In what promises to be a heightening turf war, New York Attorney General Eliot Spitzer attacked the U.S. Federal Communications Commission for sabotaging his payola investigation by offering soft deals to four of the radio conglomerates that are his targets.

Separately, Mr. Spitzer filed suit against Direct Revenue, alleging the advertising company installs ad-serving software onto computers that spies on the user's activity without their knowledge. The company denied the charges and vowed to fight the suit vigorously (see below).

In the FCC matter, Mr. Spitzer has been a thorn in the side of both the terrestrial radio and music industries for illegal airtime-for-payment arrangements as both industries seek to adapt to major changes in the entertainment industry brought on by digital technology.

Mr. Spitzer told the Associated Press that the deals being bandied about by the FCC “would be a substantial evisceration of the negotiations we’re involved in.”

The FCC is reportedly seeking deals that would force Clear Channel Communications, CBS, Citadel, and Entercom to pony up about a million dollars each in fines, while Mr. Spitzer’s office is contemplating fines in the neighborhood of $20 million.

Last December, Warner Music Group, one of the leading music labels, agreed to pay $5 million to settle Mr. Spitzer’s pay-for-play probe (see Spitzer Issues Music Subpoenas and Warner Music Pays the Piper).

Warner Music, the label Madonna calls home, admitted to its illegal practices and promised to discontinue providing radio stations and their employees with financial incentives to play its music.

Mr. Spitzer, who is running for governor of the EmpireState, reached a similar agreement with Sony Music, which agreed to pay $10 million.

Radio Targets

Mr. Spitzer has targeted nine of the largest radio conglomerates in an ongoing payola investigation. Last month, the state of New York’s main legal advisor charged Entercom with violating pay-for-play laws.

In making the announcement of the Entercom charges, Mr. Spitzer assailed the FCC for turning a blind eye to payola.

“Almost a year after payola was exposed in significant detail, the FCC has yet to respond in any meaningful way,” he said. “The agency’s inaction is especially disappointing given the pervasive nature of this problem and its corrosive impact on the entertainment industry.”

Now Mr. Spitzer charges that the FCC, which launched its own payola investigation last August, is doing far too little by offering the radio conglomerates what he considers a slap on the wrist.

Mr. Spitzer can still bring charges against the four radio conglomerates even if they agree to FCC penalties, but the companies will be able to use the FCC fines as part of their negotiations.

Mr. Spitzer has a cheerleader of sorts within the FCC in Commissioner Jonathan Adelstein, one of two Democrats on the commission, who has urged the FCC to extend the investigation of payola beyond the borders of New YorkState.

“The settlement with Warner Music Group … once again raises serious concerns that not only has New YorkState law been violated, but federal law under the FCC’s jurisdiction, as well,” said Mr. Adelstein. “The FCC needs to act on this evidence and conclude as soon as possible the investigation we are now undertaking.”

A call to the FCC for a direct response to Mr. Spitzer’s comments was not returned.

Spyware Suit

Mr. Spitzer claimed that the firm modified its software after his office served Direct Revenue with a subpoena in May 2005 to address some of the spyware concerns. However, the company allegedly continues to profit from installed software.

The four founders of the Direct Revenue, including former CEO Joshua Abram (who is now an executive vice president), are also named in the suit. They currently own 55 percent of the company after selling off the rest in 2004.

Direct Revenue has taken millions in revenue from advertisers, according to the suit. Mr. Spitzer seeks $500 for each violation of false advertising and deceptive practices laws.

Mr. Spitzer asked the state Supreme Court in New York to order Direct Revenue to stop its practices and to review the company’s to determine damages. Last year Spitzer won a $7.5-million settlement from Intermix Media after filing a similar suit against it. Intermix was the owner of social networking site MySpace, and was purchased by NewsCorp last July.

Direct Revenue attorney Andrew Celli Jr. said the company would vigorously defend itself against the attorney general’s suit.

Direct Revenue denied the allegations and called the suit “a baseless attempt … to rewrite the rules of the adware business.” It said the suit was based only on past practices at the company, and denied that even those practices involved the use of spyware.

The suit charges that Direct Revenue has installed more than 150 million pop-up ad programs, often after a user agreed to download another piece of free software, since it was founded in 2002.

Also on Tuesday, Mr. Spitzer’s office sued Direct Revenue, a New York City advertising company, for allegedly installing ad-serving programs onto users’ computers without their knowledge. The “spyware” and “adware” allegedly monitors users’ activities and allows Direct Revenue to install additional software on the users’ computers.