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Decoding Rosetta Stone: Trademark Lessons and Unanswered Questions From the Fourth Circuit's Decision Regarding Google's Keyword Advertising Program

Friday, May 25, 2012

By Eleanor M. Lackman, Cowan, DeBaets, Abrahams & Sheppard LLP


On April 9, the U.S. Court of Appeals for the Fourth Circuit handed down its decision in Rosetta Stone Ltd. v. Google Inc.1 At issue in the appeal was whether Google's sale of “Rosetta Stone” keywords for use in Google's AdWords advertisements constituted primary (direct) or secondary (contributory/vicarious) trademark infringement or diluted Rosetta Stone's trademarks.

The AdWords program runs alongside Google's regular search results that are determined by a proprietary algorithm. For a “per-click” fee, a third party can buy particular words, including brand names, and have advertisements for its products appear off-set above or next to the regular search results when a search user types in the particular word or name. While many lawsuits have been filed against Google over this practice, most of which have been dismissed voluntarily or involuntarily, the Rosetta Stone lawsuit was the first to reach the merits of the ultimate legal questions on claims for trademark infringement and dilution.

At the heart of Rosetta Stone's lawsuit was the claim that counterfeiters were purchasing “rosetta stone” for the purpose of misleading customers into clicking on the advertisements and then buying the ersatz “Rosetta Stone” software rather than the genuine product. According to Rosetta Stone, Google was liable for such confusion, and its AdWords program was leading to the dilution of Rosetta Stone's strong trademarks.

On Aug. 3, 2010, the U.S. District Court for the Eastern District of Virginia (which keeps what is known as the “rocket docket” for its speed in processing lawsuits) dismissed the case on summary judgment, holding as a matter of law that Google's program did not violate any of the laws that Rosetta Stone raised. 730 F. Supp. 2d 531, 97 USPQ1d 1855 (E.D. Va. 2010) (80 PTCJ 514, 8/13/10). On appeal however, the Fourth Circuit ruled as if it had found that the lower court acted perhaps too hastily. With the benefit of the parties' arguments and five amicus briefs from over two dozen amici, the appellate court reversed on almost every count, reinstating the case and sending it back to the district court for trial.

In its ruling, the Fourth Circuit made some important observations that may impact future cases involving trademark owners and users. The court also left some questions unanswered, leaving us to wait until trial or until another court takes up the issues.

This article will address some of the key messages from Rosetta Stone and decode the meaning of the ruling for those engaged in online trademark use.

Lesson: In “nominative use” cases, at least in the Fourth Circuit, not every factor needs to be analyzed in conducting the confusion analysis for trademark infringement, but the court may be required to address every one of the trademark dilution factors.

The hallmark of trademark infringement is likelihood of confusion,2 and in direct infringement cases, the inquiry usually turns on a multi-factor analysis and balancing test. In the Fourth Circuit, the courts usually look at nine factors. However, the district court in Rosetta Stone had looked at only three factors that had been disputed—Google's intent, actual confusion, and the consuming public's sophistication—which it resolved in favor of Google, following which the court resolved the entire confusion inquiry in favor of Google.

Rosetta Stone had argued that the district court had erred in refusing to weigh the other six factors, which Rosetta Stone argued were undisputed in its favor. The Fourth Circuit disagreed, finding that in cases where the use is “referential or nominative in nature”—i.e., using the plaintiff's mark to identify the plaintiff's own goods—the factors need only be a guide, and the district court need not discuss each or engage in a “robotic application” of each and every factor.3 Yet the court later concluded that because the district court limited its analysis to only those three factors, the question of confusion could not be resolved on summary judgment.

In contrast to the finding on confusion, when looking at the doctrine of dilution (to be discussed below), the Fourth Circuit criticized the district court for addressing only one statutory factor and not mentioning any other remaining factor among the six (non-exhaustive) factors provided in the Federal Trademark Dilution Act.4 On remand, the trial court will be required to “address whichever additional factors might apply to inform its determination of whether Google's use is likely to impair the distinctiveness of Rosetta Stone's mark.”

Lesson: Trademark policies might not be enough protection, and changing them could have consequences in litigation.

The appellate court gave substantial attention to Google's AdWords policies and internal studies. It noted that prior to 2004, Google's policies prohibited both the use of trademarks in the text of an advertisement and, upon request from the trademark owner, the use of trademarks as keywords.

However, in 2004, Google changed its policies to allow the use of trademark as keywords even over the trademark owner's objection, and it later even offered a tool that would suggest relevant trademarks for AdWords customers to bid on. Google continued to block the use of the trademarks in the text of the advertisement itself, and internal studies regarding trademarks generally suggested—one of which indicated that 94 percent of users were confused at least once—that doing so might confuse internet users.

Nonetheless, in 2009, Google changed its policy to permit the limited use of trademarks in the advertising text in particular situations. Rosetta Stone claimed that around the same time in 2009, it became “plagued with counterfeiters” and in a six-month period reported to Google 190 instances of advertisers selling counterfeit software. Rosetta Stone also pointed out that “Google expected a substantial boost in revenue from the [2009] policy change as well as an uptick in litigation from trademark owners.”

Based on this evidence, the appellate court held that “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.”

Google also protested that the advertisers were violating Google's policy, but the court rejected the policy as a fail-safe against a finding of confusion: it indicated that the public is not aware of Google's policy, and “[w]hat matters is whether the defendant's actual practice is likely to produce confusion in the minds of consumers about the origin of the goods or services in question.”

Lesson: It may be enough for a trademark owner to provide testimony from just some, rather than all, purchasers that have been confused.

The district court had rejected deposition testimony from five witnesses who had purchased counterfeit software via a Google sponsored link, on the ground that this was an insufficient level of confusion. Incidentally, the district court had limited the number of “actual confusion” depositions to five.

Perhaps finding this to be an impossible threshold, the Fourth Circuit held that—particularly where combined with survey evidence at a 17 percent confusion rate and Google's internal studies—this evidence should have been considered on the actual confusion factor in a light most favorable to Rosetta Stone.

Lesson: The “functionality defense” is dialed back to its previous limits; the question of functionality looks at the plaintiff's trademark, not at the way in which the defendant uses the plaintiff's trademark.

To the relief of many trademark practitioners, the Fourth Circuit set the record straight on the issue of functionality, sending it back to where it mainly belongs—cases involving trade dress, such as colors and design features. Google had argued that because it used the trademarks for an allegedly functional purpose, namely, to make advertisements appear, any direct infringement liability would be defensible on the grounds of functionality.

The district court agreed, and on appeal, the Fourth Circuit reversed the holding, finding that the Lanham Act's prohibition on registration of functional product features as trademarks5 “simply does not apply in these circumstances” and could not be a possible affirmative defense for Google.

Lesson: Nominative fair use is a defense to a dilution claim, and the party asserting the defense is the one that must show good faith in addition to nominative use.

In defending against Rosetta Stone's claims that the AdWords program caused dilution—the “whittling away of the established trademark's selling power and value through its unauthorized use by others”—Google had argued that it was protected by the statutory dilution defense of nominative fair use.6 Part of the district court's rejection of the dilution claim was Rosetta Stone's failure to present evidence that Google was using the Rosetta Stone trademarks to identify Google's own goods and services, rather than Rosetta Stone's as would follow in a nominative fair use context.

The Fourth Circuit criticized this holding, explaining that not only is nominative fair use a defense to be proved by Google, but that the district court had collapsed the inquiry of nominative fair use into one by completely ignoring the requirement that the nominative use must also be a “fair use.” On remand, the trial court will be required to determine whether Google has met its burden of showing that its use of the trademarks was made in good faith, or whether Google intended to capitalize on consumer confusion.

Open question: Are questions of contributory liability to be deferred until the trial phase?

Cases involving contributory liability on the internet have been rare in the trademark context, but already a pattern appears to be evolving suggesting that, particularly in matters involving new technological products, the question is best resolved at the trial stage where factual questions exist.

In dismissing Rosetta Stone's contributory infringement claim, the district court relied on the Second Circuit's landmark decision in Tiffany (NJ) Inc. v. eBayInc.,7 which held that the auction site, upon receiving knowledge or reason to know of specific instances of infringing uses, was not liable for contributory infringement because it removed the listings upon receiving notice and was not otherwise willfully blind to specific acts of infringement.

But, as the Fourth Circuit noted, in relying on that decision, the district court failed to note that Tiffany was decided after a week-long bench trial, not on summary judgment.8 This finding echoes a holding in a copyright case against a Google entity, YouTube, issued just four days prior to the Rosetta Stone decision, in which the Second Circuit noted that its rejection of a willful blindness challenge in Tiffany was based upon, and “counsels in favor of[,] explicit fact-finding on the issue of willful blindness.”9

The Fourth Circuit further explained that, unlike in Tiffany, Rosetta Stone had identified several instances of “Google's purported allowance of known infringers and counterfeiters to bid on the Rosetta Stone marks as keywords,” and that the burden on summary judgment should have shifted to Google to show that no trier of fact could find that Google continued to supply its services to known infringers.

On remand, we can expect to hear from both sides several other facts that make the AdWords case, however, significantly different from situations involving hosted auction listings. However, whether the outcome will be the same as in Tiffany is presently unclear.

Conclusion

For all the lessons in the Rosetta Stone decision, what is not resolved is the ultimate question: Google's liability to Rosetta Stone for trademark infringement and dilution. That question will await trial, and the Fourth Circuit's decision provides no indication of whether Rosetta Stone will prevail at the conclusion of the case.

But what also remains unresolved—and what may remain unresolved even after trial—is the broader question relating to keyword sales generally. Specifically, does the sale of keywords alone make the seller directly liable for confusion or dilution at the hands of the buyer? Or is Google like a virtual retailer with a practice akin to asking that a private label product be placed on the same shelf as a brand name, or that two competing laundry detergents be placed in the same aisle?

What we do know is that for now, trademark owners, their competitors and online services will be watching the battle between Rosetta Stone and Google for the additional lessons it will teach us about the evolving nature of trademark law as it applies to the internet.

Eleanor M. Lackman is litigation partner with the IP, entertainment, and media law firm of Cowan, DeBaets, Abrahams & Sheppard LLP, New York, where her practice focuses on copyright and trademark matters.

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