Google to settle click-fraud lawsuit for $90M

Google Inc. has agreed to settle a class action lawsuit brought against it over the issue of click fraud, which some industry experts believe could seriously threaten the company’s main source of revenue: pay-per-click advertising. Google will pay as much as US$90 million to affected advertisers in attorneys’ fees and credits as part of the settlement.

The case was filed in an Arkansas court against Google and other search engine operators and providers of pay-per-click ads, such as Yahoo Inc. and America Online Inc. The lead plaintiff is Lane’s Gifts & Collectibles LLC, which sells items such as dolls, figurines and teddy bears online, over the phone and by mail.

At issue is click fraud, a practice in which someone clicks on a pay-per-click ad with a malicious intent. For example, a company official may click on competitors’ ads, knowing that every time he does that, it costs his competitors money. Or the publisher of a Web site that runs pay-per-click ads may engage in the practice because the more the ads on his site are clicked on, the more commission money the publisher receives. The biggest losers from click fraud are the advertisers, because they are paying for clicks on ads that will not generate any business.

Pay-per-click ads are commonly served up by search engines based on the topic of a user’s query. These ads are the main source of revenue for Google and have become an important business for Yahoo.

Estimates about the incidence of click fraud vary widely, with a worst-case scenario estimate that up to 20 percent of all clicks on these types of ads may be fraudulent. If this were the case, Google’s business model would take a significant hit. In fiscal 2005, Google had revenue of $6.14 billion, most of it from pay-per-click ads.

John Battelle, who recently wrote a book about Google, sees this settlement as a major victory for the search engine operator. The terms validate Google’s claim that click fraud isn’t a big problem and avoiding a drawn-out trial is a good public-relations move, he wrote Wednesday in his Searchblog blog.

In the Lane’s Gifts case, Google and the plaintiffs have reached an agreement, which would still need to be approved by the judge, wrote Nicole Wong, associate general counsel at Google, on the company’s official blog on Wednesday.

Details will become public when the proposed settlement is filed for the judge’s consideration, but one key agreement is that Google has agreed to compensate advertisers that qualify for participation in the settlement. The company would pay out a maximum of US$90 million in the form of attorneys’ fees and credits for purchasing ads on Google.

“This agreement covers all advertisers who claim to have been charged but not reimbursed for invalid clicks dating from 2002 when we launched our ‘cost per click’ advertising program through the date the settlement is approved by the judge,” Wong wrote.

Meanwhile, Yahoo declined to comment on Google’s settlement but said it plans to continue fighting the lawsuit. “We stand firmly by our proprietary click protection system, and look forward to vigorously defending our position in this matter,” a Yahoo spokeswoman said via e-mail.

George McWilliams, an attorney for the plaintiffs and a partner in the Patton, Roberts, McWilliams and Capshaw LLP law firm, confirmed the news of the settlement. However, he declined to comment further because the settlement isn’t final and hasn’t been approved by Judge Joe Griffin of Miller County Circuit Court in Arkansas.

Google will account for the attorneys’ fees as an expense, “most likely in the first quarter, once the amount is determined,” while the credits will be noted as a revenue reduction in periods in which they are redeemed, Wong wrote.

Google executives have said in the past that click fraud is a problem that the company takes seriously and aggressively polices, but that it hasn’t had a material effect on the company’s business.

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