Yahoo Close to Settling Click-Fraud Lawsuit

Yahoo Inc. (YHOO) will consider refunding money to thousands of advertisers dating back to January 2004 and pay $4.95 million in attorney fees to settle a class-action lawsuit alleging the Internet powerhouse has been profiting from bogus sales referrals generated through a sham known as "click fraud."

The agreement, given preliminary approval Wednesday by U.S. District Judge Christina Snyder in Los Angeles, doesn't limit Yahoo's liability — one of several contrasts to a settlement reached in March by online search engine leader Google Inc. (GOOG) to resolve a class-action lawsuit over the same issue.

Google's financial commitment in its case, overseen by an Arkansas state court, is capped at $90 million. That's a sliver of the $13.3 billion in ad revenue that the Mountain View, Calif.-based company has collected since 2001.

As much as $30 million of the Google settlement could be paid to the attorneys who filed the case.

Although Yahoo doesn't know how much money it will end up refunding, company officials seem confident it will be a relatively small amount. Yahoo's ad revenue totaled $9.1 billion from January 2004 through March of this year.

"We want to keep our advertisers happy," said Yahoo lawyer Reggie Davis. "Whatever credits are owed will be 100 percent forthcoming."

In its settlement, Google is offering to give back less than 1 percent of the money spent on undetected click fraud and plans to make the payments in the form of credits that can used to buy more ads on its networks.

Yahoo is giving advertisers the option of receiving cash refunds instead of credits.

All advertising claims submitted to Yahoo will be subject to the review of a retired federal judge who will oversee the refund process. Google's review of click-fraud claims won't be subject to any oversight.

The settlement also will give Yahoo an opportunity to provide more clarity about one of the most confusing — and potentially disruptive — issues hanging over the rapidly growing Internet advertising market.

As part of the agreement, Yahoo has committed to working with others in the industry to define what constitutes click fraud.

The ruse takes different shapes, but the end result is usually the same: Merchants are billed for fruitless traffic generated by scam artists and mischief makers who repeatedly click on an advertiser's Web link with no intention of buying anything.

Those clicks generate revenue for Yahoo, the owner of the Internet's second-largest advertising network behind online search engine leader Google, as well other Web sites.

The estimates on the prevalence on click fraud vary widely, partly because there are so many different interpretations of the practice.

A recently established index compiling information from more than 1,000 advertisers has estimated that about 12 percent of the clicks on ads running in the Google and Yahoo networks are fraudulent.

Other studies have estimated the click fraud rate as high as 30 percent — numbers that both Google and Yahoo have vehemently disputed.

Yahoo already has given advertisers billions of free clicks because it would rather err on the side of its customers when anything questionable occurs on its network, said John Slade, senior director of product development.

Darren Kaplan, an Atlanta attorney representing advertisers in the class action, praised Yahoo's approach.

"I can only conclude from Yahoo's actions that Yahoo both cares a great deal more than Google about its own customers and that Yahoo! has a lot more confidence in its prior click fraud detection efforts than does Google," Kaplan said.

Google spokesman Steve Langdon said the company continues to believe the Arkansas settlement is fair.

Kaplan and a group of other lawyers had filed a click fraud suit against Google in San Francisco federal court. That complaint was derailed when Google settled the Arkansas class action.

Kaplan and Los Angeles attorney Brian Kabateck hope to prevent the Arkansas settlement from getting final approval in a two-day hearing beginning July 24.