Appeals Court: Buying Keyword Ads Based On a Competitor’s Name Is OK

Buying advertisements tied to words that users type into search bars on Google (NSDQ: GOOG) or Bing has become a multibillion-dollar industry, and a big chunk of those ads are paid for by companies looking to peel off consumers searching for their competitors. But the purchasing of ad “keywords” that are also the trademarks of a competitor has always been dogged by legal questions and challenges. Google itself has been sued more than a dozen times over its practice of selling trademarked keywords to advertisers; and the number of lawsuits between competitors is likely even higher than that. For all the litigation in this space, though, federal appeals courts-the courts that, together with the Supreme Court, create binding precedent-haven’t said much about the practice. Today, a California federal appeals court finally spoke.

The court ruled that buying ads based on a competitor’s name isn’t a violation of trademark law. The two parties in this case, Network Automation and Advanced Systems Concepts, both sell scheduling and management software. Network Automation started buying Google and Bing ads tied to the word “ActiveBatch,” the trademarked name of software created by Advanced Systems. Advanced complained about the practice and the dispute ended up in court. Last year, a district court judge ruled in favor of Advanced Systems, saying that consumers were likely to be confused by the practice. But the appeals court has now overturned that judgment.

The lower court judge should have considered not just the text of the ads in question, but the entire page of search results and ads, the appeals court ruled. In particular, it should have taken into account the fact that Google and Bing partition their results pages, putting advertisements in a separately labeled section. That makes the whole page less likely to be confusing to consumers, the appeals court noted, saying that the district court ruling was based in part on a case with different facts, involving banner advertisements that were “confusingly labeled or not labeled at all.”

Despite the considerable amount of litigation surrounding the practice, using competitors’ trademarks both as keywords to trigger ads and in the ads themselves has become a standard practice over the past few years. Google pioneered the practice, and in recent years it’s been exported to Europe and adopted by competitor Bing. Proponents of the practice have said it’s similar to what companies do in the real world, by physically placing competing products close to well-known brand names. For example, pharmacies will often sell cheaper generic drugs by placing them next to the well-known brand-name drugs that are their chemical equivalent.

Now that the appeals court has found in favor of Network Automation, the case goes back to the lower court to be re-considered.

Another important decision regarding trademarked keywords is pending in a Virginia federal appeals court. In that case, Rosetta Stone has sued Google over the practice of running ads against its name. While today’s ruling is different because it’s a dispute between two advertisers, it bodes well for Google, in that the panel of judges found that modern search-results pages aren’t likely to be confusing, an argument Google has been making to judges for years now.