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Microsoft has filed its first-ever lawsuit over click fraud, seeking $750,000 in damages from a Canada-based trio who allegedly orchestrated a massive online scam via its pay-per-click search ads.

"Microsoft’s Internet Safety Enforcement team has a long history in enforcement efforts on issues such as malicious code distribution, spam, scareware, child protection, and other Internet safety issues, but this is the first case we have filed with respect to click fraud," a company spokeswoman tells The Reg.

Microsoft believes that the trio - Melanie Suen, Eric Lam, and Gordon Lam - are a mother and her two sons.

Last spring, several auto insurance advertisers complained to Microsoft about an unusual increase in traffic to their pay-per-click ads on Redmond's search engine. Like Google and Yahoo!, Microsoft posts ads in response to keyword searches. If an advertiser bids high enough, its ad will appear when someone searches on a particular term or group of terms. And each time someone clicks on the ad, the advertiser pays Redmond a fee somewhere south of its bid - until its daily budget runs out.

According to Microsoft, there was a strange spike in searches for keywords such as "auto insurance quote" as well as an increase in clicks to the resulting ads. Then Redmond noticed similar spikes on searches related to World of Warcraft, the popular online game/alternative universe, and it traced both boosts back to a pair of IP-masking proxy servers.

Microsoft blocked the servers, but then others popped up and Redmond was soon locked in a kind of click-fraud arms race. But eventually a tipster told the company that a man named Eric Lam was advertising against both World of Warcraft and auto insurance keywords.

Redmond suspects that Lam was hitting competitors with fake clicks so they would quickly exhaust their daily ad budgets. That way, his ads would pop to the top of Microsoft's listings. Microsoft's complaint says that when surfers clicked through to Lam's sites, he would collect their info and sell it on to auto insurance companies. Microsoft estimates he made $250,000 from the practice, and the company says it refunded $1.5m to advertisers for Lam's alleged fake clicks.

Microsoft has linked seven advertising accounts to the alleged scam, and they were traced back to Eric Lam and a man and a woman believed to be his brother and mother: Gordon Lam and Melanie Suen.

According to the latest study from the click fraud watchers at Click Forensics, roughly 13 per cent of all paid clicks are fraudulent, and at the end of last year, that number had reached an all-time high of 17 per cent. Google filed a click fraud suit in 2004 and won a $75,000 judgment. Then, in 2006, the company ponied up $90m to settle a class action suit that accused it of doing too little to stop click fraud schemes.

Google's 2004 suit went after a classic case of click fraud: A company was hosting Google ads on its website and creating fake ad traffic in order to boost its AdSense fees. Microsoft's suit is an unusual case, but Click Forensics sees it sending an important message to both advertisers and fraudsters.

"We've been talking about this for some time, and we're thrilled Microsoft has done it," Click Forensics president and founder Tom Cuthbert tells The Reg. "It's an indication that Microsoft understands this has been a problem, is a problem, and will continue to be a problem. And by taking this step, it shows its advertisers that it's serious about giving them what they pay for."

"Plus, it makes it a financial disincentive for the guys doing [click fraud]. These guys will find ways to game the system."

We asked both Google and Yahoo! about possible legal efforts to battle click fraud, and both declined to comment. Like Microsoft, Google and Yahoo! use various technological means to cut down on fraudulent clicks, and Yahoo!'s tools are deployed in tandem with Click Forensics. ®

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