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Payday Advance Plus, Inc. v., Inc., and, Inc.

06 Civ. 1923 (JGK) (S.D.N.Y., March 12, 2007)

Click Fraud Claims Proceed Against Search Engine

Court allows plaintiff to proceed with ‘click-fraud’ claim against defendant, a search engine operator.  The complaint alleged that to increase its revenues from pay-per-click advertisements posted on its site by plaintiff, defendant directed defendant to engage ‘bots’ and individuals to click on plaintiff’s advertisements.  This had the effect of increasing defendant’s revenues, as plaintiff paid it on a pay-per-click basis.  The complaint alleged that defendant Findwhat also bid on pay-per-click search terms, thereby improperly increasing the price plaintiff had to bid therefore to obtain higher placement for such terms.  The Court held that such misconduct could run afoul of the implied covenant of good faith and fair dealing in the parties’ contract, and accordingly allowed plaintiff to proceed with a breach of contract claim against defendant changed its name to Miva, Inc. in June 2005.

The Court did dismiss the balance of the claims plaintiff asserted.  Its unjust enrichment claims failed because there was a valid contract governing the subject matter of plaintiff’s claim.  Plaintiff’s negligence claims failed because of the absence of any independent duty on the part of defendant to monitor the source of the ‘clicks’ plaintiff received.  Such an obligation would be governed by the terms of the parties’ contract. 

Finally, plaintiff’s fraudulent concealment claim failed because of plaintiff’s failure to plead such claim with the requisite particularity.  Plaintiff was granted leave to replead this claim, premised on defendant’s alleged duty to disclose that it was improperly causing a third party to click on plaintiff’s ads so as to increase’s revenues.  Such a claim, if properly alleged, would serve to support a civil conspiracy claim against defendant, which was the party that allegedly arranged to have a ‘bot’ click on plaintiff’s ads.

Search Engine Allegedly Engaged Third Party To Click On Plaintiff’s Pay-Per-Click Ads

In 2004, plaintiff entered into an agreement with defendant to display pay-per-click advertisements on its search engine.  In its complaint, plaintiff alleged that entered into an agreement with defendant to divide the revenues produced by the pay-per-click advertisements displayed on its site.  To increase these revenues, defendant allegedly directed to engage ‘bots’ that would click on such ads, including those of the plaintiff. also was alleged to have directed individuals to conduct certain keyword searches, and click on pay-per-click advertisements that appeared on the search engine results pages, including those of plaintiff.  This improperly inflated the fees defendants received by plaintiff, which, instead of paying for ‘real’ clicks from consumers potentially interested in its products, found itself paying for clicks from sources that had no interest in its products.

The Complaint further alleged that defendants also improperly bid on pay-per-click terms offered for sale to advertisers such as plaintiff.  This had the effect of artificially increasing the costs of such keywords, for which the highest bidder received the best placement.

Plaintiff commenced this suit to seek redress for this misconduct, purported on behalf of a class of advertisers similarly injured by defendants’ activities.

Defendants moved to dismiss plaintiff’s complaint.

Click Fraud Breaches Implied Covenant Of Good Faith And Fair Dealing

The court denied so much of defendant’s motion which sought to dismiss plaintiff’s breach of contract claim.

The Court rested its determination on New York’s “recogni[tion] as implicit in every contract ‘a covenant of good faith and fair dealing in the course of contract performance.’”  This implied covenant prohibits either party from a contract from “do[ing] anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”

Defendant’s acts of engaging third parties to employ ‘bots’ and individuals to click on plaintiff’s ads for the purpose of increasing defendant’s revenue, and bidding on keyword search terms, could, held the Court, constitute a breach of the contract’s implied covenant of good faith and fair dealing.  Said the Court:

The facts alleged in the Complaint, if taken to be true, suggest that Findwhat could have violated its implied covenant by inflating the bidding prices for search terms and by directing Advertising to generate ‘clicks’ on Payday’s website by people or ‘bots’ who had no purpose for visiting the site other than to generate revenue for Findwhat and Advertising.  Because this tactic would allow Findwhat to increase its profits solely at its discretion and with no benefit to Payday, it is plausible that it could be found to ‘destroy or injure Payday’s rights under the contract.  It is furthermore likely that a reasonable advertiser entering into such a contract would expect that, whatever the external risks of unproductive ‘clicks,’ it would not be subjected to unbounded increases in its prices at the hands of its promisor or at its promisor’s direction.

As a result, the Court denied defendant’s motion to dismiss plaintiff’s breach of contract claim.

The Court did dismiss plaintiff’s unjust enrichment claim, on the ground that “the existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi-contract for events arising out of the same subject matter.”  This rule bars unjust enrichment claims against both those who are party to such an agreement, such as Findwhat, as well as those who are not parties to such a contract, such as

The Court also dismissed plaintiff’s negligence claims, which alleged that defendant Findwhat owed a duty to monitor for ‘click fraud’ and detect and advise when ‘bots’ were being used to artificially inflate the traffic an ad generated.  To be able to assert such a claim, plaintiff needed to establish that defendant owed it a duty.  As plaintiff had no relationship with defendant, it owed no duty which could serve as the basis for a negligence claim.  And, held the Court, as defendant had a business relationship with plaintiff formed by contract, it was that contract which would govern it, and give rise to any claims plaintiff had.  Said the Court: “Where the only duty owed to the plaintiff arises because of a valid contract, a negligence claim does not lie. … These arguments are insufficient to establish an independent duty apart from the business relationship between Payday and Findwhat, which was governed by their contract.”

Plaintiff Granted Leave To Replead Fraudulent Concealment Claim

Finally, the Court granted defendants’ motion to dismiss plaintiff’s fraudulent concealment claim, because it was not pled with the requisite particularity.  The Court did grant plaintiff leave to replead such a claim.  To state such a claim, a plaintiff must allege “a relationship between the contracting parties that creates a duty to disclose, knowledge of the material facts by the party bound to disclose, scienter, reliance and damage.”  Such a duty to disclose can arise “under the special facts doctrine, where one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge …”.  Plaintiff urged it could state such a claim by alleging that defendant Findwhat owed it a duty to disclose it was engaging in ‘click fraud’ and thereby artificially inflating the revenues it received from plaintiff and its ads.  As stated above, plaintiff was granted leave to replead such a claim, which would serve as the predicate for a civil conspiracy claim against defendant

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