You might assume that Bill Gates’ 23-year-old daughter, Phoebe Gates, is the final boss of all nepo babies due to her zillionaire dad. But she’s long insisted that her e-commerce startup, Phia, will succeed with “no ties to my privilege or my last name.”
That goal just got harder than ever with the revelation that Phia has been taking credit for sales it didn’t drive — a practice that could land her in serious legal jeopardy, now that damning internal Slack channel messages obtained by Bloomberg suggest that both Gates and fellow cofounder Sophia Kianni knew they were involved in the scheme for at least seven months.
Cookie stuffing is a deceptive tactic in online marketing in which affiliates — marketers who drive traffic to brands and take a cut from sales — encourage consumers to buy products by crafting special links, which are “stuffed” with cookies that track how the consumer was originally referred to the site. These affiliates then claim commissions for sales they never drove, something that’s “typically treated as federal wire fraud in US courts,” as corporate attorney Ariel Givner pointed out in a tweet responding to Bloomberg’s reporting.
There’s precedent. A top eBay affiliate, run by tech founder Shawn Hogan, was sued by the online auction site in 2008 for defrauding it and its affiliates in a cookie stuffing scheme. In 2014, Hogan was sentenced to five months in federal prison after being found to have defrauded eBay for an alleged $28 million in marketing fees. (“That case is not comparable,” a lawyer representing Phia told us after we first ran this blog. “Please at least note that Phia disputes the comparison.”)
According to Givner, Gates could be facing a “max penalty of up to 20 years prison + fines/restitution.”
Phia is a “personal shopping assistant” browser extension, which is designed to lead users to the best deals for clothes and fashion accessories. When a shopper uses the extension to buy something, Phia earns a commission from the retailer.
However, as Bloomberg first reported on July 9, Phia was also found to have claimed commissions on sales that never involved its product. The extension was found to open a background tab and drop its own cookie when users made a sale, while even overriding legitimate referrals.
“This is inaccurate,” Phia’s attorney told us. “Phia placed an affiliate cookie at the moment it showed the user coupons, so its product was involved in every case. This happened only after the user chose to download the free Phia app and browser extension, consented to its Terms of Service and Privacy Policy, and agreed to multiple pop-up disclosure and consent windows. Misattribution that was corrected (along with transaction reversals) is not cookie stuffing.”
“The most fundamental requirement in affiliate marketing is that commission is only paid if a user clicks,” independent researcher and affiliate marketing expert Ben Edelman told Bloomberg at the time. “The rules don’t allow fake clicks, simulated clicks, imaginary clicks or hypothetical clicks. Only a real click will do.”
After being confronted by Bloomberg, a Phia spokesperson blamed “technical anomalies,” arguing that it had made changes within just 24 hours to fix the problem.
“As soon as we were notified, our team worked overnight to identify, mitigate, and has since resolved the issue,” the spokesperson told the publication.
But given the latest news, it seem to show far more intent behind the scenes, indicating Gates specifically knew about an offending “coupon auto drop” feature since at least December of last year. (Phia’s lawyer disputed this point, saying that the “intent was to show shoppers coupons.”)
“can u confirm auto pop for cookie drop is live on ALL sites w a coupon to confirm we are monetizing on all [gross merchandise volume,” Gates wrote in a December 18 Slack channel message.
“Whatever we can do to keep these cookies dropping will be amazing thank you,” Kianni wrote in a separate message after an engineer warned her that auto dropping cookies could be “against compliance.”
Phia’s attorney disputed that the Slack message was a “response to an engineer’s compliance warning. It was not. The compliance warning concerned a separate feature, intended to make the extension smaller, that was never released. Her message was about a different feature, and per Bloomberg’s own published excerpt, she immediately afterward said she wanted to ‘make sure that the cookie is not ‘resetting,” a line your article omits.”
While the company maintains it had done its due diligence, turning off the offending feature when Bloomberg first brought it to light last month, the numbers paint a damning picture. According to Bloomberg, average daily revenue plummeted from about $80,000 to between $10,000 and $28,000, according to a chart reviewed by the publication. Cookie stuffing alone accounted for an estimated 51 percent of all sales Phia claimed credit for in June.
“The revenue decline followed Phia’s decision on July 7th to disable most of its monetization while it reviewed the matter, not the reversal of any improper practice,” Phia’s lawyer said.
Some affiliates have already cut ties with Phia after last month’s reporting.
It remains to be seen whether Bill Gates’ daughter will face any legal repercussions. But some commentators argue there could be enough grounds for a lawsuit.
For one, eBay, which successfully sued affiliate marketer Shawn Hogan decades ago, was directly funding Phia — a particularly ironic relationship, as independent marketplace journalist Liz Morton pointed out last month after Bloomberg published its initial investigation.
“eBay is very familiar w/ the kind of cookie stuffing fraud Phia allegedly engaged in — in fact, it worked directly w/ FBI to build a case against Shawn Hogan for similar fraud 20 years ago,” Morton wrote. In a follow-up on Tuesday, Morton argued that Etsy could also “have a case.”
In a statement to Bloomberg, a Phia spokesperson said that “we will learn from this and want to ensure our users have the best possible shopping experience, with features like our new digital closet and more to come.”
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