Click fraud is one of the largest problems faced by the online advertising industry, yet many ad vendor companies have largely remained content to fight it quietly. This may be about to change. Microsoft has recently announced that it will begin to actively pursue legal action against perpetrators of click fraud. The first attempt came last week in Microsoft Corp. v. Lam et al.
What is click fraud?
The majority of online advertising is served by a small group of large ad vendors. These vendors place ads on externally operated websites as well as search engines—the largest ad vendors being Google, Yahoo and Microsoft. These vendors often sell ads using an auction based pay-per-click (PPC) model. Under the PPC model, advertisers bid on certain keywords and when a user visits a site or types a search that matches these keywords the highest bidders’ ads are displayed. Only when a user clicks on one of these ads does the advertiser pay. This model allows market conditions to set the price an advertiser is willing to pay for a potential customer. More lucrative search terms will cost more money.
Click fraud occurs when a person purposely clicks on one of these ads without the intention of visiting the target site. A person might do this for two general reasons. First, publishers of websites may click on the ads on their own sites to generate income for themselves. Second, advertisers may click on competitors’ ads to injure their competition. In addition to costing the competitors money, this second form also has the benefit of allowing the fraudster to advertise his own product below market rates. Most companies set a budget for how much they are willing to spend on advertising in any given period. By depleting the budgets of the highest-bidding companies, the fraudster may artificially lower the price of advertising.
Research has suggested that around 1 in 7 clicks on online ads are fraudulent (although most ad vendors dispute this). It harms advertisers who lose out on potential conversions. It also harms the ad vendors who must refund the money to the injured advertisers and whose reputation is injured.
Microsoft v. Lam
This case is one of the first cases of an ad vendor suing a suspected click fraudster but likely not the last. Microsoft has publicly stated its intent to use the case to set a precedent and example for others: “We have decided to become more active in the commercial fraud area on the enforcement side; the theory is you can change the economics around crime or fraud by making it more expensive” (Tim Cranton, Microsoft).
Microsoft’s complaint, filed in Seattle on June 15, alleges that Eric Lam, Melanie Suen, Gordon Lam and numerous John Does used automated means to simulate clicks on competitors’ advertisements thereby securing advertising for their own World of Warcraft (WoW) and auto insurance websites at substantially reduced rates. Microsoft estimates it suffered lost revenue and other damages to its business totalling at least $750,000 due to this fraud. The complaint lists 10 causes of action (contract, tort, and statutory) that Microsoft plans to use in seeking injunctive and monetary relief. Assuming Microsoft is successful in proving that Lam was behind the fraud, the contract claims are straightforward. The defendants have consented to the terms of Microsoft’s adCenter service which explicitly forbid this activity. However, competitor click fraud is not something that is restricted to parties to user agreements: competitors who do not themselves advertise still have an interest in harming their competition; third parties may benefit from driving business to an affiliate; it may even be done out of purely malicious intent. A bigger win for Microsoft in deterring both this type of fraud and publisher click fraud would be success with their argument that click fraud is tortious interference with contract. All the elements of that tort would also appear to be met in this case and it would have more general application in future cases.
But, if Microsoft is successful, will this case help them achieve their goal of discouraging click fraud? Perpetrators of click fraud can be very hard to track down due to the existence of botnets which distribute the work among numerous unrelated computers. Microsoft came to suspect Lam because the fraud was targeting two distinct markets (WoW and insurance) and Lam uniquely benefited from both. This is unlikely to be a common occurrence. The practical difficulties in tracking down fraudsters may prove enough to assure most who Microsoft hopes to discourage. The success of this strategy rests on whether Microsoft can continue to identify and successfully sue fraudsters and that is something only time will tell us.