In a move seen as potentially having far-reaching implications for the problem of click fraud in paid search, Microsoft this week filed a lawsuit seeking damages against three fraudsters for manipulating clicks on search ads to hurt rivals and give their own ads an advantage in ranking.

At issue is the abuse of Microsoft's (NASDAQ: MSFT) adCenter search ad platform. Generally, advertisers bid on what they will pay to have their ads displayed in the paid-search results for certain keywords -- the more they pay, the higher they are listed. When a viewer clicks on the ad, the advertiser pays the ad network -- in this case, Microsoft -- for each click on their ad.

But unscrupulous rivals can use the model to their own ends, by deluging competitors' ads with clicks that force them to pay through the nose or to deplete their search marketing budgets.

That proved to be what spawned this week's lawsuit, according to Microsoft. The company said that after more than a year of investigation, it found a "widespread scheme that generated invalid clicks on links to online ads that were displayed in response to search requests on Microsoft's network."

Microsoft filed a civil complaint seeking $750,000 in damages on Monday in United States District Court in Seattle. The suit names Eric Lam, Gordon Lam and Melanie Suen, of Vancouver, British Columbia, as defendants, along with several corporate aliases.

In addition to seeking to recoup damages from Lam and his cohorts, Microsoft said in its complaint that it provided $1.5 million in credit to advertisers impacted by the allegedly faked clicks.

While the damages may pale in comparison to the billions being spent across the industry on paid search listings, it's a move that marks a changing attitude toward click fraud, which has emerged as a major blight on the space.

"A search provider has taken legal action against what is technically one of their own customers who is allegedly using click fraud to their own advantage," Steve O'Brian, vice president of marketing at the online fraud tracking firm Click Forensics, told InternetNews.com.

Widespread problem

The lawsuit shines a light on a long-accepted risk of the paid search business, in which approximately 17 percent of all online ad clicks are bogus, according to Click Forensics.

To combat the problem, all the major search engines have full-time staff who work, largely unnoticed, to detect odd click patterns, verify that click fraud has occurred and then issue credits to advertisers victimized by the practice, O'Brien said.

But he added that Microsoft's suit serves as a wake-up call.

"People see the stats, but it's abstract -- they think, 'It's not happening to me,' so this case puts a face on it, makes it tangible," O'Brien said. "Actual people went out of their way to deploy bots to perpetrate click fraud and harmed multiple advertisers who had every reason to think the clicks were valid."

In the past, advertisers have complained that they often overpay for invalid clicks, while search engines counter that they have steps in place to identify and compensate for click fraud. Rarely, however, are the fraudsters themselves targeted.

Yet there's also a growing awareness that the situation needs to change. Last year, Google and Yahoo joined Click Forensics in stepping up self-regulation over what constitutes click fraud. To help make the industry more transparent, the Interactive Ad Bureau, an industry trade association, recently issued pay-per-click guidelines.

"The vast majority of online advertising activity is legitimate, of course. But like most online activities, there are areas where fraud can be found," Tim Cranton, Microsoft's associate general counsel, wrote in a blog post. "The online advertising industry has been making strides in this area for years, implementing technology, best practices and techniques to help address issues such as click fraud. Today’s action is one more step to expand that effort by utilizing the legal system to combat click fraud."

The fact that Microsoft is willing to go further in filing an actual lawsuit should benefit the entire industry, Click Forensics's O'Brien added.

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