Facebook Gets Partial Win in Click Fraud Lawsuit

By Eric Goldman

In re Facebook PPC Advertising Litigation, C 09-3043 JF (HRL) (N.D. Cal. April 22, 2010). My blog post on the complaint filing.

This is an unexpectedly hard-to-parse ruling in a click fraud lawsuit against Facebook. Facebook sought a 12(b)(6) motion to dismiss on the basis of its Advertising Terms and Conditions, which included the following language:

I UNDERSTAND THAT THIRD PARTIES MAY GENERATE IMPRESSIONS, CLICKS OR OTHER ACTIONS AFFECTING THE COST OF THE ADVERTISING FOR FRAUDULENT OR IMPROPER PURPOSES, AND I ACCEPT THE RISK OF ANY SUCH IMPRESSIONS, CLICKS, OR OTHER ACTIONS. FACEBOOK SHALL HAVE NO RESPONSIBILITY OR LIABILITY TO ME IN CONNECTION WITH ANY THIRD PARTY CLICK FRAUD OR OTHER IMPROPER ACTIONS THAT MAY OCCUR

Judge Fogel says that the disclaimer clearly preempts any claims for third-party caused click fraud. However, he suggests that Facebook’s contract does not preclude a claim based on Facebook’s own malfeasance or error. For example, if Facebook’s reporting system goes haywire and counts phantom clicks that never occurred, the disclaimer language doesn’t help. Fair enough, but the boundary between first party and third party malfeasance is not completely clear. For example, if a user double-clicks, is that third party click fraud or an error in how Facebook counts clicks?

In any case, this ruling exposes a hole in Facebook’s disclaimer language. Unfortunately, I’m not sure how fixable it is. Facebook could say that advertisers have to pay even if Facebook’s reporting system is miscalibrated or goes rogue. See Go2Net, Inc. v. C.I. Host, Inc., 60 P.3d 1245 (Wash. Ct. App. 2003). However, many judges would not honor those statements at face value.

The plaintiffs also attack the contract by alleging that its integration clause opens up the door to other documents. The clause reads:

[T]hese terms and conditions, the Advertising Guidelines and other applicable Facebook policies, and the terms of any applicable advertising order submitted through the site constitute the entire and exclusive agreement between the parties with respect to any advertising order I place[.] (emphasis in the court’s opinion)

Why is that italicized language in the integration clause? It opens up a debate about the scope of other incorporatable documents–exactly what you DON’T want an integration clause to do. Facebook escapes adverse consequences from that loose language; the court concludes that whatever that language means, it does not include the documents that the plaintiffs want to incorporate. But I expect Facebook will want to reconsider that catch-all going forward.

Judge Fogel gives the plaintiffs a chance to amend their complaint, but they will need to be smart in how they approach the amendment. I’ve seen numerous Fogel rulings where he generously gives the plaintiffs some leeway on the first motion to dismiss but then slams the door on sloppy plaintiffs on the second go-around.

Wendy Davis’ writeup of this ruling.