Google Proposes $90M Settlement

John Thys still hasn't figured out how much his company has paid Google Inc. for bogus sales referrals caused by "click fraud" - a sham aimed at a perceived weakness in the Internet search leader's lucrative advertising network.

Click fraud takes different forms, 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.

Based on a monthlong analysis of the traffic that Google ads referred to Radiators.com, Thys suspects click fraud may have accounted for 35 percent of the Web site's $20,000 ad bill.

Thys says he has uncovered enough of it to conclude that Google is trying to shortchange his company and thousands of other advertisers by offering refunds totaling $60 million to settle a lawsuit.

"It's almost like an insult that they expect us to take this token money," said Thys, director of Internet marketing for Radiators.com.

Google also expects to pay $30 million to the lawyers who settled the case on behalf of advertisers, raising the settlement's total value to as high as $90 million. Still, that's a fraction of the more than $10 billion in cash held by the Mountain View, Calif.-based search company.

An Arkansas judge is expected to consider the proposed class-action settlement in late July.

The refunds, which will be provided in the form of advertising credits, are meant to compensate Google's customers for undetected click fraud, which contributed to the $13.3 billion in ad revenue that has poured into the company since 2001.

Google's offer works out to a $4.50 refund on every $1,000 spent in its vast advertising network over the past 4¼ years.

Meanwhile, independent studies assert that anywhere from $100 to $400 of every $1,000 stems from click fraud. If those estimates prove correct, Google might be on the hook for $1 billion to $5 billion in advertising refunds.

After reviewing Thys' evidence, Google said its internal safeguards had spotted the suspicious activity as it occurred and never billed Radiators.com for fraudulent clicks. But Thys said the search engine didn't provide him with any data to back up its findings in an e-mail signed simply by "Ray" from Google's click quality team.

Google maintains its class action settlement represents a fair offer that underscores how well it has shielded advertisers from the costs of click fraud.

The class-action settlement of the Arkansas lawsuit will likely test advertisers' faith in Google. The company is supposed to send out notices of the settlement later this month, giving advertisers until late June to reject or protest the refund offer. Radiators.com already has decided to reject the offer.

If the entire deal is rejected, lawyers then go back to the negotiating table; individual advertisers can also declare they won't participate, freeing them to file their own lawsuits seeking better deals or join a separate one pending in California.

Miller County Circuit Court Judge Joe Griffin is scheduled to decide whether to approve the settlement in a two-day hearing beginning July 24.

Yahoo Inc. - owner of the Internet's second-largest advertising network - continues to fight similar click fraud allegations in the same Arkansas court as well as a federal court in California. A click-fraud lawsuit filed against Google in that same federal court has been suspended while its Arkansas settlement is reviewed.

The Google settlement, announced in early March, already has focused more attention on click fraud.

The shady activity produces revenue for Google, Yahoo and a long list of Web sites that display the ads because the clicks trigger sales commissions even if a referral doesn't produce a sale.

Suspected motives vary. Sometimes Web merchants try to deplete a rival's advertising budget. In other instances, the owners of small Web sites participating in the marketing networks run by Google and Yahoo are believed to click on ads to generate more commissions for themselves.

Complicating the click fraud issue even further, search engine advertising isn't subjected to independent auditing like the advertising done in newspapers, magazines and broadcast media.

In search advertising, Web site owners sign contracts obligating them to pay for all valid clicks - and the search engine has discretion over what is valid.

Google is examining ways to make its fraud-fighting efforts more transparent without revealing crucial information that might help swindlers elude detection, said Shuman Ghosemajumder, the company's product manager for trust and safety.

Outside help also may be on the way.

The class-action settlement requires a report from a yet-undisclosed independent expert to verify that Google has made reasonable efforts to weed out click fraud.

Separately, Minneapolis-based Fair Isaac Co. is studying the issue, drawing on its years of helping lenders fight fraud.

San Antonio-based Click Forensics Inc. recently set up a free service that intends to issue quarterly reports on the frequency of click fraud, compiling information from more than 1,000 advertisers.

The index's initial findings, released in late April, estimated Google and Yahoo suffered a click fraud rate of 12 percent, translating to more than $1.5 billion of Google's ad revenue.

Given those findings, the settlement amount in the Arkansas class action "was very surprising to us," said Tom Cuthbert, Click Forensics' chief executive. "If I were an advertiser, I would take great care in studying that settlement."

Attorneys suing Google in the California case say they will do everything possible to persuade advertisers to reject the Arkansas settlement.

"Google's motto is 'do no evil,' but it's not following its own advice by entering into this kind of settlement," lawyer Brian Kabateck said.

If enough advertisers balk, it might derail the deal. Google has the right to nullify the settlement if advertisers that supplied more than 5 percent of its revenue since 2001 reject the agreement.

Google spokesman Barry Schnitt said Kabateck and his colleagues are trying to rally opposition to the Arkansas settlement so they can revive the California lawsuit in an attempt to drum up more fees for themselves.

Stephen Malouf, a Dallas lawyer who negotiated the Arkansas settlement, doubts advertisers can get a better deal than what Google has offered. "It's easy to take cheap shots now, but what is the alternative and what are the chances of success?"