On Monday, Microsoft Corp filed it’s first-ever lawsuit involving a case of click fraud. The civil lawsuit was filed in the U.S. District Court for Western Washington against three individuals – Eric Lam, Gordon Lam and Melanie Suen, of Vancouver, British Columbia and companies they control. Microsoft alleges that the three engaged in massive click fraud, which impacted Microsoft’s online advertising platform and potentially other networks. Microsoft is asking for $750,000 in damages.

According to Microsoft, in Spring 2008, the three involved in a massive click fraud scheme to drive traffic to their auto insurance and the World of Warcraft websites. The click fraud scheme targeted advertisers bidding for the search terms “auto insurance” and “WoW”. So, it was a “competitor click fraud”, which is done to boost their performance of own ads by exhaust competitor’s advertising budget. The fraudsters earned thousands of dollars in profit by promoting auto insurance and virtual currency used in online role-playing game World of Warcraft.

Microsoft started internal investigation on the click fraud scheme on March 24, 2008, when it received complaints from Microsoft AdCenter advertisers. It exposed the frauds by tracing the source of the allegedly fraudulent traffic back to the computers or servers run by the defendants. Interestingly, all the three fraudsters are from the same family!In the complaint, Microsoft said that it credited nearly $1.5 million to the advertisers affected by the defendants’ actions.

Click fraud is a type of Internet crime that occurs in pay per click online advertising when a person, automated script or computer program imitates a legitimate user of a web browser clicking on an ad, for the purpose of generating a charge per click without having actual interest in the target of the ad’s link.  Click fraud not only hurts the performance of the ads, but also lowers their rankings. It is a serious issue in the pay per click online advertising industry. According to ClickForensics, the overall industry average click fraud rate was 13.8% for Q1 2009, which means one in every seven click on an advertisement is fraudulent!

With this lawsuit Microsoft seeks an injunction to help stop this illegitimate activity and to recover damages. Tim Cranton, the software company’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. Enforcement can play a critical safety role, supplementing technology and industry best practices, by using lawsuits and criminal prosecutions to stop the most egregious violators and hold them accountable for the fraud they commit.