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5/4/2006
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Yahoo Sued For Spyware-Driven Click Fraud

The lawsuit, filed by Crafts by Veronica, charges that Yahoo and its New Jersey affiliates put ads in spyware, then charged advertisers for the click-throughs.

A class-action lawsuit filed against Yahoo and unnamed affiliate companies in New Jersey charges that the search portal turned a blind eye to abuse of its advertising system and knowingly relied on spyware to manipulate its profits during financial reporting periods.

Documents filed by attorneys of the plaintiff, New Jersey-based Crafts by Veronica, claim that Yahoo defrauded its advertising customers by charging them for ads delivered in contravention of its contract with advertisers.

"In spite of Defendants' promise and duty not to place ads in pernicious spyware programs, Defendants have done just that, and have charged their advertising customers for every click made on spyware pop-up ads," the court documents claim. The lawsuit was filed Monday.

The lawsuit formally charges Yahoo with breach of contract, unjust enrichment, civil conspiracy, and violations of the New Jersey Consumer Fraud Act.

Last August and again in early April, spyware researcher and attorney Ben Edelman, one of the lawyers representing the plaintiff, posted reports critical of Yahoo's advertising practices. In those reports, he presented findings that Yahoo had engaged in syndication fraud--placing advertisers' ads in spyware programs and charging advertisers for resulting clicks--and click fraud--charging advertisers for "fake" clicks.

Yahoo is also a defendant in a click-fraud suit filed in Arkansas in February, 2005, Lane's Gifts and Collectibles LLC v. Yahoo! Inc.

Google, a co-defendant in the Arkansas suit, is seeking judicial approval of a $90 million settlement announced in March to resolve its liability in the case. The decision is expected to come in July.

Click fraud occurs when a person or software clicks on an online ad for a purpose other than obtaining further information about the advertised product or service. It's often done at the behest of sites hosting the ads, which get a portion of the advertiser's payment from the ad provider, such as a search engine like Google or Yahoo.

Advertising service companies and industry experts put the general prevalence of fraudulent clicks at somewhere between 14% and 30% overall, through it varies depending on the search advertising provider, the nature of the ad campaign, and the way click fraud is defined. Because Google, Yahoo, and other search engines do look for and discard fraudulent clicks, the percentage of fraudulent clicks billed is typically less than the overall incidence.

"When considering the validity of this exaggerated 30% figure, you should also consider who is most aggressively using it: It is those who have the most to gain from hyping the problem," Google says on its AdWords blog.

In a statement sent via E-mail from a Google spokesperson, Google elaborates, "We believe losses to click fraud are small. It is unclear how exaggerated estimates of click fraud are put together, but it's very likely that they include attempted fraud already caught and discarded by our automatic filters."

Yahoo says it stands by its click validation methods and intends to defend its position vigorously. The company declined to comment further.

The allegations in this new case against Yahoo suggest that a significant portion of search advertising profits come from illegal or disreputable activities. They also echo criticisms leveled at Internet service providers over the years to the effect that ISPs knowingly profit from similar shady practices, such as hosting spam servers.

According to Edelman, Yahoo has responded to some of his earlier criticisms by terminating relationships with affiliates associated with questionable practices. But it's not clear whether such steps or pending lawsuits can adequately resolve these issues.

At the Ad:Tech Conference in San Francisco last week, advertising industry panelists--whose companies sell click-fraud mitigation or reporting services--stressed that click fraud is a real issue and criticized the lack of transparency in the search advertising industry.

Tom Cuthbert, president and CEO of click data analysis firm ClickForenics and one of the panelists at the conference, insists that click fraud isn't as well managed as search engines claim. "Over the last few months we've definitely seen an increase in the robotic generation of clicks," he says. "Clearly, that is a growing concern for advertisers."

The solution may be uniform reporting standards and greater data sharing between advertisers and search engines, something that doesn't happen often at the moment. Click-fraud detection works best with data from before the click--held by the search engines--and data after the click--held by the advertiser or destination site. Toward that end, ClickForensics has proposed an application programming interface (API) to make it easier to share click data to prevent fraud.

Despite Google's skepticism about the motives of those raising the alarm, the company claims to be trying to address advertiser concerns. "We're working on ways to provide more information to advertisers," Google said.

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