Clicking Away the Competition

• Citation: Vol. 3 No. 2
• Publication year: 2021

Shidler Journal of Law, Commerce & Technology3 Shidler J. L. Com. & Tech. 5Volume 3, Issue 2, Autumn 2006

TOPIC

Cite as: Daniel L. Hadjinian, Clicking Away the Competition: The Legal Ramifications of Click Fraud for Companies that Offer Pay Per Click Advertising Services, 2 Shidler J. L. Com. & Tech. 5 (Dec. 4, 2006), at [http://www.lctjournal.washington.edu/Vol3/a005Hadjinian.html]

Clicking Away the Competition: The Legal Ramifications of Click Fraud for Companies that Offer Pay Per Click Advertising Services

By Daniel L. Hadjinian [fn1]

(c) 2006 Daniel L. Hadjinian

Abstract

Two businesses that advertise online, Lane's Gifts and Collectibles and Advanced Internet Technologies, recently filed lawsuits against Google, and other intermediaries that offer sponsored advertising services. The companies allege that these intermediaries failed to adequately protect them against "click fraud." Click fraud refers to the practice whereby competitors and other persons may click to view an online ad with no intention of buying, learning about the advertiser's services, or engaging in any other action that the ad aims to achieve. Plaintiffs allege that the intermediaries breached their contractual duties by charging the companies whose ads they hosted for fraudulent clicks, and by failing to take adequate detection and prevention measures. This Article examines the basic contract law claims underlying these cases and concludes that while contracts may grant the search engines discretion to define chargeable clicks, such discretion might be constrained by the terms of extrinsic writings.

Table of Contents

Introduction Understanding Click Fraud Recent Pay-Per-Click Litigation Breach of Contract Actions: Defining "Actual Clicks" and Detection Duties Elements of a PPC Breach of Contract Claim A Representative Case Study: Lane's Gifts Defense Against a PPC Breach of Contract Claim Conclusion Practice Pointers

Introduction

[1] Pay-per-click ("PPC) advertising is a lucrative online service, accounting for nearly all of the revenue of many popular search sites such as Google and Yahoo. [fn2] A new phenomenon, referred to as "click fraud," however, is currently cutting into this revenue model. Click fraud occurs when a person or program clicks on a company's PPC advertisement with no intention of viewing the advertiser's webpage or making a purchase.

[2] Two companies that use PPC advertising recently filed lawsuits against Google, Yahoo, and a number of other major intermediaries, alleging that these entities breached both the substantive terms of their contracts, as well as the implied duty of good faith. [fn3] Advanced Internet Technologies ("AIT") and Lane's Gifts and Collectibles ("Lane's Gifts") claim that the intermediaries that hosted/published their online advertisements improperly charged them for fraudulent clicks. The plaintiffs assert that such clicks are not fairly chargeable within the terms of the PPC contracts. The advertisers also claim that the search engines failed to take adequate steps to detect and prevent click fraud. These suits raise two central questions: (1) how should a chargeable click be defined within the context of a standard PPC advertising contract; and (2) whether search engines have any duty to protect advertisers from fraudulent clicks. This Article begins by providing an overview of click fraud. The Article then addresses the breach of contract claims and uses AIT and Lane's Gifts as cases illustrative of the types of disputes that have arisen regarding click fraud. [fn4] However, this Article is not meant to be a detailed analysis of any specific company's current practices.Understanding Click Fraud

Understanding Click Fraud

[3] PPC advertising is an interactive form of online advertising where visitors to a website can click on displayed ads (usually in the margins of the page), routing the visitor to a company's website. [fn5] These ads are usually keyed to specific search terms entered by the user into an intermediary's search engine. Businesses ("advertisers") pay an intermediary website ("search engines," such as Google or Yahoo) that publishes their advertisement at an agreed-upon fee for each time the advertisement is "clicked" by a website visitor. PPC advertising appeals to businesses because it offers the opportunity to reach potential consumers across the world, while also narrowing the scope of the ad to those who have expressed a particular interest in a related subject.

[4] There are two types of click fraud perpetrators: competitors and affiliates. Competitor click fraud occurs when a business's competitor clicks on a PPC ad in order to run up charges to a competitor. This not only damages a company financially, but may also result in a more favorable position for the competitor's ad. [fn6] Affiliate click fraud is perpetrated by a third party (the "affiliate") who agrees to host the ad in exchange for a share of the click stream revenue. The affiliate then uses fraudulent clicks to drive up click fees and its share of that revenue. This type of fraud is generally committed manually and by using software programs called "bots." [fn7]

[5] According to the Interactive Advertising Bureau, in the first six months of 2005 advertisers spent $2.3 billion on search-related PPC advertising - an increase of 27% from the same period in 2004. [fn8] This makes PPC advertising one of the largest and fastest growing areas of online advertising. [fn9] Analysts expect continued growth, with PPC advertising reaching nearly $20 billion by 2010. [fn10] However, some commentators estimate that as many as 20% of all clicks are fraudulent, and there are concerns about the industry's continued vitality. [fn11] Businesses may choose to spend their advertising dollars elsewhere as they become more aware of the problems posed by click fraud. [fn12]Recent Pay-Per-Click Litigation

Recent Pay-Per-Click Litigation

[6] In several recent cases, companies that use PPC advertising sued Google and other intermediaries for their failure to prevent click fraud. Companies who advertise online filed three of these cases alleging that the search engines breached their contracts by charging for fraudulent clicks. [fn13] Google filed a fourth important case seeking damages from an affiliate allegedly engaging in click fraud. [fn14]

[7] In Advanced Internet Technologies v. Google [fn15] ("AIT") and Lane's Gifts and Collectibles v. Yahoo, [fn16] the plaintiff PPC advertisers allege that the defendant PPC advertising search engines charged the plaintiffs for fraudulent clicks in violation of the terms of their contracts. [fn17] AIT entered into a contract with Google to publish AIT's PPC ads through its Adwords program. [fn18] The AIT contract calls for Google to charge AIT three dollars for every "actual click" on the advertisement when displayed to users of Google's search engine who had entered the search term "click fraud." [fn19] AIT and other PPC advertiser's bid on a price they are willing to pay for each click in order to have their ad displayed in association with the desired search terms. [fn20] The highest bidder is then generally displayed in the most prominent position on the search engine's results page, with each lower bid taking a less desirable space according to its rank. [fn21]

[8] AIT asserts that Google breached its Adwords agreement by knowingly charging advertisers for fraudulent clicks, which, according to AIT, are not "actual" clicks within either the meaning of the Adwords agreement or industry practices. [fn22] AIT further alleges that such a practice is a breach of contract because it violates the duty of good faith implied in every contract by injuring advertisers' right to receive the benefits of the contract - namely, the potential for sales to those users who click on the advertisement. [fn23] In the Lane's Gifts lawsuit, a plaintiff PPC advertiser alleged that the defendants (a number of the largest Internet Service Providers and search engines) similarly breached their contracts by charging advertisers for clicks that were not from actual customers. [fn24]

[9] The outcome of this and any similar cases may hinge on what constitutes an "actual click." A settlement has been approved between Google and the plaintiffs in Lane's Gifts. [fn25] The settlement would require Google to pay up to $90 million (including attorney's fees) to advertisers who have been victimized by click fraud. [fn26] All advertisers who have ever participated in Adwords are eligible to make a claim for a rebate, but each claim is subject to verification by Google. [fn27] The AIT case is subject to a stay pending the outcome of that negotiation. [fn28] However this settlement fails to resolve the primary question addressed by this article and any such lawsuit: what constitutes an "actual click" under a PPC contract for purposes of calculating the fees owed to an intermediary that publishes/hosts an ad. [fn29] As noted previously, the instance of fraudulent clicks has led to companies paying exorbitant fees to ad hosts without corresponding benefits for each click.

[10] The plaintiff advertiser in Go2Net, Inc. v. C.I. Host, Inc. [fn30] alleged that it was charged for invalid "impressions" under its contract with the defendant search engine. Impressions are another method of charging online advertisers, similar to pay-per-click. The most significant difference between PPC...