Class Action Defense Cases-Payday v. Findwhat.Com: New York Federal Court Grants Defense Motion In Click-Fraud Class Action To Dismiss Unjust Enrichment, Negligence And Civil Conspiracy Claims But Denies Motion As To Breach Of Contract Claim

Jun 22, 2007 | By: Michael J. Hassen

Click-Fraud Class Action Stated Claim for Breach of Contract and Breach of Implied Covenant of Good Faith and Fair Dealing, but Under New York Law Remaining Claims in Class Action Complaint Fail

Plaintiff, an advertising customer, filed a putative class action against, an Internet search engine operator, and, an Internet advertising provider, alleging that defendants “engaged in ‘click fraud’ by employing individuals and ‘robot’ computer programs (commonly called ‘bots’) to click on Payday’s hyperlinked advertisements and thereby caused Payday to incur inflated charges under its agreement with Findwhat.” Payday Advance Plus, Inc. v. Findwhat.Com, Inc., 478 F.Supp.,2d 496, 499 (S.D.N.Y. 2007). The class action complaint alleged causes of action for breach of contract, unjust enrichment, negligence and conspiracy, as well as two claims based on an alleged joint venture. Id. The defense moved to dismiss the class action complaint for failure to state a claim, id. The district court granted the defense motion as to most of the claims in the complaint, but refused to dismiss the class action claims alleging breach of contract.

Plaintiff contracted with Findwhat to provide Internet advertising services. Findwhat offers advertising services in connection with its Internet search engine, and utilizes a “pay-per-click” formula for charging its customers: “Under this formula, an advertising customer bids on one or more keywords which, when entered into Findwhat’s search engine by Internet users, will return a hyperlink … to the advertising customer’s web site alongside the search results returned by the search engine.” Payday, at 500. Each time an Internet user clicks on a customer’s link, a fee is charged ranging from 50 cents per click to more than $100 per click for “the most sought-after keywords.” Id. Defendant Advertising developed “ClickTracker,” a software program that tracks and measures Internet sales. Id., at 501. According to the class action complaint, Findwhat and Advertising entered into a business relationship to split revenue from their Internet advertising activities, and then conspired to artificially inflate the price of popular keywords. Id. Additionally, plaintiff alleged that Findwhat hired people to click on advertising links in order to increase revenue at the cost of the customer, and that Advertising used computer programs to “click continuously and systematically” on customer links in order to increase revenue. Id.

The class action complaint named only Findwhat as a defendant on the breach of contract claim, and alleged that the Findwhat contract only permitted a charge for “the actual click through advertising from actual consumers” but that Findwhat charged for “advertising and/or services that were not generated from potential consumers, but from individuals, ‘robot’ programs and other software employed by the Defendants solely designed to increase traffic to Plaintiff’s website and drive up revenue.” Payday, at 502. Defense attorneys disagreed, arguing that the terms of the contract are not as restrictive as plaintiff claims, id. Under New York law, the court resolved the contract interpretation issue as a matter of law, id. However, plaintiff never signed the contract relied upon by Findwhat and refused to acknowledge that the terms of the unsigned agreement proffered by Findwhat was the “actual agreement of the parties”: “Because there has been no agreement on the language that reflects the contract terms, and because there is a reasonable dispute as to the meaning of the terms relating to the ‘clicks’ for which Payday owed payments, the Court cannot find as a matter of law that the contract is unambiguous.” Id.

Moreover, plaintiff argued that despite the terms of the contract, under the doctrine of the implied covenant of good faith and fair dealing, defendant could not lawfully charge for clicks deliberately and fraudulently generated by defendants; rather, only clicks from “actual consumers” could be charged. Payday, at 502-03. New York law prohibits parties from “do[ing] anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” Id., at 503 (citations omitted). The district court rejected defense arguments that the class action complaint failed to plead a breach of the implied covenant of good faith and fair dealing, holding that such a claim “is not a separate cause of action, but is instead one way of establishing a breach of contract.” Id. (citations omitted). Accepted as true for purposes of the 12(b)(6) motion, the complaint adequately alleges a breach of the implied covenant because the conduct alleged “would allow [defendant] to increase its profits solely at its discretion and with no benefit to [plaintiff],” id.

Turning to the unjust enrichment claim, the class action complaint alleges that defendants overcharged for its advertising. The district court noted, however, that “[u]njust enrichment is a quasi-contract claim, and the existence of a valid and enforceable written contract governing a particular subject matter ordinarily precludes recovery in quasi-contract for events arising out of the same subject matter.” Id., at 504 (citations omitted). Because the essence of plaintiff’s claim is governed by the terms of its contract with Findwhat, the class action allegations against Findwhat fail and the motion to dismiss was granted. Id. As to Advertising, the federal court held that even though plaintiff was not in contract with that defendant, “The rule that an unjust enrichment claim does not lie where a valid, enforceable written contract governs the same subject matter extends to cases where one of the parties was not a party to the contract.” Id., at 504-05 (citations omitted). The district court dismissed the unjust enrichment claim as to Advertising because according to the class action complaint the only monies Advertising “received” from plaintiff constituted a portion of those paid to Findwhat pursuant to contract, id., at 505.

Similarly, the class action complaint based its negligence claim on the theory that defendants artificially inflated advertising costs. Payday, at 505. But under New York law, “[w]here the only duty owed to the plaintiff arises because of a valid contract, a negligence claim does not lie.” Id. (citations omitted). Further, plaintiff provided no authority for the proposition that defendants “owed a duty to monitor for click fraud and to ensure that Payday was only charged for ‘actual’ clicks,” id., at 506. Accordingly, the court granted the defense motion to dismiss the negligence cause of action, id.

As to plaintiff’s conspiracy claim, the district court noted that New York “does not recognize a substantive tort of civil conspiracy.” Payday, at 506 (citations omitted). Rather, a civil conspiracy claim must be premised upon “allegations of an independent intentional tort.” Id. (citations omitted). Plaintiff alleged that the independent tort was “fraudulent concealment,” but the court held that no fraud claim had been pleaded with the requisite specificity, id., at 506-07. Because the class action complaint failed to include adequate allegations of an independent intentional tort, the federal court granted the motion to dismiss. Id., at 507. As to each of the dismissed claims, the district court granted plaintiff leave to amend if it believed it could cure the defects identified, id., at 507 n.7.

NOTE: Plaintiff admitted that its “joint venture” claims failed, Payday, at 499; accordingly, the district court granted the motion to dismiss those causes of action, id., at 501-02.

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