Will $90 Million Make Google Click Fraud Go Away?

Google announced last week that it has reached a settlement with plaintiffs in one class-action lawsuit charging that the search engine giant has not policed its pay-per-click ad programs well enough to eliminate substantial fraud. But so far, the prospect of a settlement hasn’t derailed a second click-fraud lawsuit filed against the company in Northern California. Under the terms of the proposed settlement in the first case, Mountain View CA-based Google would set aside a pool of funds up to $90 million and would use that to credit any losses that advertisers in its pay-per-click program could show they had incurred from fraudulent clicks since Google began offering performance-based ads in 2002.

According to a post by Google associate general counsel Nicole Wong, the company reached this settlement in talks with the primary plaintiffs in the case, Lane’s Gifts and Collectibles of Texarkana, AR and Fort Lauderdale FL-based Caulfield Investigations. The parties will now ask a state court judge to approve the agreement.

That suit was filed in April 2005, accusing the defendants of overcharging advertisers in their pay-per-click ad programs with clicks that did not come from legitimate sales prospects, and then knowingly concealing the extent of those overcharges. In May, attorneys representing the plaintiffs launched a Web site, LostClicks.com, asking other advertisers who felt they had been victims of click fraud to join the suit

The $90 million would be applied to all click-fraud claimants against Google, not just the two plaintiffs in this case. Right now, Google takes advertisers’ applications for reimbursement up to 60 days after the allegedly false clickthoughs occur. But under the terms of the proposed settlement, any Google AdWords clients who believe they’ve been the victims of click fraud between the time the company first began offering paid-search ads in 2002 and the day the judge approves the Arkansas deal can apply for compensation.

That comprehensive reach, and the fact that claimants would receive credits against their Google AdWords accounts and not cash reimbursements, appear to make the proposed settlement a very good deal for Google. Since the Lane’s Gifts case had been granted class-action status, the settlement would also have to seek the approval of the class of AdWords advertisers after getting the judge’s okay. At that point, participants who wanted to pursue their own claims against Google would have to opt out of any approved settlement.

The future of the second click-fraud suit is dependent in part on timing and in part on the details of the Arkansas settlement now before the judge. The second suit was filed in federal court in the Northern District of California in June 2005 against Google by Click Defense, a click-auditing firm. It charges that Google has not taken the necessary steps to prevent and alleviate click fraud and thus has knowingly taken money from advertisers without delivering the promised services. In December, Click Defense ceded the role of lead plaintiff to Advanced Internet Technology, a Web-hosting and domain-name service.

The AIT suit is slated to come up for class-action certification on May 13, and attorneys for the plaintiffs say that if that certification is given before the Arkansas settlement is approved, their class-action click-fraud suit can proceed.

“The U.S. District Court may end up certifying a nationwide class in our case before the settlement can be finally approved in Arkansas,” said Darren Kaplan, a partner with Chitwood Harley Harnes LLP, one of the firms representing Google AdWords customers in the AIT suit. “If we are successful in certifying a class in our case, the proposed settlement in Arkansas will not resolve anything.”

Lawyers pursuing the AIT suit also say that they must continue with their suit as long as the full terms of the proposed settlement in the Arkansas case remain under wraps.

“Since the announcement [of the proposed Arkansas settlement] provided little information as to the terms and conditions of the settlement, it is impossible to fairly evaluate the proposed settlement and to determine whether it is a good result for the class,” said Brian Kabateck, partner with Kabateck Brown Kellner LLP, another law firm for the plaintiffs. “Once we learn more, we will decide what, if anything, we are prepared to do in order to protect the interests of the Google customers we represent.”

But Stephen Malouf, representing plaintiffs in the Lane’s Gifts case, said that he hoped the terms of the Google settlement will be made public within two to three weeks. When that happens, he told CNBC, “People will recognize that the evaluation of the reasonableness of the settlement is not based simply on what we think but will be based on hard evidence that Google will cooperate in producing to the court.”

The Arkansas lawsuit names other search engine defendants besides Google: Yahoo!, Lycos, AOL, Ask.com, LookSmart, Miva and Go.com. Companies like Ask.com and AOL syndicate Google’s paid-search ads on their results pages and thus will probably find themselves covered by any settlement Google reaches.

But Yahoo! and Miva would not be part of such a settlement and may face going to trial on the click-fraud issue. Malouf said plaintiffs’ attorneys are in the middle of negotiating over discovery with Yahoo!, trying to establish what click-fraud data the search company will have to share in the case. “Over the next 60 to 90 days the court will make decisions on what exactly Yahoo! is going to have to produce to us in the way of discovery,” he told CNBC. “At that point, we’ll have a better handle on whether the case will ultimately end up going to trial.”

Advertiser complaints about click fraud have been around almost as long as the pay-per-click ad model itself, but the problem began getting widespread attention in December 2004, when Google chief financial officer George Reyes told an audience of investors that click fraud was “the biggest threat” at that time to the Internet economy as a whole and to Google’s business model in specific.

Click fraud can occur when an advertiser’s rivals click on its ads in order to deplete the marketer’s search advertising budget. Perhaps more commonly, Web operators often set up Web pages—often containing nothing but spam or useless content– and sign up to join the publishing networks of Yahoo!, Google and other sponsored-listing providers. The network leaders place pay-per-click ads on those Web pages, and the operators then reap a share of the payments advertisers make to the network. Some click-fraud artists of this type set up software to click their own ads automatically, mimicking the behavior of real Internet users.

The true extent of the click-fraud problem is not known. Google and Yahoo! have not offered specifics about the proportion of clicks on their networks that turn out to be “invalid”, although they both maintain that they are catching the large proportion of those bogus clicks before advertisers are charged and offering them reimbursements for the ones that make it through their filters. At a session on click fraud during last week’s Search Engine Strategies meeting in New York, representatives of both engines insisted that they are stringent in fighting click fraud with both human resources monitoring traffic and with software.

“As a result of those systems, we actually filter out more invalid clicks proactively on a regular basis than we deal with in terms of requests for refunds,” said Shuman Ghosemajumder, a business product manager at Google. He said that often advertisers who write in to Google to complain about click fraud because they’re getting traffic from unaccustomed places on the Internet turn out to have broadened or changed their ad targeting. “They’re getting much more traffic than before from sources they’ve never received traffic from in the past,” he said. “But it’s a misunderstanding, and the traffic ends up working quite well for them.”

But advertisers maintain that insufficient data from the search engines means they can’t tell if Google and Yahoo! are indeed catching most of the fraudulent traffic on their pay-per-click ads. A study published by the Search Engine Marketing Professionals Organization last month found that 16% of the online marketers and search marketing agencies surveyed in December 2005 considered click fraud a serious problem—three times as many who said the same in December 2004.

And that growing concern may be one factor aggravating a widening trust gap between advertisers and engines. Jessie Stricchiola, founder of click-audit firm Alchemist Media, said at SES that her firm has seen “a consistent slight downward trend” in the engines’ responsiveness to inquiries about click-fraud either from marketers directly or through her company.

“Search engines admit that they don’t have crucial data points for the majority of their advertisers that are related to site visitor behavior: page views, clickstreams and conversion data,” she said. “And I don’t expect that any day soon all advertisers are going to willingly disclose all their conversion data to the search engines and use their analytics platforms. So on the one hand, they’re saying, ‘Don’t worry, we’re doing our best to protect you.’ And on the other hand they’re saying, ‘Wait, you can’t expect us to really protect you, because we don’t have all the data that we need.’”

Some advertisers are pushing for a neutral third party who could take data from the marketers’ logs and combine it with the search engines’ data to throw a more impartial spotlight on click fraud. “One of the suggestions we’ve made to Google, Yahoo! and the other search engines is that they consider outsourcing the monitoring of the traffic so that advertisers are satisfied that it’s a transparent process,” Malouf said after the settlement announcement. “There are companies—two or three very large players in the Internet market—that are now developing a monitoring program that the search engines can subscribe to or use to assist them in monitoring traffic.”

Ultimately, that kind of transparency may be needed to build trust among two parties who both have some monetary incentive to skew the data on click-fraud. “This is absolutely a relationship problem,” says Eric Goldman, a professor of cyberlaw at Marquette University. “Sure, Google can clean out its historical liability. But if it doesn’t continue building relationships with advertisers going forward, it hasn’t really solved the problem and will wind up with the same legal problems in a year or two. It’s got to do better than that.”

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