Facebook Inc. (FB) Facing a Click Fraud Lawsuit?

Facebook Inc. (NASDAQ:FB) has a lot of its revenue – a key issue for many hedge funds we track that own this stock – based solely on clicks. Lots and lots of clicks. But it’s possible that with billions of clicks every month that not every one is perfect. So if a click is flawed in some way, should Facebook be held accountable if it overcharges an marketer for clicks received? And better yet, can there be a class-action involving many marketers because the concept of “flawed” clicks can be shown to be uniform across the Facebook platform?

There are a couple of legal questions on the table with Facebook Inc. (NASDAQ:FB) this week, as a couple of pay-per-click marketing firms are trying to achieve class-action status on behalf of a number of similar firms, suing Facebook for a charge of “click fraud,” where Facebook charges these marketing firms for clicks that are deemed invalid or fraudulent. This case was tossed as a class-action by a federal judge last year, though her ruling stated that the firms could ring suit individually. The 9th Circuit Court of Appeals is slated to hear arguments in an appeal of the class-action ruling.

The central issue of this suit involves the two marketing firms, which pay Facebook Inc. (NASDAQ:FB) for each click on their ads. The firms claim that Facebook is violating its contract by charging the companies for clicks hat are “invalid.” In the appeal, the marketers say that this case should proceed as a class-action because there is a uniform contract and the issues raised are familiar to all would-be plaintiffs.

How long has this invalid click issue been in the legal system?

This case goes back to 2009, when a judge ruled that the contract between Facebook Inc. (NASDAQ:FB) and pay-per-click marketing firms stipulated no Facebook liability for fraudulent clicks – those made inadvertently by a user – but the contract had no such stipulation for invalid clicks, or those in which technical issues prevented a user from reaching the desired landing page upon clicking the link.

in the appellate brief, the plaintiffs wrote, “Because Facebook’s rules for distinguishing between valid and invalid clicks are based on uniform, automated computer algorithms, plaintiffs’ claims do not require resolution of Facebook’s culpability on a plaintiff-by-plaintiff basis. Whether plaintiffs win or lose, their claims will rise and fall together.”

What do you think? Are invalid clicks a worthy legal issue, and do you think this should be a class-action? Could this be a high-profile trial for the company? Let us know your thoughts in the comments section below.

DISCLOSURE: I own no positions in any stock mentioned.

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