A lawsuit filed late yesterday by Microsoft is getting widespread attention as a potential precedent in the battle against click fraud -- the practice of clicking repeatedly on Internet ads to manipulate the underlying pay-per-click system. In the suit, Microsoft explains how its adCenter system was scammed, and how it cracked the case.

It's important to note that these are only allegations at this point. The defendants -- Eric Lam, Gordon Lam and Melanie Suen of Vancouver, B.C -- have yet to respond publicly. But with that as a caveat, the complaint provides a fascinating behind-the-scenes look at an important battleground for online advertisers and publishers.

Download it here, PDF, 31 pages, or read on for extended excerpts.

On March 24, 2008, Microsoft received an unusually high number of complaints of suspicious activity from advertisers in the auto insurance industry. The complaints concerned a dramatic spike in "exact match"-type keywords frequently bid on by auto insurance advertisers; namely, "auto insurance," "car insurance," "cheap car insurance," "auto insurance quote" and "auto insurance quotes." Such a spike for exact match-type keywords is extremely unusual -- it is as if one hundred people in a room were asked to type the first three words that came to mind, and all one hundred typed the same three words at the same time, with no communication and no visual cues among them.

Microsoft investigators confirmed that a large number of exact match-type keywords were being search, and, within a short period of time, the top sponsored site results were being clicked, which indicated that automated or "click farm"-generated click fraud was occurring on the Microsoft Network. Over the same period of time, Microsoft investigators discerned similar traffic spikes for exact match-type keywords in the (World of Warcraft) vertical.

During certain periods of high click fraud, the sponsored sites of Defendants' companies (Super Continental and UMGE) experienced only a few isolated clicks from the IP addresses generating the click fraud (most likely tests) whereas sponsored sites placed by Defendants' competitors were hit with thousands of clicks from the IP addresses generating the click fraud. This complex and nuanced attack against the Microsoft Network demonstrated a detailed understanding of how the ad platform operates. The result was that while competitors' advertising budgets were exhausted or sponsored site performance was decreased as a result of the click fraud, Defendants' advertising budgets were not impacted, causing (Eric) Lam's sponsored sites to assume higher rankings and increased traffic, leading to increased revenue for Lam and the other Defendants.

Microsoft's complaint says it traced the activity to Eric Lam and related companies by connecting the fraudulent clicks to computers or servers registered to or operated by him. His involvement in both World of Warcraft and auto insurance was also a key tipoff.

The company says it credited nearly $1.5 million to advertisers who complained that they were affected by the fraud.

Here's the kicker: Lam himself allegedly complained, as well, and was issued a small credit, according to the complaint. "This maneuver initially diverted attention from Lam as being the source of the fraudulent activity," the lawsuit says.

Microsoft is seeking a minimum of $750,000 in damages in the case.