The case was filed by the St. Petersburg, Fla.-based company Interactive Retail Management Inc., doing business as the online jewelry store allé Fine Jewelry, which placed pay-per-click ads on the MSN Shopping Channel and MSN's shopping distribution network of sites.

The lawsuit came to light last week when a Florida appellate court ruled that allé Fine Jewelry could proceed in the state. A trial court had previously dismissed the lawsuit on the grounds that the retailer's contract with Microsoft required that any litigation occur in Washington state.

The online retailer alleges that Microsoft charged it for fraudulent clicks in 2006, in violation of a Florida law regarding deceptive and unfair trade practices.

"Defendant is aware that click fraud is extensive in the PPC advertising industry but has failed to take appropriate measures to identify fraudulent clicks, to prevent click fraud or to warn advertisers and potential advertisers about click fraud," the lawsuit alleges.

Allé Fine Jewelry does not provide any examples of fraudulent clicks in its complaint. Instead, the lawsuit relies on estimates that at least 20% of clicks on pay-per-click ads are "generated by some method other than a prospective consumer."

The jeweler also alleges that Microsoft does not account for click fraud when billing advertisers. "Defendant has represented to allé Fine Jewelry that it does not attempt to identify fraudulent clicks because it does not believe such activity occurs on its website," the lawsuit states.

The retailer is asking for a refund of any fees it paid for fraudulent clicks, an injunction ordering Microsoft to stop charging for such clicks. The company also seeks class-action status.

Microsoft spokesperson David Bowermaster said the company was "disappointed" by the appellate court's decision, but noted that the ruling wasn't about the merits of the claim. "We will continue to vigorously defend against this lawsuit and look forward to presenting our evidence in court," Bowermaster stated.

This case is the only known click fraud lawsuit against Microsoft, but Yahoo and Google have been dealing with the issue for years. Currently, Google is facing three lawsuits in federal court stemming from its parked domain program, which places paid search ads on otherwise empty Web pages.

In addition, in 2006 Google agreed to settle a class-action click fraud suit for up to $90 million. Yahoo also agreed in 2006 to settle a class-action click fraud suit. IAC also is now facing a similar lawsuit.

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