Update: Google to settle click-fraud lawsuit for $90M

IDG News Service - 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 $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.

Estimates about the incidence of click fraud vary widely, with a worst-case scenario estimate that as much as 20% 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 yesterday in his Searchblog blog.

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.

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

George McWilliams, an attorney for the plaintiffs, 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.