• by Wendy Davis  @wendyndavis, March 22, 2011

A San Francisco tour company has sued Groupon for false advertising for allegedly running misleading pay-per-click ads on Google.

The lawsuit, filed in the U.S. District Court for the Northern District of California, alleges that Groupon uses keywords relating to popular tourist attractions to trigger ads, but doesn't actually offer coupons related to those attractions. One effect, says San Francisco Comprehensive Tours, is that Groupon diverted consumers searching for touring companies to its own site.

For instance, the touring company says that on March 15, Groupon ran a search ad which said it was selling tickets to Alcatraz at a discount of 50% to 90%. "On that day," the complaint says, "it was, in fact, featuring a coupon for discounted acting lessons."

The touring company also makes a more complex false-advertising allegation: That it must pay more for top ad spots on Google's search results pages because Groupon wrongly drives up the price of search ads. Google determines the price-per-click based on a combination of factors, including quality score, or its assessment of the relevance of the ads.

The tour company argues that Groupon's quality score is artificially high because the company is popular with consumers.

"By falsely representing to users and consumers interested in 'San Francisco Tours' and 'Napa Wine Tours' ... that it provides access to such services, defendant Groupon induces users and consumers to click through to its landing page. This, in turn, artificially raises defendant Groupon's objective popularity score, further cementing its placement at or near the top of the paid placement ads."

The San Francisco tour company also alleges that the URLs in Groupon's ads are inaccurate and "appear to be designed to enhance the 'relevance' of Groupon's ads by falsely representing that Groupon has a Web page addressing the search term in question."

But whether the tour company can prove that its cost-per-click rose as a result of Groupon's ads will require additional information from Google regarding how it charges search marketers, says legal expert Martin Schwimmer, a partner in Leason Ellis. He adds that the touring company's argument -- that allegedly false advertising drove up its keyword costs -- appears to be a first.

The plaintiff is seeking monetary damages and an injunction banning Groupon from using keywords or ad copy with terms like "Alcatraz tours" and "San Francisco tours."