Facebook sued by business over counterfeit ads

October 25, 2012

A small sports retailer in New Jersey has brought a class-action lawsuit against Facebook saying that counterfeit ads on the site have substantially hurt its business.

Krystal’s is a sporting goods store in Albuquerque that has a Facebook page and pays for sponsored ads on Facebook, according to a complaint filed with the District Court of New Mexico. In a complaint filed earlier this week, the retailer said that sales of its jerseys and other sports merchandise have been undermined by ads for cheaper, counterfeit jerseys.

The suit also names adSage, a company that helps Chinese companies to advertise on Facebook, and DHgate, a Web site that advertises “Chinese wholesale products.”

When reached for comment on the lawsuit, a Facebook spokesman said, “We believe the lawsuit is without merit and will defend ourselves vigorously.” Neither adSage nor DHgate could immediately be reached for comment on the lawsuit.

Counterfeit online advertising is a problem across the Web, especially as many sites that sell or market counterfeit goods are located overseas. In many cases, even when U.S. officials close down offending sites, companies simply buy Web addresses with different names — leading to what many call a “whack-a-mole” problem.

Facebook combats these bad advertisements with a team dedicated to taking down counterfeit ads when they are reported by copyright holders and users. The company also monitors the use of fake profiles, trying to verify when suspicious profiles are fronts for bots or illegal companies — a tactic that many bad actors use on the site. Facebook is also a founding member of the Ads Integrity Alliance, a group working to set up industry standards on how to deal with counterfeit and malware-laden ads.

Facebook spokesman Frederick Wolens told The Washington Post in June that less than 0.5 percent of the network’s users — which, at that point, was around 4.5 million users — experienced spam on any given day.

But, the lawsuit contends, sites that sell legitimate sports and luxury goods may be particularly vulnerable to the presence of ads from counterfeiters. Those ads not only hurt business because of their placement next to legitimate, more expensive goods on Facebook pages, Krystal’s said, but may have also damaged retailers’ reputations.

In some cases, the retailer said, customers have associated the counterfeit ads with its store, incorrectly assuming that the ads mean Krystal’s has a relationship with the counterfeiters.

“Krystal’s has inadvertently been placed in the untenable position of actually lending credence to the counterfeit ads, by virtue of Facebook’s display of those advertisements on Krystal’s page,” the complaint read. “Krystal’s has lodged public and private complaints with Facebook, but has received no meaningful reply or response.”

This is not the first time that Facebook has faced scrutiny over counterfeit ads. As the Post reported in June, Eric Feinberg, a social marketer, started noticing bad ads on his Facebook page in January 2012. He went on to found Fans Against Kounterfeit Enterprise, or FAKE, a group calling for the government to require sites to review ads before they go up and to make sure that consumers aren’t tricked by bad ads.

Advertising in general has been a key issue for Facebook, which saw shares surge after earnings reported on Tuesday showed the company’s ad revenue is higher than expected. Its mobile advertising efforts — which largely consist of sponsored posts from companies — performed particularly well, assuaging some concerns. The social network has also been experimenting with e-commerce and user-generated revenue, launching features that let users pay to promote their own posts and send gifts to friends through Facebook.

(Washington Post Co. Chairman and Chief Executive Don Graham is a member of Facebook’s board of directors.)

Related stories:

Wonkbook: Why Facebook campaign ads are a sucker’s bet

AP: Facebook 3rd-quarter results show mobile advertising inroads, stock surges after-hours

Facebook tests ‘Want,’ ‘Collect’ buttons and muscles in on Pinterest’s turf

Hayley Tsukayama covers consumer technology for The Washington Post.
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