The US Court of Appeals for the Second Circuit heard oral arguments in an important trademark case last week. Rescuecom, a computer repair firm, sued Google in 2004 for allowing competitors to purchase advertisements that would appear when a user conducted a search for the keyword "rescuecom." A federal judge dismissed the case in 2006, but Rescuecom appealed.

Trademark law is designed to protect consumers by preventing companies from selling their products under false pretenses. The core issue of the Rescuecom case is whether choosing a competitor's trademark as an advertising keyword is likely to confuse consumers. Rescuecom has argued that Google profits from consumer confusion by obscuring the distinction between organic search results and paid advertising. Google, in contrast, compares its advertisements to a grocery store that stocks a generic product on a shelf alongside its brand-name competitor—a use that courts have consistently upheld as legal.

Last week, the case was heard by a three-judge panel of the Second Circuit. Law professor James Grimmelmann was there, and he gives a thorough summary of the exchange. The argument focused heavily on dueling analogies. Google's lawyers invoked the grocery-store-shelf analogy and suggested that the situation was akin to handing out flyers in front of a competing restaurant.

Rescuecom's lawyer countered that there was no concept of "next to" on the Internet. He argued that a consumer entering "Rescuecom" into Google's search box was expecting to be taken to Rescuecom-owned sites, not to those of Rescuecom's competitors or critics. He preferred to analogize Google's actions to a scenario in which a listener calls directory assistance and is read a paid advertisement for a competitor. A judge also brought up a scenario in which a customer asks a druggist for Advil and is given Aleve instead.

A key precedent is the Second Circuit's 1-800 Contacts v. WhenU decision, decided in 2005. In that case, the Second Circuit rejected the claim that an adware company was guilty of trademark infringement if it produced pop-up ads that were triggered by visits to the 1-800 Contacts web site. Google relied heavily on that ruling in last week's oral arguments.

The parties disagreed about whether Google labels its ads sufficiently clearly to avoid customer confusion. Rescuecom alleged that by placing sponsored ads directly above the organic search results and by using the ambiguous phrasing "Sponsored Links" rather than the more direct "Paid Advertising," Google was stoking customer confusion, which it then profited from when customers mistakenly clicked on ads they thought were organic search results.

Not just a corporate issue

The Electronic Frontier Foundation has filed a brief in the case, pointing out that the case could have important implications beyond the commercial realm. The civil liberties organization pointed out that noncommercial organizations often use trademarked terms to comment on or criticize a company's actions. Paid advertising is one way such an organization could disseminate its message. For example, a labor organization might conduct an advertising campaign criticizing a company's labor practices; the ability to use the company's trademark as a keyword for those ads would be essential to the campaign's success.

Grimmelmann thought that the judges' questions suggested that their loyalties were divided, with one leaning toward Google, one leaning toward Rescuecom, and the third undecided. However, because the question before the court was only whether to dismiss the case or let it go to trial, he predicted that all three judges would vote to let the case go forward.

If Google's lower-court victory is upheld, it could have significant implications for the future of online trademark law. It would reinforce the WhenU precedent and could prompt other circuits to reconsider their own rulings, which have been more favorable to such trademark claims. On the other hand, if Google loses, the case would go back to the lower court for a trial and would probably find its way back to the Second Circuit after the trial was completed. In that case, the controversy could easily drag on for the rest of the decade.

The use of trademarks in search ads has been a frequent source of controversy. Last year, the Utah legislature passed legislation prohibiting search engines from serving ads linked to trademarked search terms to Utah residents. The legislation provoked so much controversy that last month the Utah legislature reversed course and repealed the most controversial portions of the law.