Google Slapped with Click Fraud Lawsuit

The recently-announced lawsuit against Google by Click Defense threatens not just the search engine giant, but the entire revenue making model for most search engines. Is click fraud as pervasive as Click Defense claims? Or is there more to this story than meets the eye?

The nightmare has been brewing for at least a year, when you may have heard the first estimates of click fraud representing as much as 20 percent of the fees in some advertising categories. Click fraud, a fairly new term then, occurs when Web search pay-per-click ads are deliberately clicked by users who do not plan to do business with the company represented by the ad. Sometimes performed by software, sometimes by humans (some people are even paid by companies to perform the task), click fraud could cost a company many thousands of dollars before it realized what was happening. Yet click fraud is an industry term, not a legal term; it is not legally defined as “fraud.” But the lawsuit recently filed by Click Defense just might change that.

On June 24 in a U.S. District Court in San Jose, California, Click Defense filed a lawsuit against search engine giant Google. The company is seeking class action status for its suit. The filing, which runs to 18 pages, accuses Google of breach of contract, negligence, unjust enrichment, and unfair business practices. Click Defense believes that Google has not done enough to protect its advertisers from click fraud, or reimburse those who have suffered damages from it. Click Defense is seeking $5 million in damages.

If successful, this lawsuit stands to do far more damage to Google and other search engines than the loss of money. Given that Google’s net revenue for the first quarter was $1.3 billion, a mere $5 million, though noticeable, would register more as the cost of doing business. The problem is that the lawsuit attacks Google right in its main revenue stream – advertising. And if Google is vulnerable, why not all of the other search engines that make a significant amount of money from pay-per-click ads? That is a good question – but there may be more to this lawsuit than first meets the eye.

Google itself has admitted that it makes 99 percent of its income from advertising. It may have all of its eggs in one basket, but so far it has proven to be a very profitable basket, and Wall Street seems to approve. The search engine’s stock has risen from $85 per share at its initial public offering in August of last year to over $300 more recently.

At one time, Google used to say that click fraud did not have a material effect on its results. The company has put some effort into preventing click fraud, with teams of people working to prevent it. Its technology aimed at addressing the problem evaluates clicks based on up to fifty data points. And yet, it would seem that this is not enough.

In November of 2004, Google sued Auctions Expert International, accusing it of engaging in systematic click fraud. The following month, Google chief financial officer George Reyes admitted that the problem was growing. “I think something has to be done about this really, really quickly, because I think, potentially, it threatens our business model,” he said. It seems clear, then, that Google can’t try to claim that the problem doesn’t exist – or even that they have it completely under control.

But Click Defense may not be a mere victim in this case. It makes its money by identifying click fraud and getting money back for its customers. The kind of publicity produced by such a high-profile lawsuit couldn’t be bought for love or money; the story was picked up by Reuters, which all but guaranteed that the major news outlets would be buzzing about it. How many potential clients read the news?

To be fair, though, Click Defense is simply fanning a flame that already exists. The Search Engine Marketing Professionals Organization (SEMPO) discovered in a survey it conducted recently that 45 percent of advertisers were concerned about click fraud. Only about a quarter thought it wasn’t a significant issue. Here is the interesting point: only six percent stated that click fraud was a serious problem that they had tracked. This leaves companies such as Click Defense with a huge potential market of worried advertisers who have not yet dared to take a look at the problem. Perhaps Click Defense is hoping the lawsuit against Google will work as a wake up call. 

Some commentators have observed that the suit “falls just short of accusing Google of physically performing the click fraud itself,” this from Jason L. Miller at WebProNews. He raises the excellent point that “Click Defense…accusing Google of having a financial interest in not detecting click fraud is a little bit funny as Click Defense has a definite financial interest in nailing Google for it.”

On the other hand, this is not the first click fraud-related lawsuit that Google has had to defend against recently. The website LostClicks.com, created by lawyers Joel Fineberg, Dean Gresham and Stephen Malouf, was launched in late May to help them find click fraud victims for their class action lawsuit. Filed in the circuit court of Miller County, Arkansas, the class action names as defendants Google, Yahoo, Lycos, Ask Jeeves, FindWhat.com, Buena Vista Internet Group, LookSmart, America Online, Netscape and Time Warner. The lead plaintiffs named by the site are Lane’s Gifts and Collectibles and Caulfield Investigations.
 
The site’s accusations dovetail with Click Defense’s charges. To quote LostClicks.com: “We believe that the major search engines are seeking to conceal this problem [click fraud] and have not done enough to make their bills transparent and collect only for bona fide advertising. Clearly, the search engines have an economic disincentive to eliminating click fraud as it increases the revenue they collect.” And yet, the site has not yet generated as much buzz as you would expect for a hot topic. Its forums currently have only three registered users, and no posts.

Indeed, part of the issue is that it’s questionable just how strong a case can be made against Google. Click fraud itself is not always easy to detect. And Kevin Lee, chairman of search marketing firm Did-it.com, observed that it is “difficult to imagine that Google is not committed to reducing and eliminating click fraud, which ultimately reduces click prices due to poor conversion.” So how does one prove that Google has or has not been doing enough to prevent click fraud?

Google spokesperson Mike Mayzel stated that “We believe the suit is without merit, and we will defend ourselves against it vigorously.” Click Defense begs to differ, stating in its lawsuit that click fraud on Google accounts for up to 38 percent of clicks. “Google knows…that click fraud is rampant in its AdWords program, and that the advertisements it sold and sells…are worth significantly less than the amount…bid for key words.” Who is right?

The problem is that it is difficult to know who is right. Again, quoting Lee, “No one has fully defined when a click is `fraudulent’ versus simply a click from a poor quality source. So it is difficult to know if the firm initiating the lawsuit…truly believes the fraud problem to be as big a deal as stated, or if they are just using the legal action for public relations.”

With these kinds of problems, one wonders whether it is time to find a different online advertising model, something that may be less susceptible to fraud. This would not be easy; pay-per-click ads have been around for several years now, which makes them well-established in the world of the Internet. Perhaps a wholesale change would not be necessary, however. It may be technologically possible to give advertisers more control over what locations they accept clicks from, as a first step.

I am not a technology wizard, nor am I a fan of lawsuits. But it seems to me that the solution to this problem is more likely to be found in the computer room than the courtroom.

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