Keyword Advertising and Trademark Infringement

Keyword advertising recently has spawned numerous trademark infringement cases. Internet search engines sometimes sell trademarked words and phrases for use as keywords to the trademark holder’s competitors. Trademark holders argue that this practice creates consumer confusion as to the source of products associated with the mark, thereby eroding the mark’s information value and raising consumers’ search costs. Trademark holders have sued competitors for unauthorized use of marks. They have also sued search engines, alleging both direct infringement in the sale of the mark as a keyword and contributory infringement as the search engine allegedly facilitated the advertiser’s direct infringement. Advertisers and search engines have responded that keyword searches benefit consumers and do not create confusion. Recent rulings on these suits have considered how the rise of Internet marketing and advances in search engine technology have changed the way consumers search for and compare products. Economic analysis informs numerous aspects of keyword advertising litigation. For example, economists can assess market facts, such as the information value of the mark and the proximity of goods. Economists can also use Internet traffic data and consumer surveys to evaluate the likelihood of confusion and estimate damages from allegedly infringing sales.

Search engines, such as Google and Microsoft Bing, sell the rights to specific keywords that trigger the display of advertisements. When a user enters the keyword in a query, the results page will show sponsored advertisements for companies that purchased the keyword. The advertisements do not affect search results and appear in a separate section. When a user clicks on a sponsored link, the user is taken to the advertiser’s website, and the advertiser pays a fee to the search engine. The potential problem arises when keywords include company names or other trademarks. Some consumers searching for the trademark holder’s website instead may click on an advertisement, open a competitor’s website and purchase the competitor’s products.

This process can be considered normal competition if it does not cause consumer confusion, in the same way that a consumer might search for a particular brand of cereal in a store but then purchase a different brand placed on the same shelf. Keyword advertising could even lower the consumer’s search costs by displaying alternative products, including those the consumer may not have been aware of. Nonetheless, the competitor’s advertisement could lead the consumer to mistake the competitor’s product for the desired item. This confusion degrades the information provided by the mark and makes it harder for the consumer to locate the desired product.

Trademark law grants protection to marks for their value in designating a particular good or service, enabling consumers to lower their search costs in locating that product. Trademarks do not enjoy protection as entities in and of themselves. Infringement occurs when the use of a mark is likely to confuse consumers as to the source, sponsorship or approval of goods. Importantly for search engines, trademarks are not protected if they are deemed “functional,” meaning that without infringement a competitor either could not make its product or could only make it at a cost much higher than the cost with infringement. Recent keyword advertising litigation has centered on likelihood of confusion and search engines’ liability.

An eight-factor test dating to AMF v. Sleekcraft (1979) was the traditional standard for assessing likelihood of confusion. The courts have ruled in plaintiffs’ favor based on the traditional eight factors in keyword advertising cases, such asBinder v. Disability Group Inc., finding likelihood of confusion and willful infringement. In such cases, economic analysis can assess the alleged harm to both trademark holders and consumers, using established techniques to estimate infringing sales, increased costs, diminished goodwill, and costs of corrective advertising.

However, a recent decision advocates flexible application of the traditional eight factors in keyword advertising cases. The Ninth Circuit’s landmark 2011 decision in Network Automation v. Advanced Systems Concepts International stated that although “same market channel” was one of the traditional eight factors, the mere fact of a common online channel did little to help determine likelihood of confusion. Consumers were deemed sufficiently sophisticated for online marketing to fit the cereal analogy described above. Moreover, that decision considered factors not in the traditional test, such as the labeling of advertisements and their surrounding context on the results page. This ruling emphasized the careful consideration of how keyword advertising could affect a consumer’s search process and thus the value of a mark. In light of this decision, facts peculiar to each case must inform the choice of factors relevant to assessing likelihood of confusion. Economic analysis informs this choice by helping to define the relevant market, identify consumers’ search costs and quantify the value of the mark to its holders and to consumers.

Traditional trademark infringement cases have relied in part on consumer surveys to assess the likelihood of confusion. These surveys provide information about consumers’ perception of different products, their preferences for product features and their propensity to substitute among alternatives. In keyword advertising cases, traffic data that provide information about consumers’ Internet activity are also important. Through quantitative analysis of detailed consumer surveys and traffic data, economists can determine whether there is evidence of confusion in consumers’ perceptions of competing goods, their search patterns and purchasing decisions. With sufficient data on consumer choice, economists can also estimate the extent of alleged infringing sales and, if relevant, damages.

A recent decision regarding search engines’ liability for infringement is Rosetta Stone Ltd. v. Google Inc. The U.S. District Court for the Eastern District of Virginia found that Google’s practice of selling keyword advertising was protected under the functionality doctrine. Google’s search engine used keywords in an “essential indexing function” and keyword searches using trademarked terms reduced the cost and increased the quality of its advertising program. The court also found that Rosetta Stone’s brand awareness had increased due to its trademark’s use as a keyword and its appearance in sponsored advertisements. The ruling is under appeal in the Fourth Circuit, and numerous amicus briefs challenge the District Court’s analysis. They dispute the applicability of the functionality doctrine to Google’s product and contend that this finding would limit infringement liability for any firm that used another’s trademark to improve its business. Functionality can be analyzed economically by examining a defendant’s business model and comparing the cost savings provided by the disputed activity to alternative practices. Economists can evaluate the contribution of trademarked keywords to the quality of an advertising program by studying advertisers’ and consumers’ preferences for this feature.

Economic analysis can inform keyword advertising litigation that involves claims of infringement, unfair competition, trademark dilution, or false advertising. Economists establish market facts, such as the strength of a mark and competition between parties’ products. Using data on consumers’ preferences and online activity, economists evaluate alleged harm by estimating consumers’ but-for choices and quantifying changes in a mark’s value due to allegedly infringing behavior. Assessment of these relevant market conditions leads to an appropriate determination and quantification of infringement damages.

Erica E. Greulich, an empirical microeconomist, specializes in quantitative analysis and assessment of damages in intellectual property, breach of contract, employment, antitrust, and class action matters. Clarissa A. Yeap specializes in empirical microeconomics and Industrial Organization. Her experience includes model estimation and data analysis in the assessment of liability and damages in antitrust litigation. Drs. Greulich and Yeap are currently conducting research on trademark licensing, analyzing nearly 1000 licenses spanning numerous industries and 15 years.