Online Advertising Provider May Be Liable for Failing to Prevent “Click Fraud”

This posting was written by Mark Engstrom, Editor of CCH State Unfair Trade Practices Law.

An individual who purchased "pay-per-click" advertising from an online provider of "lifestyle" guides to local businesses, entertainment, and events could proceed with California Unfair Competition Law (UCL) claims against the provider and related entities for failing to prevent "click fraud" and refusing to refund disputed charges, the federal district court in Los Angeles has ruled.

“Click fraud” was defined as purposeful clicks on online advertisements by someone other than a potential customer.

Unfair Practices

The individual alleged that the advertising service falsely led its customers to believe that it was taking proactive measures to prevent click fraud, and that it proactively researched and developed processes, policies, and technologies to identify invalid clicks.

Because the individual was not a "competitor" of the online provider, a fairness inquiry required the court to balance the impact of the practices at issue against the reasons, justifications, and motives for those practices.

In the court's view, the inquiry did not require that the alleged unfairness be "tethered to some legislatively declared policy," as the California Supreme Court had held in 1999, because the state high court had expressly limited that holding to "competitor" lawsuits that were brought under the unfair prong of the UCL. Thus, the individual's allegations were sufficient to defeat the advertising service's motion to dismiss.

Unlawful Practices

The individual also pursued a click fraud claim under the "unlawful" prong of the UCL. The provider sought dismissal of this claim because the individual averred that the provider's "unlawful" conduct constituted a breach of their service agreement.
According to the provider, a breach of contract could not form the basis of a UCL claim. The court disagreed, explaining that a breach of contract could form the predicate act for a UCL claim, if the action also constituted conduct that was unlawful, unfair, or fraudulent. In this instance, the plaintiff alleged that the conduct at issue was fraudulent. Therefore, he stated a viable claim under the "unlawful" prong of the UCL.

Standing

The individual lacked standing to seek injunctive relief. Because he did not appear to be a current customer—and was unlikely to be a future customer—of the provider, he was not entitled to prospective relief.

Whether he had standing to seek restitutionary relief, however, was a different matter. The individual alleged that the provider had refused to refund $69.75 in disputed advertising charges that had been automatically deducted from his credit union account through a direct debit arrangement. This loss constituted an injury under the UCL.

Although the credit union ultimately refunded the disputed charges, the individual had lost the use of his money during the two-month interim period that preceded the refund and followed the automatic deduction. According to the court, a claim seeking recovery for the loss of one's use of money was a claim for restitutionary relief under the UCL. Nevertheless, the parties failed to disclose whether the advertising service "had ever possessed the money at issue." Therefore, a genuine issue of material fact existed as to whether the individual had standing to seek restitutionary relief.

Reliance

The court declined to decide whether a fraud claim under the UCL required proof of actual reliance pursuant to Proposition 64 (a state initiative that amended the UCL to restrict private lawsuits to persons who have lost money or property as the result of unfair competition) because the issue that was currently before the California Supreme Court in three other cases.

The decision is Lambotte v. IAC/Internactive Corp., CCH State Unfair Trade Practices Law ¶31,640