In the ongoing class action litigation brought by Advertisers against Facebook (see Pay-Per-Click Advertising Case Against Facebook Survives Motion to Dismiss) the social networking site successfully moved to dismiss the Advertisers' claims of fraud under California's Unfair Competition Law. In re Facebook PPC Advertising Litigation, Nos. 5:09-cv-03043-JF, 5:09-cv-03519-JF, 5:09-cv-03430-JF, 2010 WL 5174021 (N.D. Cal. Dec. 15, 2010). The District Court for the Northern District of California found that the plaintiffs had not met the heightened pleading requirement under Federal Rule of Civil Procedure 9(b), requiring fraud claims to be plead with "particularity."
The Advertisers' claims arose out of their contracts with Facebook to place advertisements on portions of Facebook's Web site. The Advertisers paid for the advertising pursuant to a "cost per click" (CPC) arrangement which charges the Advertiser based on the number of times a user clicks on the advertisement. The Advertisers subsequently discovered a number of fraudulent clicks that were made solely in an effort to drive up their costs--a practice known as "click fraud."
Based on their contracts with Facebook, each of which contained a disclaimer of liability for "click fraud," the Advertisers brought suit against the social networking site pointing to terms on Facebook's "Help Center" page, which ensured advertisers holding CPC contracts that they would only be charged "for legitimate clicks, and not clicks that come from automated programs, or clicks that may be repetitive, abusive, or otherwise inauthentic." Furthermore, Facebook's Help Center represented that the Web site had several measures in place to prevent click fraud. Although seeking relief for breach of contract and declaratory judgment, the instant motion to dismiss challenged the Advertisers' relief sought under California's Unfair Competition Law (the "UCL") with the respect to the click fraud claims. Cal. Bus. Prof. Code § 17200 et. seq. The UCL prohibits any "unlawful, unfair or fraudulent business practices." The Advertisers argued that Facebook's representations on its Help Center page constituted fraudulent "misrepresentations and omissions," in violation of the UCL.
Facebook unsuccessfully argued that the Court's prior ruling absolving Facebook of breach of contract liability precluded the present claim for fraud under the UCL. Noting its previous decision to dismiss the Advertisers' breach of contract claims in light of the unambiguous statement in each contract disclaiming any liability for click fraud, the Court distinguished its prior ruling and focused the present inquiry "on whether the language in the Help Center [rather than the language in the contract] was 'likely to deceive members of the public.'"
The Advertisers argued that absent the statements in the Help Center assuring advertisers that Facebook employed adequate methods to prevent click fraud, they would not have entered into the contracts with the Web site. Moreover, the Advertisers asserted that such statements "were likely to cause a reasonable consumer to believe that Facebook employed a filtering system that was adequate to protect them against click fraud, making them more willing to accept the disclaimer." The Court then analyzed whether the Advertisers' reliance on Facebook's statements was reasonable. Although noting that Facebook could have avoided uncertainty with respect to its assurances against click fraud by representing "that it would 'defend against,' 'protect from,' or 'make every effort to prevent' fraudulent clicks," the Court nevertheless held that a reasonable consumer would not interpret Facebook's statement as a "guarantee that its filtering system will always be effective," especially in light of the Advertisers' admission "that no existing filtering system is capable of detecting all fraudulent clicks."
The Court concluded that although the Advertisers' allegations may prove "that Facebook's filtering system suffers from serious defects," such allegations fall short of raising a plausible claim that Facebook knew of the deficiencies in its filtering system at the time it made the representations in the Help Center. Furthermore, because the allegations "sound in fraud," the Advertisers were required to overcome the heightened pleading standard of Rule 9(b), requiring such claims to be plead with particularity. The Advertisers' "conclusory allegations" were insufficient to satisfy this standard. Thus, the Court granted Facebook's motion to dismiss with respect to the UCL claim based on click fraud. However, Facebook may not have heard the last of this claim, as the Court also granted the Advertisers leave to amend.