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Investor Sues Google over AdWords Sales to Canadian Pharmacies

Aug 30, 2011 | Parker Waichman LLP

The first of what could be many Google shareholder lawsuits stemming from last week's record-setting settlement with the U.S. Department of Justice (DOJ) was filed in federal court in San Jose, California yesterday. The derivative lawsuit, filed by a Google investor from Pennsylvania, seeks unspecified damages on behalf of the company and its investors.

The lawsuit alleges that Google's board and CEO Larry Page knew or should have known it was illegal for pharmacies outside the U.S. to ship prescription drugs into the country. It further alleges that Google's annual reports from 2003 to 2009 were false and misleading because the company didn't disclose revenue from the improper advertising.

The lawsuit came just days after the DOJ announced that Google had agreed to pay $500 million to settle charges it allowed online Canadian pharmacies to place advertisements through its AdWords program targeting consumers in the U.S. Because of Google's sale of these internet ads, many U.S. consumers then went on to import prescription drugs from Canada, which the Justice Department said "is almost always unlawful."

By agreeing to the settlement, Google was able to avoid criminal charges. According to a statement from the DOJ, the $500 million settlement represents the gross revenue received by Google as a result of Canadian pharmacies advertising through Google's AdWords program, plus gross revenue made by Canadian pharmacies from their sales to U.S. consumers.

Google was aware as early as 2003, that generally, it was illegal for pharmacies to ship controlled and non-controlled prescription drugs into the United States from Canada, the DOJ said. Lead prosecutor, Peter Neronha, the U.S. Attorney in Rhode Island, told The Wall Street Journal that Google's efforts to prevent such advertising in the years leading up to the probe - including the use of third-party services to screen out sites that didn't comply with U.S. law - were mere "window dressing." Neronha also told the Journal that the illegal AdWords sales were not the result of "two or three rogue employees at the customer service level doing this on their own," and represented a "corporate decision to engage in this conduct."

Google was warned in 2003 and 2008 by U.S. pharmaceutical drug regulators that importation of drugs from abroad was illegal, the Journal said. According to the DOJ, Google allowed ads from Canadian online pharmacies to target U.S. consumers until 2009, when it became aware of the government investigation.

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