Sell a trademark as a keyword for directed search or online auctions and make $billions.

But use a trademark in a domain name for direct search and lose the domain, or worse.

The gap between how trademark law treats the two species of search has grown wider in the wake of several landmark 2010 trademark law decisions—and provides another sound reason why ICANN should not establish any new rights protections for new generic Top-Level Domains (gTLDs) beyond those STI-RT compromise positions already included in the fourth version of its Draft Applicant Guidebook (DAGv4). Any further changes should occur across the DNS—for both new gTLDs and incumbents—and should take place within the context of comprehensive UDRP reform that is fully informed by an impartial review of trademark law decisions in the U.S., EU, and other key jurisdictions and that seeks to revise the UDRP in a manner which is consistent with those trends. The world in which the UDRP was launched was a more innocent one in which e-commerce was a nascent enterprise. Today, for better or worse, the reality is that advertising drives e-commerce and subsidizes almost all Internet content—and that both users’ personal browsing habits and third parties’ trademarks are regularly and legally sold to serve up the most relevant ads. More importantly, many of the same arguments that drove recommendations for significant tightening of rights protections at new gTLDs are being routinely rejected by courts on both sides of the Atlantic.

This widening gap was reemphasized last week when Google announced that it will begin selling trademarked terms to advertisers as keywords in Europe. The new policy, to take effect on September 14th, brings Google’s EU policy in line with what it already does in most other parts of the planet, including the U.S. and U.K. The head of Google’s legal division in Europe dismissed its prior policy, which permitted trademark owners to prevent Google from triggering ads placed by companies that did not own the trademarked keyword, as one in which “brand owners previously had a monopoly on the ad space”. Meanwhile, another Google spokesperson opined that “users will benefit by seeing more relevant ads”.

Google’s policy shift was triggered by a European Court of Justice (ECJ) decision rendered in March, in which it ruled against a lawsuit brought by LMVH Louis Vuitton Moet Hennessy and other brand owners. Google’s new policy still bars advertisers from using the trademarks of others in the text of their ads—but that too may change down the road, as Google already allows resellers of branded products or sellers of compatible parts for a branded product to use others’ trademarks in their U.K and Irish ads.

The ECJ decision is wholly consistent with recent U.S. case law. For example, on August 3rd the U.S. District Court for the Eastern District of Virginia issued its opinion explaining its granting of Google’s motion to dismiss all claims in Rosetta Stone Ltd. V. Google.

In granting Google this total victory the Court:

• Completely rejected Rosetta Stone’s claim that Google’s practice of auctioning the trademarks for its language instruction products would create any likelihood of confusion among the sophisticated customers spending $hundreds for each product.
• Declared that Google’s keyword suggestion tool, which often suggests trademarks, is a smart business tool and does not constitute inducement for contributory trademark infringement.
• Blazed new ground in applying the trademark functionality doctrine to the use of trademarks as keywords, stating, “Here, Google uses trademarked keywords, including the Rosetta Stone marks, to identify relevant Sponsored Links,” with the trademarked keyword triggers having “an essential indexing function because they enable Google to readily identify in its database relevant information in response to the web user’s query.”

Of course this lower court opinion is subject to appeal, but it continues a string of cases in which Google has successfully defended its sale of trademarks as keyword ad triggers.

So where does this leave directed search facilitated by search engines versus direct search facilitated by domain names? As a main thrust of trademark law is to prevent consumer confusion let’s compare them from the consumer’s viewpoint. In both instances a consumer interested in a particular good or service types in a generic word or a trademarked brand name, the only difference being whether that search term is followed by a .tld. The close convergence of the methods is reinforced by the facts that the consumer typing a brand into the search box is often unsure of the brand’s website address and is hoping to be directed to it as well as to related websites for the same or similar goods and services, and that the address bar in modern web browsers functions as a search box if no .tld is entered. They are, in short, different roads to pretty much the same place.

In directed search a search engine like Google provides pages of suggested links in response to a search term typed in by users. If that search term is a trademark then many of the links—as well many of the paid ads on the results page—will be to or from competitors of the trademark’s owner. Provide this type of search service and you can earn more than $2 billion a month in revenue, as Google just reported revenues of $7 billion for the second quarter of 2010. Those revenues shot upward, by the way, after Google liberalized its U.S. AdWords policy change last year.

In direct search users type in a search term followed by a .tld, usually .com in the U.S. but more likely a ccTLD abroad. They reach a web page which may be “parked” and filled with ads (identical in many cases to those that would be displayed in directed search, as they are provided by Google in the great majority of instances!), or that may have substantial original content. Use a trademarked term in your domain and serve up ads related to the trademark owner’s business and you may well lose it in a UDRP action or face even stiffer sanctions under national laws like the U.S. Anti-Cybersquatting Consumer Protection Act (ACPA).

Many trademark advocates decried the European Court’s decision (even though the brand owners they represent may well be buying competitors’ trademarks as keywords for their own marketing campaigns). As for domains, they maintain that a domain is more likely to confuse a consumer than a page of search results, and point out that search engines will often provide a “Did you mean?” link for typos as well as a prominent link to the brand owner’s website (while neglecting to note that brand owners are huge purchasers of search engine ads run against typos of their own trademarks, or that almost all ISPs now run their own ads against typos of trademarks entered as nonexistent domain addresses). Let’s concede that a trademark.tld domain may indeed create consumer confusion as to the domain’s source (as noted in the Toyota decision discussed below)—where does that leave domains that may incorporate a trademark as part of its name? If a domain registrant seeks to dispel consumer confusion through such means as a prominent disclaimer of endorsement, and a link to a trademark owner’s domain, that is unlikely to be of much help in defending a UDRP or ACPA action.

Google made clear that their new policy will maintain an existing ban on the advertising of counterfeit goods—which brings us to another big online trademark case of the year, this one in the U.S. In April a decision by the Second Circuit Court of Appeals in Tiffany v. eBay affirmed most of a landmark 2008 District Court opinion and held that eBay had no direct, secondary, or trademark dilution liability notwithstanding its general knowledge that many sellers of “Tiffany” goods on its online auction website are in fact peddling counterfeits. (The case was returned to the lower court for further arguments on whether eBay had any liability for false advertising for such ads as “Tiffany & Co. under $50” on its own website as well as “Find Tiffany items at low prices” on search engines like Google, but eBay seems likely to prevail here as well.) The Court found that eBay was mostly in the clear because there were some legitimate Tiffany goods being sold on its website, even though there were also lots of fakes. eBay got a pass from the Court in part because it does discontinue listings of fake goods on its website when specific acts of infringement are brought to its attention under its internal notice-and-takedown policy, a policy facilitated by 70 dedicated full-time employees. (The UDRP presently incorporates no such notice-and-takedown escape route for registrants, even for inadvertent infringement caused by ads placed by third parties like Google.) The Court also noted that eBay had a strong economic motive to police against counterfeits brought to its attention; namely, that customers might abandon it if fakes predominated among the merchandise being offered.

The Court’s reasoning is instructive, especially on the role of disclaimers:

“An online advertiser such as eBay need not cease its advertisements for a kind of goods only because it knows that not all of those goods are authentic. A disclaimer might suffice. But the law prohibits an advertisement that implies that all of the goods offered on a defendant’s website are genuine when in fact, as here, a sizeable proportion of them are not.” (Emphasis added.)

So, again, establish an auction site and run ads to promote it using someone else’s trademarks—even when you know that many of the “trademarked” goods being sold on your website are rip-offs at best and dangerous at worse—and make $billions. Register a domain incorporating a trademark or similar variant thereof and provide ads and links to related goods and services, even if your provide disclaimers that you are not the trademark owner and take pains to assure that all the ads and links are for legitimate goods and services—and you may well lose your domain and perhaps face serious monetary damages.

Consumers clearly suffer substantial harm when they purchase a good they believe to be genuine and it turns out to be a fake. To the contrary, regardless of which search methodology they employ, when they type in a trademark and receive back some ads and links to legitimate trademarked goods and services, as well as those of competitors, they and society receive a net benefit from the additional information and market competition that results. If Ford buys “Toyota” or AT&T buys “Verizon” as ad keywords it just makes consumers more aware of their marketplace options when they conduct a search for a car or cell phone.

The Google and eBay decisions illustrate that the trend in both European and U.S. judicial forums is to rebuff the more extreme positions of brand owners when they would inhibit competition or relieve them of the affirmative duty to protect their brands. They also illustrate that evolving trademark law for online commerce is generally moving further away from the hard-and-fast doctrines embodied in the UDRP and national laws like the ACPA. That’s not surprising, since those doctrines embody the thinking of the late 1990’s—practically a prehistoric era in relation to e-commerce methodologies and technologies as well as online consumer sophistication.

That brings in a final important recent court decision. On July 8, 2010, in Toyota Motor Sales v. Tabari, the U.S. Court of Appeals for the Ninth Circuit discussed the practices of reasonably prudent online consumers in denying Toyota’s trademark infringement claim against the independent auto broker registrants of the domains buy-a-lexus.com and buyorleaselexus.com, said websites also including copyrighted photos of Lexus vehicles and the trademarked “L Symbol Design mark”. (Full decision here [PDF])

The Toyota decision provides one of the best judicial discussions we’ve ever read regarding how online consumers actually use the Internet and perceive domains that include trademarks, and how trademark law should apply to online ads and commerce, so let’s quote a chunk of it (case references deleted):

In performing this analysis, our focus must be on the “‘reasonably prudent consumer’ in the marketplace.”...The relevant marketplace is the online marketplace, and the relevant consumer is a reasonably prudent consumer accustomed to shopping online; the kind of consumer who is likely to visit the Tabaris’ website when shopping for an expensive product like a luxury car. Unreasonable, imprudent and inexperienced web-shoppers are not relevant.

The injunction here is plainly overbroad—as even Toyota’s counsel grudgingly conceded at oral argument—because it prohibits domain names that on their face dispel any confusion as to sponsorship or endorsement. The Tabaris are prohibited from doing business at sites like independentlexus-broker.com and we-are-definitely-not-lexus.com, although a reasonable consumer wouldn’t believe Toyota sponsors the websites using those domains. Prohibition of such truthful and non-misleading speech does not advance the Lanham Act’s purpose of protecting consumers and preventing unfair competition; in fact, it undermines that rationale by frustrating honest communication between the Tabaris and their customers….

The district court reasoned that the fact that an internet domain contains a trademark will “generally” suggest sponsorship or endorsement by the trademark holder. When a domain name consists only of the trademark followed by .com, or some other suffix like .org or .net, it will typically suggest sponsorship or endorsement by the trademark holder. This is because “[a] customer who is unsure about a company’s domain name will often guess that the domain name is also the company’s name.” If customers type in trademark.com and find the site occupied by someone other than the trademark holder, they may well believe it is the trademark holder, despite contrary evidence on the website itself. Alternatively, they may become discouraged and give up looking for the trademark holder’s official site, believing perhaps that such a website doesn’t exist.

But the case where the URL consists of nothing but a trademark followed by a suffix like .com or .org is a special one indeed. The importance ascribed to trademark.com in fact suggests that far less confusion will result when a domain making nominative use of a trademark includes characters in addition to those making up the mark. Because the official Lexus site is almost certain to be found at lexus.com (as, in fact, it is), it’s far less likely to be found at other sites containing the word Lexus. On the other hand, a number of sites make nominative use of trademarks in their domains but are not sponsored or endorsed by the trademark holder: You can preen about your Mercedes at mercedesforum.com and mercedestalk.net, read the latest about your double-skim-no-whip latte at starbucksgossip.com and find out what goodies the world’s greatest electronics store has on sale this week at fryselectronics-ads.com. Consumers who use the internet for shopping are generally quite sophisticated about such matters and won’t be fooled into thinking that the prestigious German car manufacturer sells boots at mercedesboots.com, or homes at mercedeshomes.com, or that comcastsucks.org is sponsored or endorsed by the TV cable company just because the string of letters making up its trademark appears in the domain.

When people go shopping online, they don’t start out by typing random URLs containing trademarked words hoping to get a lucky hit. They may start out by typing trademark.com, but then they’ll rely on a search engine or word of mouth. If word of mouth, confusion is unlikely because the consumer will usually be aware of who runs the site before typing in the URL. And, if the site is located through a search engine, the consumer will click on the link for a likely-relevant site without paying much attention to the URL. Use of a trademark in the site’s domain name isn’t materially different from use in its text or metatags in this context; a search engine can find a trademark in a site regardless of where exactly it appears. In Welles, we upheld a claim that use of a mark in a site’s metatags constituted nominative fair use; we reasoned that “[s]earchers would have a much more difficult time locating relevant websites” if the law outlawed such truthful, nonmisleading use of a mark. The same logic applies to nominative use of a mark in a domain name.

Of course a domain name containing a mark cannot be nominative fair use if it suggests sponsorship or endorsement by the trademark holder. We’ve already explained why trademark.com domains have that effect…When a domain name making nominative use of a mark does not actively suggest sponsorship or endorsement, the worst that can happen is that some consumers may arrive at the site uncertain as to what they will find. But in the age of FIOS, cable modems, DSL and T1 lines, reasonable, prudent and experienced internet consumers are accustomed to such exploration by trial and error. They skip from site to site, ready to hit the back button whenever they’re not satisfied with a site’s contents. They fully expect to find some sites that aren’t what they imagine based on a glance at the domain name or search engine summary. Outside the special case of trademark.com, or domains that actively claim affiliation with the trademark holder, consumers don’t form any firm expectations about the sponsorship of a website until they’ve seen the landing page—if then. This is sensible agnosticism, not consumer confusion. So long as the site as a whole does not suggest sponsorship or endorsement by the trademark holder, such momentary uncertainty does not preclude a finding of nominative fair use.

Toyota argues it is entitled to exclusive use of the string “lexus” in domain names because it spends hundreds of millions of dollars every year making sure everyone recognizes and understands the word “Lexus.” But “[a] large expenditure of money does not in itself create legally protectable rights.” Indeed, it is precisely because of Toyota’s investment in the Lexus mark that “[m]uch useful social and commercial discourse would be all but impossible if speakers were under threat of an infringement lawsuit every time they made reference to [Lexus] by using its trademark.”

It is the wholesale prohibition of nominative use in domain names that would be unfair. It would be unfair to merchants seeking to communicate the nature of the service or product offered at their sites. And it would be unfair to consumers, who would be deprived of an increasingly important means of
receiving such information. As noted, this would have serious First Amendment implications. The only winners would be companies like Toyota, which would acquire greater control over the markets for goods and services related to their trademarked brands, to the detriment of competition and consumers. The nominative fair use doctrine is designed to prevent this type of abuse of the rights granted by the Lanham Act…

A defendant seeking to assert nominative fair use as a defense need only show that it used the mark to refer to the trademarked good, as the Tabaris undoubtedly have here. The burden then reverts to the plaintiff to show a likelihood of confusion. (Emphasis added)

Remarkably, the Tabaris won against Toyota’s expert counsel even though they are not attorneys and defended themselves! But how would this case have turned out if Toyota had brought a UDRP action instead? There’s a good chance the Tabaris would have lost, even with the assistance of expert counsel.

The benchmark UDRP standard for nominative use is found in the 2001 case of Oki Data Americas, Inc. v. ASD, Inc. (available here).

It established a multi-part nominative use defense consisting of:

• The respondent must actually be offering the goods and services.
• The respondent must use the site to sell only the trademarked goods
• The site must accurately disclose the registrant’s relationship with the trademark holder
• The respondent must not try to corner the market in all domain names

As the Tabaris brokered a large variety of auto brands, if someone initiated a relationship with them via their Lexus-related website but wound up purchasing a Mercedes or a Cadillac instead that alone could have resulted in a loss of the domain (even though there’s zero chance the consumer would confusedly believe the purchased product was made by Lexus). Or, given the uneven quality of UDRP examiners and lack of consistency in UDRP decisions, the presence of a trademarked term alone might have resulted in a finding of bad faith registration and use, and required them to file an ACPA appeal to keep their names. In any event, had any domain incorporating Lexus been “parked” with links to Lexus dealers and independent auto brokers current UDRP practice would have resulted in the loss of the domain—even if all the links were to bona fide third party retailers and the ad links were exactly those that would have resulted from typing “Buy or Lease Lexus” into a search engine.

So, yes, let’s concede that trademark.tld domains are different and, as the Ninth Circuit discussed, are more likely to result in consumer confusion. But direct search is not so different from directed search that the trademark rules reflected in the UDRP should increasingly diverge from evolving trademark law as articulated by U.S. and EU courts. This is not to argue that domains that state false endorsements by or affiliations with trademark owners—much less facilitate phishing or pharming scams, distribute malware, or knowingly facilitate the sale of counterfeit goods—should not be subject to rapid transfer or takedown. But such domains are a far cry from those that inform a consumer that a better deal may be available for the types of goods or services they seek.

There does not seem to be any realistic likelihood that the UDRP or ACPA-type laws will be liberalized in the very near term. But ICANN has a duty to keep contemporary judicial trends in mind as it considers rights protections for new gTLDs. The UDRP imposes far tougher rules on trademarks used for direct search domains than what’s in place for the exact same word employed by the identical consumer as a keyword for directed search. And the STI-RT recommendations adopted as rights protections for new gTLDs in DAGv4 go beyond the UDRP. Domain investors and developers have learned to abide with the UDRP and related laws and build profitable websites based on generic words and other non-infringing terms. But given that just about every dictionary word is trademarked for something, they also need a UDRP regime that is predictable and reasonably in sync with general trademark rules for e-commerce. Brand owners and their advocates, including WIPO, contend these tougher DAGv4 provisions are insufficient and are urging ICANN to reopen the trademark debate and adopt rights protections even more draconian than those recommended by the IRT last year. Their arguments and legal theories are joined at the hip with those recently rejected by European and American courts.

ICANN has a responsibility to upheld established trademark law in the DNS. But ICANN also has a responsibility to see that rights protections in the DNS are informed by and are consistent with an evolving legal landscape. Indeed, ICANN lacks any authority to establish DNS rights protections that are not firmly grounded in established law as ICANN has no legislative powers to promulgate new trademark policy. ICANN should also consider that draconian rights protections for the DNS would surely detract from the prospects that new gTLDs can deliver on innovative new models that benefit consumers.

As regards the rules for new gTLDs, enough is more than enough—the STI-RT compromise should be the high water mark for now. The growing legal gap between direct and directed search is already too broad and facilitates an unfair advantage for search engines in the consumer search arena. ICANN should not be intimidated by brand owners who were not given their DNS policy wish list in DAG v4, notwithstanding rumors that some are exploring litigation to enjoin ICANN from accepting applications for new gTLDs—especially when it’s not clear what irreparable harm could be posited to overcome the U.S. Constitution’s bar against advisory opinions rendered on the basis of hypothetical future injury.

Any further consideration of rights protections at new or incumbent gTLDs should occur only in the context of a balanced and comprehensive policy development process for UDRP reform. It’s not likely that one result of such reform will be a “clean hands” doctrine that inquires whether a complainant is buying its competitors’ trademarks for its own online advertising purposes, or is operating an online business that knowingly facilitates the distribution of counterfeit goods. But it doesn’t seem unreasonable to set a goal of an evenhanded policy that brings rights protections for domains employed for direct search in line with evolving online trademark law.