But at least one lawsuit has come nearer to death. A federal appellate court ruled against Zango in its dispute with spyware removal vendor Kaspersky Lab, saying the lab is immune from liability for offering programs that delete ad-serving software, according to MediaPost. The court said the federal Communications Decency Act shielded Kaspersky from liability. A “good samaritan” provision protects interactive computer services from liability for good faith efforts to restrict objectionable material.

The 9th Circuit Court of Appeals’s decision was the first time an appellate court ruled on whether the “good samaritan” provisions apply when anti-spyware companies decide to remove programs they deem objectionable.

After raising $150 million in debt and equity financing and integrating five mergers and acquisitions over the last decade, the online media shop that provided free downloads of games, music and other content in exchange for the ability to serve ads shuttered months ago.

A California judge this week threw out a $45 million false advertising lawsuit against ValueClick that was brought by Internet service provider Hypertouch under a state law barring false and misleading commercial emails, according to Reuters. Hypertouch had accused the defendants of “using spam email ads with fraudulent and misleading headers, often to randomly generated, harvested or stolen email addresses,” but the judge ruled that it didn’t have enough evidence to prove its allegations.

Last year, ValueClick agreed to a $2.9 million settlement with the Federal Trade Commission over allegations that it used deceptive marketing practices in violation of the CAN-SPAM and FTC Act.  In addition, according to Ars Technica, ValueClick and its subsidiaries settled a lawsuit with publishers and advertisers that worked with it. That lawsuit alleged that ValueClick had allowed adware creators to hijack commissions from other advertisers.

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As lightening rod for controversy, the stories of their transgressions receive much more attention than any relating to their potential thriving. Adware companies have raised a lot of money, made select people tons of money, and spent as much time in legal battles as running their operations.

One thing they haven’t managed to do is stay in business for the long-run, as evidenced by the latest casualty, Zango. For those who worked in the performance-marketing between 2000 and 2006, the names Gator, Hotbar, WhenU, 180 Solutions, and Direct Revenue, along with select companies’ rebranded names (Gator -> Claria -> Jelly Fish and 180 Solutions + Hotbar -> Zango) will elicit strong memories of a time period not all that different from the Wild West of today’s flog/review sites.

When it came to kings of revenue and controversy, not even email marketing could quite top the adware folks, and in hindsight their challenges mirror every highly profitable, easy to copy, and equally easy to abuse method of advertising.

For those not familiar with adware, those in the space helped create the ad-supported software boom. They operated on the premise that the value of the bundled software made up for any perceived inconvenience from advertisements. It’s a premise that works for multi-billion dollar firms (Google for instance), but the majority of adware companies ran afoul with the following:

A. The nature of the free software – Users love free things. Reader’s of Dan Ariely’s Predictably Irrational will recall empirical data showing not just the value of free but that some of the smartest, most logical people still fall victim to the power of free. As the saying goes, you can fool some of the people some of the time but not all of the people all of time. While free, the software given away to consumers didn’t quite measure up to the non-monetary cost of using it (see point B). The free screensavers, emoticons, wallpapers, etc. weren’t necessarily bad, but they weren’t exactly ambitious undertakings of value. In other words, after seeing them, few would seek them out or recommend them to a friend.

B. The way they display their ads – It’s not that the adware companies did anything truly bad; sure on occasion some stories would emerge of truly bad behavior (hijacking links for example). They just didn’t innovate. When the ad market turned around and websites began offering great products for free with non-intrusive advertising, antiquated software programs with intrusive ads didn’t stand a chance. For those that haven’t installed adware, ads weren’t especially innocuous. They popped-up on your computer at unexpected times and with a regularity sure to annoy. The best of the bunch limited the frequency, but alas there is no way to make pop-up ads tolerable. If only IAC would learn that with their travel properties.

C. The way they obtained their users – It’s one thing if the majority of users entered into the pop-up ad-supported model, understanding knowingly what they would get, but most didn’t. Those acting on better behavior had clear disclosures that users didn’t have to read. Presenting users disclosures they might not read doesn’t imply any wrongdoing; the issue at hand comes from the generally aggressive manner in which the ads were displayed.

If you thought the exit pops that the majority of continuity companies use to try and keep users were annoying, you haven’t experienced an ActiveX ad. It’s an ad disguised in an operating system prompt. It is common to see them when installing software, but it takes a trained eye to recognize a prompt for download triggered from ad code and a prompt triggered by deliberate action (clicking “Download” for instance). In the usual ad paradox, savvy users don’t make advertisers money, so whether they didn’t instinctively hit “OK” didn’t matter to them. The money came from the non-savvy user who did and would then keep it installed a beyond average length of time for they didn’t understand what they had installed or how to remove it.

Having understood the ways that the adware companies attracted negative attention, we can then group the major adware players into the following types:

1. Legitimate – While some people would contend that a legitimate adware company is an oxymoron at best, several of the better funded companies could sleep well at night feeling that they did in fact offer a fair value to the consumers. The difference between legitimate and infamous are the exact things that meant the legitimate would struggle to survive – infrastructure.

The legitimate players invested heavily in compliance, customer service, and didn’t obfuscate their identity. Over time, they even made it relatively easy for users to figure out whether they had the software and how to uninstall it if they wished. Each step adds costs and lowers their revenue per user. It also makes puts them on the radar as a target for any small issues and allows any who want to criticize them to follow their moves easily. It’s unfortunate, as some of them weren’t that far off from success, and some of the products people did like. They were simply a little too stuck in their ways from a revenue perspective to make the switch to one that had longevity.

2. Infamous – The infamous adware companies are the same group of people (sometimes literally) insuring that flogs will live a short lifespan. They have no staff, no infrastructure, no customer service, and no real concern. The infamous ones ruined it for the rest by taking the shortest route to profit. Why offer free software and attempt to add value when you can simply get a user to install the adware.

They realized early on that an ActiveX ad didn’t have to say much to get a user to install a program which simply showed ads. These are the ones that stopped installing a toolbar as well once they realized that a) the major ppc engines didn’t want the traffic and b) it made it that much easier for users to figure out they had installed something. This group perfected the “drive-by” install where in the early days the software could install without a prompt depending on the user’s computer permission settings. And, unlike the legitimate group, they didn’t have investors, weren’t looking for an exit. They had a skeleton crew enjoying the six figure revenue days of high profit, and when it was a little too costly to stay around, they just took the millions and left.

Courtesy of DM Confidential editor

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According to the FTC, Direct Revenue enticed consumers with free content like games, icons and screensavers, but did not adequately inform those customers that by downloading and installing those packages, they were also installing software that would monitor their behavior and serve them targeted popup ads.

Under the terms of the settlement, Direct Revenue will not be able to send software to customers without their consent and must provide an easy way to remove that software.

In November 2006, the FTC cracked down on a number of adware distributors. Adware company Zango settled for $3 million.

According to a company statement, Direct Revenue is happy to pay $1.5 million. “This agreement is a major step forward in resolving the legal and regulatory issues facing Direct Revenue,” said Direct Revenue council Stuart Friedel.

The FTC Commission approved the settlement, with a vote of four to one.

FTC commissioner Jon Leibowitz was unhappy with the settlement and issued his own statement saying that “the $1.5 million … is a disappointment because it apparently leaves DirectRevenue’s owners lining their pockets with more than $20 million from a business model based on deceit.”

Direct Revenue blames third-party distributors for the charges and says it had stopped distributing software through affiliates in 2005 and through third parties in 2006.

Three advertisers came under fire after a lawsuit filed by the Attorney General’s office in April 2006 against Direct Revenue alleging that the advertising company installed its software on home computers without consent or adequate notice. Once a piece of adware has been installed on a computer system, it will continue to display advertising until it has been removed, something the Attorney General claimed Direct Revenue made deliberately difficult to do. Cuomo and company learned that the aforementioned advertisers, as well as several others, spent hundreds of thousands of dollars on advertising delivered through Direct Revenue.

“Advertisers can no longer insulate themselves from liability by turning a blind eye to how their advertisements are delivered, or by placing ads through intermediaries, such as media buyers. New Yorkers have suffered enough with unwanted adware programs and this agreement goes a long way toward clamping down on this odious practice,” said Cuomo in a statement.

In addition to penalties in the $30,000-35,000 range, Priceline, Travelocity, and Cingular have agreed to better screen their advertising providers and affiliates.

According to the Center for Democracy and Technology, the advocacy group that filed the complaint with the FTC in January, Zango deceived users into installing intrusive ad serving software onto their systems.

Zango has agreed to hand over $3 million in fines, and the agreement sets legal standards for downloadable adware applications. Zango maintains its innocence, saying that its software delivery system no longer relies on unscrupulous affiliates who modify and distribute Zango software against its policies.

Still, industry analyst and 180solutions critic Ben Edelman tells ADOTAS that hands aren’t completely clean with the re-branding. “180 continues plenty of bad practices, including unlabeled ads, materially misleading installations that fail to disclose key aspects of 180′s effects, and installation attempts predicated on security exploits. I have the proof, and I expect to post this on my website in the coming weeks.” Still, Edelman adds, “I commend the FTC’s efforts here, but serious diligence will be required to assure that 180 actually complies with its many obligations” under the settlement. At this instant, I am confident that 180 is not in compliance.”

In a press statement, though, Zango CEO Keith Smith stated: “Early in our business, and as we’ve acknowledged, we relied too heavily on our affiliates to enforce our consumer notice and consent policies… We deeply regret and apologize for the resulting negative impact. The FTC’s leadership in providing clarity around best practices is a welcome and significant step forward for Zango and our industry. We embrace the new standards and will continue to create, abide by and strive for best practices that protect consumers.”

In a major victory for Zango, a federal judge dismissed the suit today with prejudice, meaning the plaintiffs can’t bring the same suit against Zango in the future. “We are pleased, but frankly not too surprised, by the voluntary, with- prejudice dismissal of the lawsuit by the plaintiffs,” said Ken McGraw, Zango’s EVP and general counsel in a statement. “We have maintained from its inception that this case had no merit. The dismissal vindicates that position.”

Keith Smith, CEO of Zango referred to critics of the Zango search software as “background noise.” Zango estimates they have about 20 million users, all of whom would’ve been included in the class.

“It’s deeply frustrating that legitimate companies continue to willingly do business with adware distributors known to be engaged in unethical, and in some cases illegal, distribution practices,” said CDT deputy director Ari Schwartz in a statement. “Clearly these companies haven’t gotten the message about how fed up consumers are with adware and spyware. I can’t understand why any legitimate company would risk tarnishing its brand by association with such practices.”

The study looked at 380 ads served by Zango and Direct Revenue, and “followed the money” from the adware provider all the way back to the advertiser. The CDT also found that 55% of adware ads were placed there directly by the advertiser, while only 5% were placed there blindly by intermediaries. The study found that ads from large, well-known companies tended to be placed more by intermediaries, where the advertiser has no say in how its ads are placed than ads from lesser-known brands.

UPDATE: Zango has posted its own retort to the CDT report, which can be found on the company’s blog under the heading UPDATE – Response to Intermediaries Report

Hackers are of vulnerability in Microsoft’s Internet Explorer, particularly in the way that it handles WMF (Windows Metafile) image files. The Explorer problem became evident back in December when hackers distributed a WMF image through email, IM links, and websites that, when opened, allow a hacker to gain control over a victim’s computer.

Microsoft subsequently issued a patch for the bug, but many users may be unaware of the problem, let alone the solution. When unpatched computers visit a page that features the Deckoutyourdeck.com advertisement, the banner causes the download of a Trojan program. Once the Trojan begins to run, infected machines begin to contact various websites and download advertising software from Purity Scan as well as other unwanted programs. Purity Scan causes pop-up windows to appear and tracks a user’s online activity.

Ken Dunham, director of the rapid response team at iDefense, said that it is possible that the banner has been active for weeks. There is currently a search to determine who is behind the adware, but because hackers frequently use false credentials when registering a domain name, Dunham said that inquiries remain clouded.

To reflect the merger, 180solutions is now known as “Zango,” also the name of its behavioral advertising service. “Zango” will continue to provide the same Hotbar and 180 services as before.

“We have built an extensive user base and effective advertising opportunities through a wide variety of Internet services,” said Dobronsky in a statement. “The scale of this merger makes possible an array of opportunities to fulfill consumer and advertising demand for the products of the new Zango.”

This is perhaps the most bold move from 180solutions to clean up its image as an advertising provider. In January, the company fended off complaints filed by the Center for Democracy and Technology with the FTC for deceptive business practices.