Fourth Circuit Decision Threatens Current Phase of Google AdWords Program

On April 9, 2012, the Fourth Circuit Court of Appeals vacated a District Court judgment which found that Google did not infringe on plaintiff’s “Rosetta Stone” registered trademark through the Google AdWords program. The case was sent back to the lower court for re-consideration and, quite possibly, a jury trial.

Through its AdWords program, Google sells advertisers the right to use registered trademarks so that they can receive top placement in Google search results. Advertisers purchase their desired keywords (including any registered trademark with which they may want to be associated) through competitive auction. Since there are only a certain number of top positions, it is quite possible that a trademark owner and its legitimate distributors could be outbid by an unrelated third party.

Prior to 2009, Google permitted the use of third party trademarks only as search terms. They were not displayed in the purchaser’s links or advertising. That changed in 2009, when Google decided to permit AdWord purchasers to use third party trademarks in their advertisements if the trademark has NOT been [http://en.wikipedia.org/wiki/AdWords#Ad_content_restrictions] registered with Google’s Advertising Legal Support team. (According to Google’s [http://support.google.com/adwordspolicy/bin/answer.py?hl=en&answer=106476] policy, Google is “only able to prohibit all use or to allow all use of a trademark in ad text by an advertiser.” Obviously, prohibiting all use of a trademark in ad text by any advertiser is not a viable option for many trademark holders.)

Google also imposed some restrictions, but they aren’t necessarily favorable to trademark holders. In order to use the third party trademark in advertising, the AdWords purchaser must be a reseller of a genuine trademarked product (whether or not authorized by the trademark owner) or a maker or seller of component parts or compatible goods; or must offer information or reviews of the trademarked product. In the latter category are advertisers who set up a web page giving short shrift to the trademark owner’s product and then offering a competing product. (This practice, known as “[http://en.wikipedia.org/wiki/Comparative_advertising] comparative advertising,” is protected by principles of free speech, but is rife with abuse, as advertisers regularly make misleading and unsubstantiated claims to make their products seem better than that of their competitors and the FTC does not engage in proactive enforcement of its regulations against such practices.)

Plaintiff Rosetta Stone sued Google after being plagued with counterfeiters who purchased the “Rosetta Stone” mark as a keyword in Google’s AdWords program. Between September 3, 2009 and March 1, 2010, the Plaintiff reported to Google 190 instances in which counterfeit products bearing the Rosetta Stone mark appeared in Google’s sponsored links, providing Google with the domain names, the text of each sponsored link and other identifying information. According to Rosetta Stone, Google continued, despite the notifications, to allow those same advertisers to use Rosetta Stone’s mark on other websites. It is unclear from the 4th Circuit’s decision whether Rosetta Stone had provided enough information so that Google “knew or should have known” of the infringing activity. Undoubtedly that question will be answered by the finder of fact in the lower court.

On nearly every major legal point, the Fourth Circuit differed with the District Court. As to the facts, the Fourth Circuit castigated the District Court for failing to “apply the summary judgment standard of review but instead view[ing] the evidence much as it would during a bench trial.” That is, the District Court failed to draw all inferences regarding the evidence in favor of Rosetta Stone, the party against whom summary judgment was sought. This is the basic summary judgment standard.

Rosetta Stone’s main charge against Google, that of direct trademark infringement, is illustrative. Here, the District Court misunderstood the Lanham Act as merely prohibiting Google from passing off its own goods and services as those of Rosetta Stone’s, completely missing the fact, according to the 4th Circuit, that the law prohibits not just confusion as to source, but also as to affiliation, connection and sponsorship. Under this interpretation of the law, Rosetta Stone clearly had presented enough evidence to defeat Google’s motion for summary judgment and take the case to trial.

On the issue of Google’s knowledge and intent, Google’s own studies showed that “there was significant source confusion among Internet searchers when trademarks were included in the title or body of the advertisements” — precisely what Google permitted the purchasers of “Rosetta Stone” to do. Consequently, the Fourth Circuit concluded, “a reasonable trier of fact could find that Google intended to cause confusion in that it acted with the knowledge that confusion was very likely to result from its use of the marks.”

Regarding consumer confusion, the evidence also tended to favor Rosetta Stone. In the District Court, Rosetta Stone presented testimony from would-be customers who purchased bogus “Rosetta Stone” products from a Google-sponsored advertiser, believing that they were buying the genuine article. In addition, Rosetta Stone provided documentation of 123 similar complaints and produced an expert’s report showing that “17% of consumers demonstrate actual confusion” as to whether the paid links were sponsored by Rosetta Stone or a third party. And if this weren’t enough, when two of Google’s in-house trademark lawyers were shown a Google search results page, “they were unable to determine without more research which [of those] sponsored links were authorized resellers of Rosetta Stone products.” Since uncertainly about the origin of a product is quintessential evidence of actual confusion, the 4th Circuit ruled, the District Court should have denied summary judgment to Google.

The 4th Circuit also laid to rest any claim by Google that its use of the Rosetta Stone mark was “functional” because its use allowed Google “to readily identify in its databases relevant information in response to a web user’s query.” As the 4th Circuit pointed out, the functionality doctrine has nothing to do with Google’s use of Rosetta Stone’s mark, but holds that a party may not register a trademark that is the name of a useful or functional product feature. “It is irrelevant,” the 4th Circuit ruled, “whether Google’s computer program functions better by use of Rosetta Stone’s nonfunctional mark.” On the other hand, the court did leave open the possibility of an affirmative defense based on “nominative” use, which occurs when a defendant uses the plaintiff’s mark to refer to plaintiff’s products, generally for purposes of comparison with those of defendant. The 4th Circuit declined to decide whether this affirmative defense was available to Google and merely cited to the standard set by other cases for determining whether a nominative use has occured: “[I]n order to avail [itself] of the nominative fair use defense[,] the defendant (1) may only use so much of the mark as necessary to identify the product or service and (2) may not do anything that suggests affiliation, sponsorship, or endorsement by the markholder.” However, given the actual use in context, a nominative fair use defense does not seem likely.

On remand, Google will be required to prove that it did not turn a blind eye to trademark infringement by those Rosetta Stone advertisers who switched websites after Rosetta Stone reported them to Google. (Again, whether Rosetta Stone provided Google with enough information is an open question.) Google will also need to convince the court or jury that any likelihood of, or actual, confusion among consumers is de minimis. That may be a difficult burden to meet in light of the fact that Google instituted the current phase of its AdWords program in 2009 not because it believed there would be no likelihood of confusion as to the registered trademarks it would auction off, but because it wanted to make money. Google’s admission that it “expected a substantial boost in revenue from this policy change as well as an uptick in litigation from trademark owners” is likely to weigh heavily against Google.

One issue that the 4th Circuit did not directly address in its decision was whether Google’s sale of the Rosetta Stone mark as an AdWord constituted a “use in commerce” under the Lanham Act. For purposes of its decision, however, it assumed that was the case while also citing the Second Circuit’s opinion in Rescuecom Corp. v. Google Inc., 562 F.3d 123, 129-31 (2d Cir. 2009) which expressly decided that the sale of AdWords is a “use in commerce” where the plaintiff’s trademark is used in the advertisement or link. It is highly unlikely that the 4th Circuit will take a different view if that question comes back up on appeal.

With the Rescuecom and Rosetta Stone decisions, it is becoming clear that courts are ready to line up against the use of AdWords in links and advertisements, a practice that has been lucrative for Google for several years. When Google sold AdWords only for “internal” use, the courts were split. District Courts in the Second Circuit unanimously found that such uses were not “uses in commerce” primarily because consumers never saw them. S & L Vitamins, Inc. v. Australian Gold, Inc., 2:05-cv-1217 (E.D.N.Y. Sept. 30, 2007); FragranceNet.com, Inc. v. FragranceX.com, Inc., 2007 WL 1821153 (E.D.N.Y., June 12, 2007); Site Pro-1, Inc. v. Better Metal, LLC, 06-CV-6508 (ILG) (RER) (E.D.N.Y. May 9, 2007) (“Better Metal did not place plaintiff’s SITE PRO 1R trademark on any of its goods, or any advertisements or displays associated with the sale of its goods”); Hamzik v. Zale Corp./Delaware, 2007 WL 1174863 (N.D.N.Y., April 19, 2007); and Merck & Co. v. Mediplan Health Consulting, 2006 WO 800756 (S.D.N.Y., March 30, 2006). However, other courts found that an AdWord purchase of a third party trademark was, by its very nature (i.e., regardless of the visibility of the use), a “use in commerce.” See, e.g., Buying for the Home, LLC v. Humble Abode, LLC, 03-CV-2783 (JAP) (D.N.J. Oct. 20, 2006); 800-JR Cigar, Inc. v. GoTo.com, Inc., 2006 WL 1971659 (D. N.J. July 13, 2006); and Edina Realty, Inc. v. TheMLSonline.com, 2006 WL 737064 (D. Minn. Mar. 20, 2006). Similarly, 9th Circuit precedent holds that the use of a third party trademark as a metatag is a “use in commerce” even though consumers wouldn’t normally see it. Brookfield Communications, Inc. v. West Coast Entertainment Corp, , 174 F.3d 1036, 1064 (9th Cir.1999).

Even so, Google could still prevail, either by attrition (as in the Rescuecom case, where Rescuecom simply voluntarily dismissed its lawsuit after receiving the favorable ruling); negotiated settlement; the defense of nominative use; or plaintiff’s failure to prove actual or likelihood of confusion. Whatever the case, it will be some time before we have an answer.