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AFTER an investigation that took more than a year, Microsoft has filed its first lawsuit over click fraud, where people manipulate clicks on a Web advertisement.

Microsoft filed the civil complaint on Monday in United States District Court in Seattle against Eric Lam, Gordon Lam and Melanie Suen, of Vancouver, British Columbia, along with several corporation names they were believed to have used, and several unnamed parties.

Microsoft is seeking at least $750,000 in damages. That might seem a small amount for a company that had sales of $13.7 billion last quarter. But about one in every seven clicks on an advertisement is estimated to be fraudulent, according to the traffic analysis firm ClickForensics, and Microsoft is trying to make that kind of deception more expensive for perpetrators.

“We have decided to become more active in the commercial fraud area on the enforcement side,” said Tim Cranton, associate general counsel for Microsoft. “The theory is you can change the economics around crime or fraud by making it more expensive.”

Jeremy Fain, the vice president of industry services for the Interactive Advertising Bureau, a trade group, said that Microsoft’s lawsuit was more than a warning shot.

“Legally, if you commit wire fraud or mail fraud, there’s a lot of very stiff penalties for that, where we don’t have a lot of precedents, legally, from an Internet perspective yet,” he said. “It’s really meant to try to create more of a legal precedent, and more of a legal library of cases to draw from in the future.”

Gordon Lam, reached on Monday evening, said he had not yet seen the filing and could not comment further.

Microsoft said it found a pattern of click fraud on its search pages, where lists ranked by relevance and popularity appear alongside a handful of paid results. Advertisers bid on what they will pay to appear in the paid-search results for certain keywords. The more an advertiser pays, the higher they are in that list, and advertisers usually pay for each click on their ad.

In March 2008, several auto insurance advertisers began complaining to Microsoft that traffic to their ads was spiking suspiciously. Microsoft looked at the searches being conducted, and noticed that searches for keywords like “auto insurance quote” had sharply increased. And clicks to the advertisers appearing at the top of the paid-search results listings for those terms were high.

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Microsoft investigators noticed there was an oddly similar pattern in a seemingly unrelated area, advertisements for the game World of Warcraft. Though investigators weren’t sure how the two were connected, they began to see some similarities. Although traffic appeared to come from different computers, it was actually coming from two proxy servers, which mask the original address of a click.

Microsoft began trying to stop the suspect traffic, but a little game evolved. Microsoft would block a server, or block a certain level of traffic for those advertisements, but whoever was on the other side of the clicks kept finding new ways around the company’s fixes.

“They’re basically just trying to figure out what our filters and technology tools are going to flag, and seeing if they can change their thresholds to get around it,” Mr. Cranton said. “Then we figure out what they’ve done and we change our thresholds, and it goes back and forth.”

Microsoft didn’t know why someone would be interested in both World of Warcraft and auto insurance ads, though, until a third party told investigators that an advertiser for World of Warcraft keywords named Eric Lam was also taking a fee for directing traffic to auto insurance sites. Investigators figured out that seven different accounts, registered under different individual and company names, were linked to Mr. Lam and two other defendants, Gordon Lam and Melanie Suen, believed to be Mr. Lam’s brother and mother.

Microsoft’s theory is that Mr. Lam was running or working for low-ranking sites that took potential client information for auto insurers. The complaint said that he directed traffic to competitors’ Web sites so they would pay for those clicks and exhaust their advertising budgets quickly, which let the lower-ranking sites that he sponsored move up in the paid-search results.

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When people clicked through to his site, it asked them to supply contact information, which he then resold to auto insurance companies, according to Microsoft’s complaint, which estimated his profit at $250,000. In the complaint, it also said it had to credit back $1.5 million to advertisers because of the Lams’ alleged fake clicks. Microsoft is seeking $750,000 in damages from the defendants.

Although small advertisers have sued search firms, complaining the firms did not do enough to prevent fraudulent clicks, this is among the first cases where a search provider has gone after a suspected perpetrator.

While Mr. Cranton said that this was not a gigantic case for Microsoft, he said the fraud was “significant.”

“We think there’s a good place for enforcement, basically to say, ‘You think this is a game, cat and mouse, back and forth. At some point, once we figure out who you are, we’re going to hold you accountable for it, it’s going to be expensive, and we’re going to deter you from doing it because you’re ripping off advertisers and people online,’ â€ he said.

source: NYT