Wednesday, September 22, 2010

Facebook’s Advertising Charges Could Violate California Unfair Competition Law

This posting was written by Jody Coultas, Editor of CCH State Unfair Trade Practices Law.

Social networking website Facebook PPC could be held liable under the California Unfair Competition Law (UCL) for unfair business practices related to a breach of an advertising contract, but not for fraudulent or unlawful business practices, according to the federal district court in San Jose, California.

Sports website Rootzoo entered into an advertising contract with Facebook that allowed Rootzoo to place advertisements on portions of Facebook’s website with embedded links to external sites.

Facebook gives advertisers the choice between two payment structures: “cost per click” or cost per thousand impressions. In selecting the “cost per click” option, Rootzoo specified the maximum amount it was willing to pay for each click and each day.

Each advertising contract contained a disclaimer stating that third parties may generate clicks that could affect the cost of the advertising and that advertisers accept the risk and cannot hold Facebook liable for those fraudulent clicks.

Despite the disclaimer, Rootzoo alleged that Facebook made representations that it would charge for only certain types of clicks and that it had measures in place to ensure advertisers would be charged only for legitimate clicks. Rootzoo filed the UCL claim after Facebook billed for allegedly invalid clicks.

Unlawful, Unfair, Fraudulent Practices

The UCL prohibits unlawful, unfair, and fraudulent business practices and unfair, deceptive, untrue, or misleading advertising. Each prong applies separately in each case and a party need only meet one of the three criteria—unlawful, unfair, or fraudulent—to state a UCL cause of action.

Rootzoo’s UCL claim under the unfair prong could go forward based on the alleged breach of contract, according to the court. Although California courts have found that systematic breaches of contract may state a claim under the unlawful prong of the UCL, the court determined that the issue was better analyzed under the unfairness prong.

Because Rootzoo’s claims based in fraud were too general, they could not be brought under the unfairness prong. However, the claim based on Facebook’s systematic breach of the advertising contract was not subject to Rule 9(b) and was sufficient to withstand the motion to dismiss.

Heightened Pleading Standard

Because Rootzoo could not meet the heightened pleading standard of Federal Rule of Civil Procedure 9(b) that applies to UCL claims under the fraudulent prong, the court dismissed the claim. Rootzoo alleged that Facebook misrepresented how advertisers were billed, misrepresented the methods in place to protect advertisers from paying for invalid clicks, and failed to disclose that it charged for invalid clicks.

Rule 9(b) requires evidence of the time, place, and specific content of the false representations in order to give defendants notice of the particular misconduct at issue. In this case, Rootzoo’s allegations were too general and lacked any evidence of reliance on the alleged misrepresentations. Thus, the claim was dismissed.

The decision, In re Facebook PPC Advertising Litigation, appears at CCH State Unfair Trade Practices Law ¶32,125. It also will appear at CCH Advertising Law Guide ¶63,980 and CCH Guide to Computer Law ¶50,022.

Further details regarding CCH State Unfair Trade Practices Law appear here.

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