Does a search engine's sale of your company's brands to third parties as part of its key-word advertising program support a trademark infringement or dilution action?  In 2010, the Eastern District of Virginia court granted summary judgment in favor of Google on these issues in Rosetta Stone Ltd. v. Google, Inc.  But this week, the Fourth Circuit Court of Appeals vacated that judgment and left the question unsettled for the time being.

The Rosetta Stone case arose out of Google's practice of allowing advertisers to bid for keywords and, if their bid is successful, receive preferred ad placement above Google's regular search results when those keywords are searched.  Rosetta Stone, the maker of popular language-learning software, brought claims of direct, contributory, and vicarious infringement and dilution against Google based on its sale of the keywords "Rosetta Stone" to third parties that posted ads for counterfeit goods on Google's search pages.  The district court rejected the claims on the grounds that Rosetta Stone could not establish a likelihood of confusion or dilution.  However, the Fourth Circuit vacated the lower court's order in most respects.

Direct Infringement

On the trademark infringement claim, the Fourth Circuit took issue with the district court's analysis of each of the three likelihood of confusion it considered: (i) intent, (ii) actual confusion and (iii) sophistication of the purchasers.

Intent

For the intent factor, it was Google's own due diligence that perhaps proved most damning on appeal.  Google conducted internal studies suggesting that ads linked to trademark terms could lead some customers to become confused.  Despite these internal studies, Google subsequently loosened its restrictions on third-party purchases of ads linked to trademark terms.  The Fourth Circuit cited an internal communication where Google conceded that there would be "a slight increase in risk that we and our partners will be the subject of lawsuits from unhappy trademark owners."   Viewing this evidence in the light most favorable to Rosetta Stone, the Fourth Circuit concluded that a trier of fact could find that Google intended to cause confusion.

Actual Confusion

With regard to actual confusion, Rosetta Stone presented evidence that five customers had purchased counterfeit software via Google ads, when intending to buy the real thing.  The trial court discounted the evidence, however, for a number of reasons.  First, the trial court held that while some customers did inadvertently buy counterfeit software, the evidence showed that consumers knew that they were not being taken to the official Rosetta Stone website via Google's ads.  The district court took a caveat emptor approach and concluded that, once buyers knew they were not at the official site, they were on their own.  The appellate court disagreed, however, and held that the confusion necessary for an infringement action need not be confusion as to source.  Confusion as to Rosetta Stone's sponsorship of a website and the authenticity of the goods would be enough to sustain an infringement action.

The district court also noted that the ads for counterfeit goods were, in fact, a violation of Google's policies for advertisers and, on that basis, discounted any evidence of customer confusion over the ads.  Indeed, Google actively policed counterfeit goods and removed such ads from its listings.  The district court held that Google could not be responsible for confusion stemming from a violation of its policies by advertisers.  The Fourth Circuit, once again, disagreed.  Customers, the appellate panel reasoned, do not necessarily know Google's policies–much less know whether its advertisers are complying with them.  Any violation of Google policies by its advertisers, then, was simply irrelevant to the question of a customer's actual confusion.

The lower court found the evidence of actual confusion de minimis because only five confused customers had come forward out of millions of ad viewings.  The Fourth Circuit deemed this assessment premature.  On a motion for summary judgment, even such limited evidence of confusion must be construed in favor of the party opposing the motion the Court explained.  By this standard, the Fourth Circuit found that the five confused consumers were sufficient to avoid summary judgment.

Sophistication of Purchasers

The district court held that consumers of Rosetta Stone products are sophisticated because the high price of the software would attract only well-educated buyers who were willing to spend time learning about the product.  The Fourth Circuit disagreed and noted that Google's own internal studies showed that well-educated consumers could sometimes be confused by Google's sponsored links.  While high prices could be a reason to rule for Google on this issue at trial, the panel found that such a ruling was inappropriate on a motion for summary judgment.

Functionality

The Fourth Circuit also found in favor of Rosetta Stone on the "functionality" doctrine (which limits trademarks with a functional purpose independent of the brand), holding that it applies where the owner, and not the infringer, uses the trademark in a "functional" manner.

Contributory Infringement

As to the contributory infringement claim, the Fourth Circuit found that the trial court applied an incorrect standard of review in ruling that Google did not know or have reason to know of specific instances of infringement to which it was contributing.  While Rosetta Stone put forward evidence that Google had been notified of infringement by advertisers, the trial court appeared to impose the burden of proof on Rosetta Stone in finding that it was "unpersuaded" by the evidence.  The Fourth Circuit held that this was improper and vacated the trial court's order.

Dilution

The trial court granted summary judgment to Google on the dilution claim on two grounds: first, it held that Google was not using the Rosetta Stone trademarks for its own goods and services, which the trial court believed was a necessary element of a dilution claim; second, it held that Google's use of the marks had not affected Rosetta Stone's brand awareness, which had only grown since the alleged dilution, and so Rosetta Stone could not show that its trademarks had become impaired.  Again, however, the Fourth Circuit vacated the trial court's ruling. 

With respect to the first issue, the appellate court explained that the trial court had confused an element of Rosetta Stone's dilution claim with an element of the "fair-use" defense.  While a defendant claiming fair use is required to show that it had not used a mark for its own goods and services (i.e. that its use is "nontrademark" use), that does not imply that such nontrademark use would automatically defeat a plaintiff's dilution claim.  In particular, the Court noted that a defendant could be liable for dilution, even where it was engaged in nontrademark use, if its nontrademark use was not "fair," i.e. in good faith and unlikely to confuse. 

In regards to the brand impairment issue, the Fourth Circuit held that, even if the Rosetta Stone brand's recognition had increased, that would not automatically defeat a claim for dilution because recognition is merely one of six statutory factors relevant to the dilution analysis.  The Court instructed the trial court on remand to "address whichever additional factors might apply," e.g. the "degree of inherent or acquired distinctiveness of the famous mark."

Conclusion

The Rosetta Stone decision should not be overstated.  Since the Fourth Circuit addressed narrow issues within the trademark infringement and dilution analyses, the ultimate impact of this decision appears limited.  To sustain a claim of infringement, after all, a defendant must also be found to have "used" the trademark "in commerce." Google arguably did not "use" the trademark at all; it was the retailers who had misappropriated the Rosetta Stone brand.

Even so, the Fourth Circuit's decision could invite new key-word advertising cases against search engines and third-party bidders alike.  Prudent businesses, therefore, should be cautious.  How their customers, partners, and employees use third-party trademarks as part of their key-word advertising practices could pose litigation risks down the road.

The Fourth Circuit opinion can be found at http://pacer.ca4.uscourts.gov/opinion.pdf/102007.P.pdf.

The district court's opinion is Rosetta Stone Ltd. v. Google Inc., 730 F. Supp. 2d 531 (E.D. Va. 2010).

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