection policy to govern the usage, transmission, and disclosure of data. Any breach from the said policies can make the affiliate liable for the damages.              

Conclusion and suggestions 

Affiliate marketing refers to the buying and selling of goods through various channels. Host companies to promote and sell their products, hire affiliates. The affiliates act as agents for the company and convince the consumers to buy the products. An affiliate plays the role of intermediary between the company and the seller and therefore the company is responsible to indemnify the affiliate for any loss incurred during the course of employment.  Affiliate marketing in this process connects merchants with bankers and creates a network between the seller and consumers. It is, therefore, important that the affiliate does not exaggerate or provide false information about the product as would lead to a breach of trust between the parties. 

Affiliate marketing can act as an employment generator if the government takes stringent steps to regulate the market. If the company has an unfair advantage in comparison to the affiliate and influences its work, then this will affect the long-term relationship of both of the parties. Both parties should build a framework for the effective dissemination of information and implement stringent policies for product protection. Affiliate agreements are therefore essential to govern and define the association of the affiliate and the promoting company. 

References


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