New Jersey Federal Court Approves Software Publisher’s Fraud Claim Against An Executive Accused Of Operating A “Click-Flooding” Scheme At His Mobile-Advertising Agency

February 2, 2023

By:  Carl L. Engel

On January 31, 2023, the U.S. District Court for the District of New Jersey, in the case IDT Domestic Telecom, Inc. v. Crumpler, approved a software publisher’s claims against the executive of a mobile-advertising agency.  The publisher has accused the executive of running a “click-flooding” scheme, in which his company created fake clicks on advertisements that it placed for the publisher’s products.  Based on these fake clicks, the agency claimed attribution for sales that were not actually generated by its ad placements.  The publisher claims that it paid more than $5 million to the agency for falsely attributed sales.  The executive moved to dismiss the publisher’s claims against him, arguing that any alleged wrongdoing was done by his company, and not him.  But the court disagreed, finding that because he was alleged to be a participant in the wrongdoing, he can be personally liable to IDT.

IDT owns several cell-phone apps that offer various services to users, such as money transfers and telephone calls.  Robert Crumpler is the founder, CEO, and controlling director of Altrooz, a mobile advertising agency.  IDT and Altrooz entered into a series of contracts for Altrooz to place advertisements for IDT’s apps in various websites and other apps.  Under their agreement, IDT would pay Altrooz only when a user clicked on one of its advertisements and then installed an IDT app.  IDT was not required to pay Altrooz for clicks that did not lead to app downloads, nor for app downloads that did not result from someone clicking an Altrooz ad.  IDT hired an analytics firm to track which of its installations were generated by Altrooz’s ads.

This payment arrangement is susceptible to a kind of fraud called “click flooding,” where mobile-advertising agencies use tools to generate a large number of fake clicks associated with real devices.  A small percentage of these fake clicks will, by chance, correspond with devices on which someone installed an app organically, thereby giving the agency credit for the download, which is called “attribution fraud.”  This scheme has a tell-tale sign: The fake clicks lead to an extraordinarily high click-to-installation ratio, because the fake clicks do not increase the number of installations.  IDT alleges that its analytics revealed that the websites where Altrooz placed ads showed an excessive click-to-installation ratio, which indicated a click-flooding scheme.  IDT claims that it paid Altrooz more than $5 million for organic installations that were falsely attributed to Altrooz.

IDT sued Mr. Crumpler personally, based on allegations that he ordered the fraudulent invoices to be sent, and brought claims against him for fraud and conversion.  Mr. Crumpler moved to dismiss the lawsuit, arguing that the proper defendant was Altrooz, and that he did not ignore business formalities such that his company was merely a name or an “alter ego” of himself.

On January 31, 2023, the court denied his motion as to the fraud claim, but dismissed the conversion claim.  The court reasoned that Mr. Crumpler was a proper defendant, because IDT alleged that he personally had engaged in the wrongful conduct at issue, and was not alleged to be liable merely through his position as Altrooz’s owner.  As to the fraud claim, the court found that IDT’s complaint clearly described his perpetration of the alleged fraud by approving and sending invoices for fraudulent charges.  The conversion claim was dismissed, however, because the court found that sending fraudulent invoices did not amount to “dominion or control” over IDT’s property, which is a necessary element of the claim.

This case illustrates the limits of the protection against personal liability offered by the corporate form.  As a general matter, an officer of a company will not be held liable for its malfeasance based solely on their position as an officer.  However, if the officer personally participated in the alleged wrongdoing, they can be held liable for the misconduct based on their role as a participant.  Therefore, officers and executives should not take the corporate form’s protections against liability for granted, and should conduct themselves with an understanding that they cannot hide from liability for their participation in wrongdoing.