An advertiser has filed a lawsuit against Google, claiming that the web giant knows that click fraud is rampant in its pay-per-click advertising program. The lawsuit contends that Google hasn't seriously attempted to prevent the practice of individuals clicking on ads with malicious intent.

Click Defense claims it was the victim of click fraud when it advertised on Google's AdWords program earlier this year, and has filed the lawsuit alleging breach of contract, negligence, unjust enrichment and unfair business practices.

Click fraud involves wrongly clicking on pay-per-click advertisements. A common type of click-fraudster is a company official who hits competitors' ads, knowing that every time he does itm he costs his competitors money. Another is the publisher of a website which runs pay-per-click ads – the more the ads on his site are clicked on, the more commission money he receives.

Application service provider Click Defense knows a thing or two about click fraud: its specialty is helping customers enhance their online advertising campaigns and it monitors for click fraud.

In its lawsuit the company alleges that Google is aware that due to click fraud, the ads it sells are worth "significantly less" than what advertisers pay for them. Click Defense also accuses Google of not "adequately" warning customers about the existence of click fraud and of not "adequately" alerting them and refunding them when they become victims of this practice.

"Google has an inherent conflict of interest in preventing click fraud since it derives the same amount of income from each fraudulent click as it does from each legitimate click," Click Defense claims in the lawsuit.

It also notes that some industry analysts put the incidence of click fraud at up to 20 percent of all clicks, and points out that in December 2004, Google Chief Financial Officer George Reyes described click fraud as "the biggest threat to the Internet economy."

A Google spokesman claims the company believes the lawsuit is without merit. "We will defend ourselves vigorously," he said. He declined to comment any further on the specific allegations.

In its 2005 annual report, Google addressed click fraud, saying it has "regularly" refunded advertisers due to this practice, and that those refunds may increase if Google is unable to curb this activity. Moreover, Google acknowledged that if evidence of past fraudulent clicks emerges, it may have to issue retroactive refunds which would negatively affect its bottom line and could hurt its brand.

"If fraudulent clicks are not detected, the affected advertisers may experience a reduced return on their investment in our advertising programs because the fraudulent clicks will not lead to potential revenue for the advertisers. This could lead the advertisers to become dissatisfied with our advertising programs, which could lead to loss of advertisers and revenue," the annual report reads.