Click-fraud settlement good for Google

Most Google advertisers tacitly forfeited their right to sue the company with the settlement

Google's settlement of a class-action lawsuit this week goes a long way toward protecting the company from litigation related to click fraud, a problem some say could cripple Google's business.

When an Arkansas judge gave final approval to the $90 million settlement, all but several hundred Google advertisers tacitly forfeited their right to sue the company over click-fraud instances dating back to Jan. 1, 2002.

Along the way, Google admitted to no wrongdoing or liability, made no formal commitments to improve its click-fraud detection mechanisms and will only have to pay a third of the settlement in cash -- all for plaintiffs' attorney fees -- while the rest will take the form of future credits for advertisers.

"This is a big win and a very good deal for Google. For a comparatively trivial amount of cash, Google has cleaned up a significant amount of potential liability related to click fraud," says attorney Eric Goldman, professor and director of the High Technology Law Institute at Santa Clara University School of Law.

The $60 million allotted for ad credits is a worst-case scenario. It's likely only a fraction -- some estimate no more than $12 million -- will be claimed.

Not surprisingly, Google is pleased that the settlement was approved, though has declined to comment on the case beyond a written statement released Thursday. "We're pleased Judge Griffin has affirmed the settlement as appropriate and fair to advertisers," Nicole Wong, Google associate general counsel said in the statement. "We look forward to continuing to manage invalid clicks effectively and provide our advertisers with an outstanding return on their investment."

Even the full amount is a small price to pay if click-fraud estimates of 20 percent are accurate. Google, with revenue of $6.14 billion in 2005, generates most of its money from pay per click ads, the type that is vulnerable to click fraud. Click fraud happens when someone clicks on an ad maliciously, to drive up a competitor's ad spending or to increase his own commissions.

Still, the settlement isn't a complete win for the Mountain View, California, search engine company. The litigation specter still lurks, because 556 members of the affected class opted out of the settlement, retaining their ability to sue Google over click fraud.

"The reason anyone settles is to buy peace. If you have 500 or 600 potential plaintiffs out there, this is only a purchase of partial peace," says Aitan Goelman, partner with Zuckerman Spaeder LLP in Washington, D.C.

And Google may find itself with some explaining to do in future cases due to information about a click-fraud practice that was revealed in a court-ordered, independent report and that some find alarming.

The otherwise positive report about Google's efforts to combat click fraud, states that Google didn't stop charging advertisers for so-called double-clicks until March 2005. A double-click is when the same user clicks a second time on the same ad immediately after the first time.

"Double-clicking is prevalent in normal browsing behavior," says Kevin Lee, executive chairman and co-founder of LLC, a search engine marketing firm. "That's a lot of invalid clicking activity that should have been credited back to advertisers."

Lee had been under the impression that Google had stopped charging for double clicks years earlier. "I was surprised and disappointed to learn this," he says. He thinks that if people had known how long Google charged for double clicks, more advertisers might have opted out of the settlement.

This also took Eric Goldman aback, who says Google should unilaterally credit advertisers for those double clicks.

The report's author, Alexander Tuzhilin, writes that charging for double clicks is clearly wrong and wonders "why it took Google so long" to reverse its policy. He also hints at the prevalence of double clicks, when he notes that Google lost "noticeable" revenue when it stopped charging for them.

The settlement also faces legal challenges. Joseph Kinney, a Google advertiser, is objecting to the settlement terms in a lawsuit filed in May. And an unidentified member of the affected class who didn't opt out of the settlement plans to appeal, according to one of this person's attorneys, Shawn Khorrami, who is also part of Kinney's legal team. "There's still a lot more litigation that could take place," Eric Goldman says.

Whether the settlement is a good deal for affected advertisers is less clear. "You have wildly disparate estimates of what percentage of advertising clicks are fraudulent, so depending on which estimate you believe, it's either a terrible or a good deal for the plaintiffs," Aitan Goelman says.

On the plus side, Eric Goldman points out that, had the case gone to trial, plaintiffs' chances of winning were low. "People who are upset with the deal are over-inflating prospects of judicial success," Goldman says. At least with this settlement, class members get access to some relief without incurring in legal costs.

Among the reasons winning would have been hard are the difficulties in identifying click fraud and Google's contract stipulations with advertisers. For example, the contracts say that Google at most has to use "reasonable efforts" to combat the problem, not eliminate it completely, and that advertisers have 60 days to file a claim after a questionable charge.

On the minus side, affected advertisers aren't getting cash refunds, but credits for future purchases of Google ads. This is meaningless to advertisers that have sworn off pay per click ads or that don't wish to do business with Google anymore.

Moreover, the credit can only be applied to a maximum of 50 percent of the cost of future ad purchases. "It's essentially a discount. So it compels advertisers to continue buying ads. It keeps them within the system," says industry analyst Greg Sterling, of Sterling Market Intelligence. On top of that, the burden to prove click fraud lies on the advertisers. "That's going to be a further barrier," Sterling says.

Then there is the pro rata calculation method to be employed to determine credit amounts. "If the amounts that you paid to Google for the affected ads were 1 percent of Google’s revenues from online advertising since Jan. 1, 2002, you would be eligible to receive 1 percent of the total available credits," reads the court-ordered notice of settlement terms. In practice, this means that, except for large advertisers, credit amounts are likely to be very small, and as such, the incentive to claim them will be minimal.

One thing in which there is broad consensus is that the plaintiffs' attorneys did well for themselves. "Getting $30 million in attorneys' fees, that's a pretty good deal for them," Eric Goldman says.

It's a controversial issue when class-action attorneys get paid in cash and plaintiffs get compensated in other ways, which is the case here, Aitan Goelman says. It raises the question of whether the interests of the attorneys and the class members were properly aligned. "It's a danger area," he says.

Copyright © 2006 IDG Communications, Inc.

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