Did you ever have the feeling that somebody is watching you? Tracking your every search, click and purchase online? ISPs collecting web traffic data can make web ads even more targeted and effective. On the other hand it is kind of creepy. Some even say that it is the ultimate invasion of privacy. This is called behavioral targeting, which has been a very controversial subject. And many companies that practice it have faced litigation by privacy advocates.

We found out last week that a privacy lawsuit against behavioral targeting company Adzilla and its partners was recently settled. Adzilla stopped operating in the U.S. in 2008, but did not acknowledge any wrongdoing as part of the settlement. They did agree that they will “require opt-in consent of consumers or any consent that may be required to avoid violation of the Electronic Communications Privacy Act” should the company resume ISP-based targeting in the U.S.

This settlement leaves the issue unresolved as to whether it’s legal to target Web users based on data purchased from Internet service providers. NebuAd (now out of business) still faces a lawsuit for working with ISPs to collect data about users’ Web-surfing activity in order to provide targeted ads.

What makes this issue even more interesting is that the FTC, who normally sets advertising deception and privacy standards, came out with a 48-page report on behavioral targeting last year and really set no standards. Instead, they decided to let marketers self-regulate behavioral-marketing privacy issues, rather than introduce government regulation.

I believe rather than the FTC trusting marketers they are simply confused and don’t know what to do. The government has traditionally been behind when it comes to new media regulation and I think they are simply taking a wait and see position. I guess we’ll have to let the courts work out the standards and hope the industry picks up the regulation ball.