Europe's highest court ruled Google did not infringe trademark law by selling keywords to trigger ads after Louis Vuitton and others said the practice undermined their brands.
The Court of Justice of the European Union said on Tuesday advertisers were free to buy keywords identical to trademarks of rivals as long as consumers were not confused on the provenance of goods and services by the way ads were displayed online.
The court said that in cases where ads could confuse consumers, brand owners should invoke their rights against the advertisers concerned, not against Google - unless Google failed to act on a complaint or actively manipulated keywords.
The ruling validates the AdWords paid-search business at the core of Google's $23 billion online advertising operations, as well as the way competitors like Yahoo! sell ads, and gives brand owners a way to protect their trademarks.
"It's a good decision in large parts," said Fabian Ziegenaus, an intellectual property lawyer at Linklaters.
"It does not forbid Google per se to sell trademark keywords, so the business model is not at stake, and brand owners are also protected through the decision."
Advertisers often buy brand names of their competitors as keywords to trigger their own ads. Google says the practice is in the interest of consumers, who do not want their search results to be limited to a single brand.
Brand owners can also bid for their own brand names as keywords and the order in which sponsored links are displayed online is determined mainly through this auction process.
Google used to block advertisers from buying others' brand names as keywords but changed its policy in North America in 2004 and four years later extended that to Britain and Ireland.
It says it will honor valid complaints from brand owners and prevent their rivals from using a trademarked keyword in their ad text.
Both Google and LVMH, the world's biggest luxury-goods group, claimed the court's decision as a victory.
"Trademarks ... are key for companies to market and advertise their products and services. But trademark rights are not absolute," wrote Google's senior litigation counsel for Europe, Harjinder S. Obhi (googlepolicyeurope.blogspot.com).
"We believe that user interest is best served by maximizing the choice of keywords, ensuring relevant and informative advertising for a wide variety of different contexts."
LVMH Vice Chairman Pierre Gode told Reuters: "We are very happy with the decision. We consider the decision is very important as the liability of advertisers is well established."
LVMH shares were up 0.9 percent at 87.60 euros at 1603 GMT. Google shares were down 1.8 per cent at $547.28 on the Nasdaq.
The ruling will, however, make it more complicated for brand owners to pursue legal complaints, as they will have to go after advertisers one by one.
"It's a bit of a disappointment for the brand owners because they're going to have to police their brand in a more active way than they'd have to do if it were just Google they had to deal with," said John Mackenzie, partner at law firm Pinsent Masons.
The summary of the court judgment did not explicitly address the issue of counterfeit goods, but it did offer more clarity than expected on the misuse of trademarks in search results displayed to consumers.
"If the trademarks are actually used in the results that are shown to users and the advertiser does not own the trademark, that is likely to be deemed infringement," said Thomas Vinje, a partner at Clifford Chance specializing in European Union and intellectual property (IP) law.
"That would seem to defeat counterfeiters ... that would be to the advantage of the trademark owners," he said.
The European Brands Association, which represents 1,800 brand companies in 22 countries, said: "By confirming trademark rights online and holding sellers of keywords liable for illicit material, such as counterfeits, this ruling seems positive."
Google says it investigates complaints and may disable ads that promote counterfeit goods and/or terminate the advertiser.
The court said the matter of whether consumers were likely to be confused by the way search results were displayed was a matter for national European courts to decide case by case. The LVMH case, for example, will now go back to France's top court.
LVMH scored a victory last month when a Paris tribunal found eBay guilty of misleading consumers by using misspelt versions of its brand as search engine keywords to redirect users to eBay website links.
National courts guided by the principles in Tuesday's ruling will also have to decide whether in fact Google, eBay and others are as passive as they appear to be in the administration of their automated services.
If they are found to take a more active role, they will not be exempt from liability. "There are potential traps here for Google and eBay and all other Internet providers," said Nicola Dagg, head of IP for law firm Allen & Overy in London.
Several cases brought by brand owners are pending against advertisers at the ECJ, the first of which will be ruled on this week. Google also faces eight cases in the United States over the sale of trademarked keywords.