The use of trademarks in search engine advertising is one of the most important legal issues arising in cyberlaw nowadays. Internet advertising in general, and search engine advertising in particular, has grown tremendously in recent years.  It is enough to keep track of the SEC reports of Google Inc. (whose revenues are derived mostly from search engine advertising) to understand how this market is growing.

How does search engine advertising work?
When an internet user conducts a search for a certain word, the search engine shows two kinds of search results:
(1) "Algorithmic" results - websites which are relevant to the typed search, according to parameters determined by the search engine. In recent years a whole new industry of SEO (Search Engine Optimization) companies has developed to help website owners advance their websites to become one of the first algorithmic results.
(2) Sponsored links - links to websites of advertisers which are presented to the user in a more prominent manner than the algorithmic results (above or besides the algorithmic results).
The advertisers "purchase" keywords so that their websites are presented in such manner to the user, and pay to the search engine on a cost per click basis.

Is the advertiser entitled to purchase keywords which are trademarked by third parties?

That is the critical question. There are two approaches:
On one hand, the search engines and the advertisers contend that this activity is fine since there is no likelihood of confusion. In some cases it is also claimed that the use of the trademark is authorized since it is used in a descriptive and comparative manner. Moreover, when the search engines are under attack for their involvement in these activities, they contend that the sale of the trademarked word to the advertiser does not constitute "use in commerce" as required under US trademark law and thus there cannot be trademark infringement.
On the other hand, trademark owners contend that the use of a trademarked word is prohibited since it unlawfully diverts the user to the website of the competitor of the trademark owner. This constitutes trademark infringement, trademark dilution and damages the business of the trademark owner. Moreover, it is contended that the diversion of the user to the competitor's website is prohibited, even if eventually there is no likelihood of confusion. This contention is based on the doctrine of initial interest confusion taken from the famous judgment in the matter of Brookfield v. West Coast, where the US Federal Court ruled that the use of a competitor's trademark in the website's meta tags for the purpose of appearing in algorithmic search results for the trademark is unlawful use of the trademark. This approach is also supported by the Israeli case law, in accordance with the Israeli Supreme Court in the McDonald case, in which it was decided that a proprietor of a registered trademark is entitled to broad and strong protection.

The case law in this regard is not conclusive. Google has been conducting a worldwide struggle on this issue. In the case of Google v. Geico a US Federal Court ruled in a preliminary decision that as long as the advertiser does not use the trademark in the header or text of the sponsored link advertisement, Google shall not be liable for trademark infringement (see a link to Eric Goldman's criticism on the decision as well as a link to the full text of the decision). However, a different approach was taken by the courts in the cases of Google v. American Blind and Playboy v. Netscape (see a link to the latter decision from the FIndlaw website). Thus, there is no clear precedent on this issue.

Google has also been struggling on this issue outside the US. In Israel two claims were filed during 2006 and one of them (Matim Li v. Crazy Line) was rejected by the Tel Aviv District Court. There are also some pending cases in France and Europe (in some of which Google lost). Here is a link to a website which provides a good overview over the status of Google's proceedings worldwide.

Interestingly, the US case law is not clear even in cases filed against advertisers, although such circumstances seem a bit more clear to adjudicate. See Eric Goldman's report on two conflicting recent US court decisions in this respect.

Conclusion - One must be careful from using a competitor's trademark in search engine advertising. While the case law is not conclusive and each case is determined according to its circumstances, we believe that the advertiser will usually be found liable for the infringement of the trademark holder's rights, especially when the mark is used within the header or the text of the sponsored link advertisement. 

If you need legal advice in this matter, you are welcome to contact us.

Update - April 2007 - Google settled its remaining pending case in Israel against Hana Koren in a confidential settlement agreement. Regardless of the terms of the settlement, this is a smart move by Google, which removed the only pending case which could undermine the Matim Li precedent.