As has been widely reported, Lane's Gifts and Collectibles is the lead plantiff in a class action lawsuit filed in February, but recently exposed publicly. The case was filed in Arkansas state court, but defendants are seeking to "remove" the case to federal court, which is generally considered to be less favorable to plaintiffs. (Less of a hometown advantage.)
Defendants include Yahoo!, AOL, Google, Ask Jeeves, Lycos, FindWhat and several others.
I haven't seen the specific complaint, but it appears from the third-party reports that the plaintiffs are alleging conspiracy by the paid search companies to systematically overcharge and defraud pay-per-click (PPC) advertisers.
At this point, nothing can really be said about the merits of the case except to speculate that absent tangible evidence of willful or knowing behavior on the part of Yahoo! et al, the plaintiffs will have a very hard time proving their case. (Think maniacal laughter on tape or in email: "Those fools think they're getting real leads, but our click monkeys in the back room are sucking their ad budgets dry.")
Seriously, discovery of knowledge among the engines that X percent of clicks were fraudulent, combined with active concealment of that information from advertisers would lend veracity to the claims and potentially lay the basis for a finding of liability.
What you've probably got here are: angry advertiser + overzealous and opportunistic attorneys hoping for early settlement. Ultimately the case itself will probably fail on the merits (unless it never gets to that stage because of settlement). Interestingly, there's a bit of an analogy here to the trademark cases because they also raise the question: who's responsible to police the system? What are the duties of Google vs. the obligations of the private parties using the Google marketplace?
My view is that real problem is not the litigation but the potential bad PR that comes from something like this.
Given that SEM is still in its "early adolescence," the engines have got to maintain confidence in the system. If they don't convince the world that they're aggressively policing the issue, they risk a perception that the system is fundamentally flawed, which would instill doubt in the minds of the many millions of potential PPC advertisers who have yet to adopt.
Now is the time for the engines to come together and convince the universe of existing and potential advertisers that the integrity of the PPC system is being jealously guarded and that no real harm can come to it from unscrupulous individuals.