Alert May 01, 2009

Buyer Beware: Second Circuit’s Decision Shifts the Landscape for Search Engine Advertising Practices

On April 3, 2009, the U.S. Court of Appeals for the Second Circuit issued a decision that has the legal and business communities abuzz. Exactly one year after hearing oral arguments in Rescuecom Corp. v. Google Inc. (Docket No. 06-4881-cv), the Second Circuit reversed the lower court’s dismissal of Rescuecom’s trademark infringement claims against Google that were based on Google’s search engine advertising practices. The decision, which has sent the case back to the lower court for further proceedings, has serious ramifications for search engine advertising practices that make use of competitors’ trademarks.

The Rescuecom Dispute

In 2004, Rescuecom filed suit against Google alleging that Google had infringed and diluted Rescuecom’s federally registered trademark RESCUECOM. Rescuecom’s claims relate to Google’s use of context-based advertising to respond to search requests using Google’s search engine.

Typically, a person using Google’s search engine enters a term to launch a search. Google’s system responds to this search request in two ways. First, Google’s proprietary algorithms organize search results in order of descending relevance (as deemed by Google). These results are then displayed along the left side of the screen. Second, and more pertinent to the issues presented by the Rescuecom litigation, the search results also display context-based advertising triggered by the term entered. This advertising is paid for by an advertiser believing that the placement of its ad, complete with a link to the advertiser’s website, will be of interest to the searcher. These paid advertisements are displayed either directly above the relevance-based search results, or along the right-hand side of the screen. These advertisements are usually identified with a banner which states that they are “sponsored links.”

Google uses two programs to facilitate this context-based advertising: AdWords and Keyword Suggestion Tool. AdWords is a program whereby advertisers purchase specific keywords. The keywords, in turn, trigger the appearance of the advertiser’s ad. Keyword Suggestion Tool is just that – a “tool” that recommends to advertisers keywords that may be of interest. The keywords are for sale, as they are in AdWords.

Rescuecom, a computer service company, took umbrage with Google’s advertising program. Claiming that Google recommended and sold the RESCUECOM trademark to Rescuecom’s competitors for purposes of Google’s context-based advertising, Rescuecom sued Google for trademark infringement, false designation of origin and dilution of its trademark. Among its allegations, Rescuecom claims that Google, in cooperation with Rescuecom’s competitors, uses the RESCUECOM mark to divert potential customers away from Rescuecom and to trade on the goodwill of the RESCUECOM name.

Google filed a motion to dismiss Rescuecom’s complaint for failing to adequately state a claim.

The District Court Ruling:  No Actionable “Use in Commerce” Under Trademark Law

In 2006, the district court agreed with Google and dismissed Rescuecom’s claims. In doing so, the district court relied heavily on the Second Circuit’s 2005 decision in 1-800 Contacts, Inc. v. WhenU.com, Inc., 414 F.3d 400 (2d Cir. 2005).

In 1-800, the defendant offered a proprietary software which it freely distributed to computer users. The software program utilized specific search terms to generate pop-up advertisements. Thus, once downloaded, the program would display pop-up advertisements when certain search terms or websites were entered into the user’s browser. The advertisements were displayed randomly, based on the category of the term entered. The advertisers could not purchase specific keywords to trigger their ads.

The Second Circuit concluded that the defendant in 1-800 did not use, reproduce or display the plaintiff’s mark. Rather, the court reasoned, any use of the plaintiff’s mark was merely an internal component of the software, and therefore was not a “use in commerce” within the meaning of federal trademark law.

Relying on this precedent, the district court in Rescuecom concluded that Google’s actions similarly were not a “use in commerce” because the competitor’s advertisements did not actually exhibit the RESCUECOM trademark. The court concluded that any use of the RESCUECOM trademark was merely internal – much like that in 1-800. As such, Rescuecom failed to allege the requisite “use in commerce” needed to support its claims.

Rescuecom appealed the decision to the Second Circuit.

The Court of Appeals: Distinguishing the 1-800 Decision

In reviewing the district court’s decision, the Second Circuit has gone to great lengths to distinguish the precedent set by its 1-800 decision from the facts alleged by Rescuecom. Specifically, the software in 1-800 did not sell keywords or other terms. As the 1-800 plaintiff did not market or sell keywords to the advertisers in question, using or otherwise displaying a competitor’s trademark in one of the pop-up advertisements was not possible.

In addition, the subject ads in 1-800 appeared in a separate browser window, with the defendant’s brand displayed in the window frame. Therefore, according to the Second Circuit, “there was no confusion as to the nature of the pop-up as an advertisement, nor as to the fact that the defendant, not the trademark owner, was responsible for displaying the ad, in response to the particular term searched.” Slip. Op., p. 9.

Similarly, in 1-800 the plaintiff did not allege that the defendant used the plaintiff’s trademark to generate the advertisements in question; instead, the 1-800 defendant used the plaintiff’s website address.

The Second Circuit seized on these differences to explain its ruling:

[I]n contrast with the facts of 1-800 where the defendant did not “use or display,” much less sell, trademarks as search terms to its advertisers, here Google displays, offers and sells Rescuecom’s mark to Google’s advertising customers when selling its advertising services. In addition, Google encourages the purchase of Rescuecom’s mark through its Keyword Suggestion Tool. Slip. Op., p.11.

Notably, the Second Circuit’s decision reserves judgment as to whether Google’s practices are benign or whether consumers are likely to be confused.  Because the lower court’s decision was made on a motion to dismiss, any such conclusion would be premature.  It is important, however, that the court distinguished and sharply limited its precedent in 1-800 in order to allow Rescuecom to pursue its case against Google.

Looking Ahead

In its analysis of whether Google’s use of Rescuecom’s trademark constitutes “use in commerce,” the Second Circuit significantly limited the scope of its decision in 1-800. In finding that Google’s recommendation and sale of Rescuecom’s trademark to Google’s advertising customers was not merely “internal use,” the court opened the door for additional lawsuits against search engine advertising practices. In fact, as recently as May 11, 2009, a software company filed against Google and its related entities what is believed to be the first class action suit stemming from the sale of keywords for targeted advertising. FPX, LLC v. Google, Inc., et al., 2:09-cv-00142-TJW (E.D. Tex. 2009).

Of course, it remains to be seen whether Rescuecom will prevail in proving the merits of its case. The Second Circuit’s decision will nonetheless be instructive. Companies and individuals participating in any search engine service which generates context advertising should carefully consider the potential liabilities arising from the purchase and use of a competitor’s trademark as an ad-triggering keyword. Google also recently announced a change to its AdWords policy. Beginning in June, Google will allow advertisers in certain circumstances to use third-party trademarks in their AdWords text. See “Update to U.S. ad text trademark policy,” http://adwords.blogspot.com (May 14, 2009). Thus, trademark owners similarly should take note: context-based advertising should be closely monitored and considered when crafting enforcement strategies.

As is already evident, the Second Circuit’s decision has significant legal ramifications for Rescuecom and Google. However, the practical considerations of this decision may prove to be even greater for trademark owners and those advertising on the Internet.