Rather than removing Kickflip’s virtual currency system from the Facebook platform to maintain its monopoly, Facebook claims it ended its contract with Kickflip after it was contacted by a regulatory agency over a spate of allegedly deceitful advertisements linked to Kickflip games.

For example, Facebook claims that the company sent advertisements to Canadian gamers who played Kickflip games through Facebook, offering to reward them with in-game currency if they agreed to pay a small shipping and handling fee for an advertiser’s product.

But after the initial payment was made, the advertiser then hit the user with a C$90 monthly bill, which was not made clear either in the advert or the landing page, Facebook alleges.

The breach of contract and fraud counterclaims come in response to Kickflip’s antitrust lawsuit, filed in Delaware federal court last November, which accused the social network of forcing game developers to use its own virtual currency system rather than a rival platform.

Kickflip, which does business as Gambit Gaming, said in the lawsuit that Facebook “destroyed” its virtual currency service by kicking it off the network in 2009 and replacing it with an in-house currency system, only after Facebook failed to gain a foothold in the virtual currency market on its own.

“Facebook began forcing developers to switch to its services exclusively in 2009 and 2010, thereby systematically excluding alternative virtual-currency services providers like Gambit,” Kickflip said in the complaint. “Facebook leveraged its dominance in the social-game marketplace to control and dominate the separate market for virtual-currency services.”

Virtual currency markets allow gamers to use real money to buy in-game currency used for upgrades and additional gameplay. Users can also choose to view advertisements or sign up for an advertiser’s services in exchange for virtual money.

But in court papers filed late last week, Facebook says many of the advertisements Kickflip would provide users contained hidden fees, linked to unexpected landing pages or advertised gambling and alcohol – all in violation of its developer terms of agreement.

By late 2009, the practice had found its way to the headlines, with several major publications, including Time magazine, suggesting Facebook users were being scammed by online adverts.

Facebook says it sent Kickflip a cease-and-desist letter in November that year, ordering the company to vacate the network. Kickflip assured Facebook it had essentially left the network entirely over the course of that week, Facebook claims.

But in the court papers, Facebook alleges Kickflip continued to tell its game developers that it remained on the Facebook network, violating the cease-and-desist order.

Facebook also offered the court 26 affirmative defences against the antitrust claims, including failure to state a claim and “unclean hands” – that Kickflip’s claims should be barred because of its own allegedly illegal conduct.

The counterclaim comes less than a month after the court rejected Facebook’s attempt to have the lawsuit dismissed.

Counsel to Kickflip

Morris James

Partners Kenneth Dorsney and Mary Matterer in Delaware

Counsel to Facebook

Covington & Burling

Partners Thomas O Barnett and Jonathan Gimblett in Washington, DC