May 3, 2006

On Monday, a class-action suit was filed against Yahoo and a group of third-parties accusing the company of engaging in syndication fraud against some of its advertisers.

The lawsuit claims that Yahoo displayed these advertisers' Internet ads with the use of spyware and of so-called "typosquatter" sites that capitalize on misspellings of popular trademarks and/or company names.

Even more explosive is the plaintiff's claim that Yahoo regularly uses its relationship with spyware and typosquatting sites to boost extra revenue around earnings time. The plaintiff alleges that Yahoo is conspiring with unnamed third-parties to increase revenue.

From the suit:

"Not only have Defendants turned a blind eye to abuse of their pay-per-click (PPC) advertising system, but Defendants knowingly have manipulated that system for their own benefit, by increasing the volume of improper advertising displays during financial reporting periods when Defendants were at risk of failing to meet investor expectations."

The lawsuit was filed in federal court in New Jersey.

One of the attorneys of record in the case, Ben Edelman, said the plaintiffs aren't ready to divulge the source of their information on the conspiracy allegations, adding that the information would come to light at trial if Yahoo decided not to settle the case.

"Yahoo ought to settle this case, but they ought never have allowed this problem to fester to the extent that it has," Edelman said in a phone interview. Edelman is a Harvard Ph.D. candidate and well-known spyware expert.

The suit alleges that Yahoo defrauded pay-per-click advertisers who thought they were paying to have their ads displayed alongside search-engine results generated by certain keywords that the advertisers bid on.

The complaint alleges that "by placing ads into illegal platforms such as spyware programs, [Yahoo] wrongfully collected high search engine advertising fees for ads that are actually shown in contexts that are worth far less, if anything.

It is well known that spyware advertising is much cheaper than search engine advertising."

The complaint continues: "But when Defendants and their syndication partners place class members' ads into spyware, they continue to charge class members full price for those ads, and pocketing the difference between the high fees class members pay and the low cost of providing spyware-delivered advertising."

Among the "spyware vendors" named in the complaint as partners in Yahoo's ad program are Direct Revenue and Intermix, two companies recently sued by New York Attorney General Eliot Spitzer for violating consumer protection laws.

The class-action suit includes examples of customer ads shown on typosquatting sites, such as "Expedai.com," a "parked domain" which includes a Yahoo ad for the real Expedia.com. Expedia would be required to pay Yahoo and the owner of that typosquatted domain a hefty fee each time someone clicks on the Expedia link on that site.

Martin Fleischmann, president and CEO of MostChoice.com, a national insurance and mortgage lead company based in Atlanta, said his company has been complaining to Yahoo about click fraud for almost three years now. He said MostChoice is constantly receiving "low converting" traffic from bogus search engines and typosquatting sites.

"It has always been a kind of dirty little secret in the industry.

I wrote them several e-mail letters the last couple of years saying that these issues were going to come back and bite them because they really get to the integrity of the network," Fleischmann said.

"The fraudsters lower the efficiency of the network for all advertisers. Yahoo hasn't had much incentive to go after them too hard since it also makes the company lots of money."

Yahoo did not immediately return calls seeking comment. If the allegations in the suit are true, Yahoo would hardly be alone in getting its hands dirty by associating with the typosquatting industry.

On Sunday, The Washington Post ran a story I co-wrote with Leslie Walker on Google's role in fueling a speculative frenzy in parked domain names, including many that appear to do nothing but capitalize on misspellings of popular brand names.

Yahoo is already battling "click fraud" claims that it overcharged customers for advertising, a very real problem that is costing legitimate online businesses tens of millions of dollars each year by some estimates.

One of those suits was filed in California, and the other in Arkansas. The latter suit also named Google, which agreed to pay up to $90 million to settle the case.

The company named as a plaintiff in the suit was Crafts by Veronica, of Newark, NJ.

While the case was filed in New Jersey, any Yahoo customer regardless of which state they reside in would be considered a member of the class should a court certify the lawsuit and allow it to go forward.

Source: Washington Post Blog

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