Last week the Second Circuit Court of Appeals issued a ruling in the Rescuecom v. Google case that has some potentially serious implications for all concerned. The appellate court has jurisdiction over cases arising in Connecticut, New York, and Vermont but the case has national impact because of the way that AdWords is operated and administered.

The Electronic Frontier Foundation (EFF) decries the ruling, which found that use of trademarked keywords in AdWords, even though they don't appear in ad text, constitute a potential violation of trademark law. Here's the EFF's explanation of what happened and it's potential impact:

In 2006, a district court ruled that Google's AdWords program, which allows advertisers to buy search terms (including trademarks) that trigger their ads, did not violate trademark law. Following Second Circuit precedent (EFF participated as amicus in that case), and in line with other decisions around the U.S., the lower court held that this type of sale did not involve a "use" of the trademark within the meaning of trademark law, any more than strategically placing a generic brand of cough syrup next to Robittussin might. In essence, so long as the prospective customer never sees the trademark, neither Google nor the AdWords participant has "used" the trademark "in commerce."

Today, the Second Circuit reversed the lower court ruling and held that recommending and "selling" a mark to an advertiser to trigger a sponsored link could violate trademark law. Indeed, the Court went further, observing that even product placements could be subject to trademark law if the mark holder could show that consumers were confused.

The holding has obvious implications for Google, which could now face an avalanche of similar lawsuits with no easy way to shut them down (instead, they'll have to go through the expense of discovery and arguing the always difficult question of consumer confusion). But the real losers will be consumers.

Here's the summary of the Second Circuit's thinking and rationale for the decision, from the factual discussion in the opinion:

Many of Rescuecom's competitors advertise on the Internet.  Through its Keyword Suggestion Tool, Google has recommended the Rescuecom trademark to Rescuecom's competitors as a search term to be purchased.  Rescuecom's competitors, some responding to Google's recommendation, have purchased Rescuecom's trademark as a keyword in Google's AdWords program, so that whenever a user launches a search for the term "Rescuecom," seeking to be connected to Rescuecom's website, the competitors' advertisement and link will appear on the searcher's screen.  This practice allegedly allows Rescuecom's competitors to deceive and divert users searching for Rescuecom's website.  According to Rescuecom's allegations, when a Google user launches a search for the term "Rescuecom" because the searcher wishes to purchase Rescuecom's services, links to websites of its competitors will appear on the searcher's screen in a manner likely to cause the searcher to believe mistakenly that a competitor's advertisement (and website link) is sponsored by, endorsed by, approved by, or affiliated with Rescuecom.

The main thing the EFF is concerned about is a "chilling effect" on third parties and Google. Advertisers will now potentially be reluctant to use terms that may be trademarks and Google might have to litigate lots of cases. The risk of litigation and associated costs will create the chilling effect EFF is talking about.

Any ruling that creates uncertainty or opens the door to additional lawsuits is bad by definition. Previously there was relative clarity: trademarked terms could be used as keywords, but not in ad copy. EFF cites a couple of fairly compelling examples of why this ruling may harm consumers and be bad for online free speech more broadly:

Consider an example. If you used Google to search on the term "McDonald's" in 2007, among the "sponsored links" that may have appeared in response was a link for "The Coalition of Immokalee Farm workers," a community-based organization that supports the rights of low-wage workers in Florida. The Coalition deliberately chose the trademark to trigger its ad because it is highly critical of the practices of McDonald's and thought you might like to learn more about why before you buy that next burger. Or consider a consumer seeking comparative information on hybrid vehicles, searching on the (trademarked) term "Prius." That consumer might like to know about GM's hybrid offerings (did you even know GM sold hybrids?), but after today, the threat of litigation may make Google hesitant to let GM buy a "sponsored link" triggered by the term "Prius."

Courts sometimes get "confused" about trademark law, which is intended to protect consumers from deception or manipulation and not the economic interests of the companies that own the trademarks and usually bring the cases. The two sets of interests are often treated as one, which is analytically incorrect as EFF points out.

Google has not "lost" the case and this ruling is not necessarily the final word on the keyword-trademark violation issue. There are other jurisdictions that have different rules and the case could be appealed in turn to the US Supreme Court. Eric Goldman doubts this will happen, however, and offers a list of all the potential implications (directed toward lawyers rather than search marketers) of the decision.

Policing trademarks is messy and Google doesn't want to do it, but this decision all but compels the company to change its keyword suggestion tool policy and go deeper into the role of trademark enforcer.

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