March 19, 2007
Click Fraud Lawsuit Survives Motion to Dismiss--Payday Advance v. FindWhat
By Eric Goldman
Payday Advance Plus, Inc. v. Findwhat.com, Inc., 2007 WL 760437 (S.D.N.Y. Mar. 12, 2007)
The high-profile click fraud lawsuits against Google and Yahoo settled last summer, but other lesser-known lawsuits appear to be in the pipeline, such as this lawsuit against FindWhat (now Miva). In this ruling, the defendants attempt to shut down the lawsuit and they met with some success; the defendants eliminated 5 out of the plaintiff's 6 claims (at least temporarily). However, the most dangerous claim--breach of contract--survived the motion to dismiss. This case is a long way away from final resolution, but I'm sure FindWhat would have loved to have squashed the case entirely without incurring more litigation costs.
The plaintiffs initially filed this lawsuit in 2005 in California, but it was dismissed for improper venue. The plaintiffs refiled the lawsuit in NY claiming 6 causes of action: breach of contract, unjust enrichment, negligence, civil conspiracy, "joint venture" and a violation of NY GBL Sec. 249 (a consumer protection statute). The plaintiffs voluntarily capitulated on the last 2 causes of action. In this ruling, the defendants moved to dismiss the remaining four causes of action per 12(b)(6).
The plaintiffs allege that FindWhat entered into an affiliate arrangement with Advertising.com where Advertising.com would drive traffic to FindWhat's search listings in exchange for a cut of the revenue. The plaintiffs allege that Advertising.com boosted the plaintiffs' costs by competitively bidding on the same keywords (thus raising keyword prices) and by engaging in both manual and automated click fraud.
The Court's Analysis
It sounds relatively simple--KEEP A COPY OF YOUR SIGNED CONTRACTS. But, the plaintiff can't find its copy. FindWhat introduced what it thinks is the governing contract, but the plaintiff disagreed that FindWhat's version is the contract it signed. On this basis alone, the court can't dismiss the contract claims because the parties don't even agree on the contract terms. Unless the plaintiff magically finds its signed contract, the judge ultimately may need to choose between various possible contracts.
The court also discuss the language that the plaintiffs would pay FindWhat for "actual clicks." I've said before that I hate the word "actual" in this phrase, which introduces unnecessary ambiguity. The right way to draft this language would be to say that advertisers pay for all clicks except those that FindWhat determines are illegitimate, or to define "actual clicks" that way.
Either way, the determination of clicks is governed by the "implied covenant of good faith and fair dealing." Courts apply this implied covenant inconsistently, so in many cases it has no effect so long as the parties engage in profit-maximizing behavior. In other cases, the covenant allows the judge to opine on the business ethics of the parties and declare some behavior out-of-bounds. For example, even if the contract said unambiguously that advertisers pay for each and every click, many courts nevertheless would use the implied covenant to dishonor any clicks by the search engine's employees done for illegitimate purposes. Thus, the court says:
The facts alleged in the Complaint, if taken to be true, suggest that Findwhat could have violated its implied covenant by inflating the bidding prices for search terms and by directing Advertising to generate “clicks” on Payday's website by people or “bots” who had no purpose for visiting the site other than to generate revenues for Findwhat and Advertising. Because this tactic would allow Findwhat to increase its profits solely at its discretion and with no benefit to Payday, it is plausible that it could be found to “destroy[ ] or injur[e]” Payday's rights under the contract. Dalton, 663 N.E.2d at 291. It is furthermore likely that a reasonable advertiser entering into such a contract would expect that, whatever the external risks of unproductive “clicks,” it would not be subjected to unbounded increases in its prices at the hands of its promisor or at its promisor's direction. (emphasis added)
This leaves open several inquiries, including (1) does outright click fraud engineered by the search engine constitute a breach of the good faith covenant, and (2) can the plaintiffs introduce evidence showing that FindWhat, in fact, engaged in such condemnable behavior? Therefore, the plaintiffs still have a lot of work to reach a payday here (sorry for the pun). But, they live another day to try to make that showing.
The court spent a lot less time dismissing the other claims. The unjust enrichment claim is dismissed because it is subsumed by the breach of contract claim. The negligence claim is dismissed because, under NY law, a contract relationship does not give rise to a duty to avoid tortious negligent behavior. The civil conspiracy claim is dismissed because there needs to be an underlying tort advanced by the conspiracy, and the plaintiffs didn't allege any. The plaintiffs want to allege that FindWhat engaged in fraudulent concealment but failed to make strong enough statements to support that. The judge gave them another chance to amend the complaint.
Due to the successful motion to dismiss, Advertising.com is now out of the lawsuit, leaving FindWhat/Miva as the only remaining defendant. It's too early to assess FindWhat/Miva's ultimate risk exposure, but presumably the plaintiffs will use this opportunity to do some hard-hitting discovery to see if they can get some juicy facts.
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