Yahoo sued over alleged pay-per-click fraud

Instead of the "highly targeted" sites the ads are supposed to appear on, the ads end up on low-quality sites that show random ads and little or no bona fide content, according to the lawsuit, filed Monday in New Jersey federal court.

Spyware programs are unwanted software installed on users' computers without their express consent that can display unwanted and annoying pop-up ads, transmit personal information about the user and slow computers. The New York Attorney General's Office investigated spyware programs and alleged that Yahoo had placed ads into spyware provided by Intermix and Direct Revenue, the lawsuit notes, although it does not name Intermix and Direct as defendants.

Using an example of typosquatting, the suit said that mistyping Expedia as "expedai.com" displayed a site with ads provided by Yahoo, including an ad for Expedia.

The lawsuit, which seeks class-action status against Yahoo and a group of unnamed third parites, was filed on behalf of Crafts by Veronica, a Newark, N.J.-based retailer that declined to comment. It accuses Yahoo of breach of contract, unjust enrichment, civil conspiracy and violations of the New Jersey consumer fraud act.

Yahoo is charging for pay-per-click (PPC) advertising "even though defendants knew that a substantial percentage of click revenue resulted from PPC advertisements shown improperly, including in ways that contravene defendants' contracts with its advertising customers," the lawsuit alleges.

The lawsuit also alleges that Yahoo not only chose to ignore abuse of its PPC advertising system by spyware and typosquatter sites, but also "knowingly...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."

"We're not going to comment on this matter other than to say that we plan to vigorously defend our position," a Yahoo representative wrote in an e-mail seeking comment.

One of the lawyers on the case said Yahoo could have taken steps to address the problem. "They could have refused to partner with spyware companies," said Ben Edelman, a spyware expert and Harvard doctoral candidate. "Instead, they are partnering with spyware companies and have paid out millions of dollars in advertising money to them."

Anyone who purchased ads on Yahoo's pay-per-click ad system in the last six years can join the lawsuit after it is certified as class action by the court, he said.

Yahoo remains a defendant in a click fraud lawsuit that Google settled for $90 million that claims search engines overcharged customers for click fraud, or illegitimate clicks on ads designed to either generate revenue for a Web site publisher or make an advertiser pay out more in advertising.