Overstock.com Sues Claria Advertiser

Overstock.com filed the first lawsuit under Utah's new anti-spyware law, targeting competitor Smart Bargains for advertising through Claria's pop-up ad software.

The suit in state court in Salt Lake City alleges that Smart Bargains, Boston, engaged in unfair business practices by using pop-up advertising to divert users visiting Overstock's Web site. The suit does not name the software used to display the ads, but the exhibit enclosed shows a Smart Bargains ad served by Claria.

The lawsuit is the fifth this month levied against Claria advertisers. On Monday, L.L. Bean said it filed trademark-infringement suits against four rival retailers for using Claria to display ads to visitors of its Web site. Those suits, filed in federal court in Maine, allege the ads confuse visitors into thinking L.L. Bean displayed them.

Overstock's suit alleges that its discount-merchandise rival deliberately aimed to confuse Overstock customers with an “implied affiliation” by popping up ads on Overstock.com. The company seeks an order for Smart Bargains to stop the ads and $10,000 in damages for each violation.

“We believe that Overstock's intention is to avoid and restrict competition by impeding consumers from comparison shopping on the Internet,” Smart Bargains CEO Carl Rosendorf said in a statement.

Claria is a Redwood City, CA, adware maker formerly known as Gator. Its software, often bundled with popular programs like file-sharing system KaZaA, serves pop-up ads to users based on their Web-surfing behavior. The company claims 425 advertisers use its service, including NetFlix, FTD.com and Orbitz.

A number of Web site owners say Claria hijacks customers from their sites in violation of trademark and copyright law. Claria asserts users choose to download its ad software, which displays windows on their computer screens not unlike instant messaging programs.

The controversy over Claria and similar adware makers like WhenU.com has led to a spate of lawsuits. Last June, Overstock sued Claria and WhenU on trademark-infringement claims. At the time, Claria noted that Overstock was a former advertiser on its service and spent “hundreds of thousands of dollars.” Overstock confirmed it previously advertised with the company. Overstock dropped the suit in December.

At least nine companies are still suing Claria. Litigants include Hertz, L.L. Bean, Six Continent Hotels and Wells Fargo.

Increased attention has been paid to spyware, a loosely defined term that includes programs that track a user's Internet behavior without his knowledge, sometimes collecting credit card numbers and passwords. Some critics label adware from Claria and WhenU as spyware, a charge both vehemently deny.

Claria asserts its software is on 43 million computers, and WhenU puts its penetration at 25 million to 30 million. Both cite high uninstall rates as proof that consumers know it is on their computers.

Utah recently enacted the first state spyware statute that bans software delivering ads based on a user's Internet behavior. The law was enacted with the strong backing of 1-800-Contacts, a Utah business.

The Utah law is on hold at least until June 15 as a Utah judge considers a challenge to it filed by WhenU. Overstock’s lawsuit also alleged violations of other state laws against unfair competition.

Utah is not the only state concerned about spyware. Legislatures in California and New York are considering spyware laws. Last month, the Federal Trade Commission convened a one-day spyware summit to discuss the problem. Congress, faced with the prospect of a patchwork of state laws, is considering legislative proposals to regulate spyware.

Claria cited the Utah law as a major risk factor in its filing for a $150 million stock offering last month. The company said the law could stop it from doing business in the state.

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