Facebook, Zynga Face Class-Action Suit Over Offer-Based Ads

Offer-based ads seemed to be the secret to monetizing social games — and social network users, in general — that standard banner ads couldn’t provide. But amid ongoing accusations that the ads actually “scammed” users into paying for things they didn’t want and giving up their personal info, comes the inevitable: a class-action lawsuit. The suit, which seeks upwards of $5 million in damages, is being handled by Sacramento-based law firm Kershaw, Cutter & Ratinoff (KCR). via Valleywag.

More notable is that the suit isn’t just aimed at high-profile social gamer Zynga — it’s also going after Facebook itself. KCR argues that the social network generates “from 10 to 20 percent” of its annual revenue from Zynga’s games, and has been “actively” promoting them, despite being “fully aware of the false and misleading” offer-based ads they contain. (The companies have never publicly revealed whether Facebook gets an ad sales rev-share). Facebook actually banned Zynga’s newest game, FishVille, because of the ads, but it hadn’t done so previously.

KCR started looking for people that had been hit with unauthorized credit, debit or mobile charges from offer-based ads, right after TechCrunch kicked off a series of scathing articles (complete with a video of Zynga CEO Mark Pincus admitting that the company “did every horrible thing in the book” to generate revenues). The law firm will ultimately use the video as part of its courtroom evidence.

Pincus said Zynga would stop using offer-based ads until it could ensure that they were scam-free; in the meantime, the company got a vote of confidence from its investors in the form of a $15.1 million third round of funding. While Zynga had likely been in the process of raising the money well before the media backlash, its backers — including KPC&B and Foundry Group — are VC firms well-versed in the process of due diligence, so chances are they’ve been aware of how Zynga makes most of its money from the start.

Facebook too, has had its own legal issues with advertising — though they’ve stemmed from a privacy angle, not actual “scams” — but it has been brokering deals with trusted names like Nielsen to bolster its image as a brand-friendly ad platform.