Click Fraud Gets Day in Court--Maybe

Fraud in pay-per-click marketing has reared its head once again to bedevil the online advertising industry. A lawsuit filed last February by a group of advertisers in a Circuit Court in Miller, AK, charges some of the biggest search ad networks in the business—including Google and Yahoo—with conspiracy for knowingly charging advertisers for bogus clicks that did not come from legitimate visitors to their Web sites.

One plaintiff in the suit is Lane’s Gifts & Collectibles LLC, a Texarkana, AK, retailer of dolls and figurines; the other is Max Caulfield Investigations, a private detective agency in Fort Lauderdale, FL. Joel Fineberg, one of the plaintiffs’ lawyers in the case, says that other companies have expressed interest in joining the suit but have not yet done so.

Fineberg said that the two plaintiffs maintain they are due compensation for fraudulent clicks from the defendants in the case-- who also include America Online, Ask Jeeves, Lycos, LookSmart, FindWhat.com, and the online unit of Walt Disney Co.—but have not specified a figure for any possible damages. Caulfield monitored his clicks using available anti-fraud software and received a click-compensation check for a few hundred dollars from one of the defendants, but Fineberg says neither his company nor Lane’s Gifts got the detailed click-tracing that would allow them to check their suspicions against the search engines’ server logs. “What they got was a whole bunch of techno-doublespeak and a great deal of run-around, but no substantive answers to their legitimate inquiries,” he says.

That’s why there’s been no specific damage claim yet from the plaintiffs: because they say they don’t know enough about how much they may have been wronged. The remedy for that would be to open up the search engines’ server logs and give the plaintiffs a look at the origins of the clicks, both legitimate and suspect. “We already have a great deal of evidence on our side, and when we look at search engine’s logs, we’re going to find even more.”

The aim of the suit is not just to get repayment for any services these advertisers may have paid for but not received, Fineberg says. “It’s also to fix the system for future advertisers. We all know the system has a significant problem. The question is how do we solve this?” In addition to any monetary relief, Lane’s and Caulfield also are asking for a “future benefit” from Google, Yahoo and the other defendants for the class of Internet advertisers: “To ensure that there is integrity and certainty in the bills they send to advertisers,” Fineberg says, “and so that the advertisers are not paying for services they are not receiving.”

Pay-per-click (PPC) advertising has become both the backbone of the search marketing industry and a main economic driver of its largest players. Advertisers pay Google, Yahoo and other cost-per-click (CPC) operators to place their ads on a network of Web sites on pages that are more or less relevant to their products and services. Every time those ads are clicked on, advertisers pay a rough average of 50 cents to the network operators, who then share a portion of that fee with the Web site operators. That 50 cents is an average drawn across all industries; for some keywords, the price can be in the $10 range.

PPC fraud can take a number of forms. Some advertisers have claimed that their direct competitors are clicking on their ads in order to cripple their marketing efforts, forcing them to lay out ad money for unproductive clicks. The network operators themselves have alleged that some Web site operators have been clicking on PPC ads on their own sites in order to beef up their payments. A Google lawsuit in April 2004 against Houston-based Auctions Expert International LLC charged that the site owners recruited 50 individuals to artificially inflate the clickthrough totals on ads placed on its site through Google’s ad network, and that as a result some portion of the $50,000 the site received in ad revenue was fraudulently earned.

Evidence suggests that scammers have gone high-tech, using “hit bots” to automate the process of simulating clickthroughs to earn cash for web site operators. And a May 2004 story in the Star of India newspaper indicated that click crooks may also have become big Third World employers. The article claimed that a “secret army” of bogus ad-clickers had been recruited to make $100 to $200 a month by spending several hours a day clicking on ads.

CPC companies have publicly admitted that click fraud poses an ongoing problem. Google’s chief financial officer George Reyes caused a pre-IPO stir last November by declaring to analysts that click fraud “threatens the business model” of his company and the search industry. Most say they have instituted precautions to detect it, prosecute or isolate its practitioners, and compensate advertisers for illegitimate click charges. But they regularly refused to discuss the extent or shape of click fraud or their preventive measures, saying that would simply encourage determined fraudsters to find ways around those checks and safeguards.

But that black-box approach to the issue has been a source of anxiety and even anger for some advertisers on their networks. Jessie Stricchiola, founder and president of Alchemist Media, agrees that forcing the search engines to be too specific about their anti-fraud measures could initiate a vicious cycle of tech development by giving scammers more precise targets to aim for. But she says the mysterious manner in which some of the engines issue refunds for fraudulent clicks raises suspicions about the true scope of the problem.

Stricchiola cites one online advertiser who spent $2 million on Google PPC ads last year and got a refund check from its fraud protection division-- for $113 in supposedly bogus clicks. This comes at a time when advertisers are becoming more technologically savvy about tracking clicks and more determined to make every marketing dollar work, the engines’ inscrutable refund policy raises two questions for many advertisers, she says: “How did you come up with that strange figure, and what are you doing to protect me continuously from this type of abuse in the future?”

There’s also a wide disagreement about the size of the click fraud problem. Some observers have put it as high as 20% or even 30% of all PPC ad clicks; others peg it at a more modest 8%. The variation is partly due to the engines’ reticence about discussing the problem, but also to the fact that the rates vary greatly by industry. “There are some high-volume keywords that are probably easier to hide automated fraud in, such as mortgages,” says Dana Todd, executive vice president of interactive agency SiteLab and the current president of the Search Engine Marketing Professional Organization (SEMPO). “They’re going to cherry-pick the keywords that can make the most money in the shortest period of time.”

Even though click fraud can afflict both large and small advertisers, it’s the smaller, less affluent ones who feel its effect the most, Todd says. Big brands tend to view the loses from fraudulent clicks as an online version of inventory shrinkage: just an unfortunate but manageable cost of doing business. But those allowable losses mean a lot more to the smaller advertisers with more constrained ad budgets. For that reason, Todd says, it “absolutely makes sense” that the first advertiser lawsuit about click fraud would come from a small online marketer such as Lane’s Gifts.

Larger PPC advertisers are also more likely to outsource management of their campaigns to a search engine marketing firm, and most of those keep watch for the possibility of click fraud directed at their clients’ ads. Fredrick Marckini, CEO of SEM firm iProspect, says that out of 60 campaigns his agency is currently running, its bidding agent automatically detected a possibility of click fraud in one and immediately pulled the client’s bid.

By being purposely vague about the extent of click fraud and the techniques they use to fight it, the engines may seem to lend credibility to a belief that they don’t mind profiting from click fraud. In fact, most industry observers think they recognize that the long-term health of search marketing and PPC ads depend on delivering high-quality traffic and stamping out fraud.

Marckini says he would not be surprised to see more vigorous pursuit of click-fraud practitioners by both industry groups and law enforcement officials, and to see laws passed that would make click fraud more than a civil infraction. “The answer here is not to knock the search engines around,” he says. “When the people committing click fraud are forced to do a perp walk, that will be the end of this problem.”

But others says the search powers can and should be forced to open their operations up to greater scrutiny by outsiders, if only to show that they are indeed doing as much as they say to keep the level of fraud down. “Ultimately I would like to see more disclosure about the issues involved in trying to police traffic come out of this case, “ Stricchiola says. “There’s been a limited amount of communication from the CPC engines. Because this is a pretty new issue, and because many, many billed clicks should not have been billed, we don’t have a marketplace where advertisers feel their needs are being met. At the same time, the CPC engines are making a heck of a lot of money off this issue.”