• by Wendy Davis , Staff Writer @wendyndavis, April 3, 2009

A federal appellate court handed Google a defeat today in a trademark lawsuit stemming from AdWords ads. The 2nd Circuit ruled that allowing a trademark to trigger a search ad is a "use in commerce."

The decision doesn't mean that Google will ultimately lose the case. It also doesn't stop Google or other search engines from allowing companies to use trademarks to trigger ads. But it makes doing so riskier: If those ads are found to confuse consumers, search engines could be on the hook for trademark infringement.

Here, Google was sued by computer repair shop Rescuecom for allowing rivals to appear as sponsored listings when consumers typed "rescuecom" into the query box. A district court judge dismissed the case before trial on the theory that allowing a word to trigger an ad didn't violate trademark law because it wasn't a use in commerce.

Judge Pierre Leval, who wrote the appellate opinion, disagreed with that conclusion -- which isn't surprising because he indicated at oral argument last year that he believed the trial court was wrong.

Leval and his colleagues sent the matter back to the district court for a trial about whether the search ads potentially confused consumers. So far, Google has successfully defended itself at trial in another lawsuit on that issue. In that case, brought by Geico, a U.S. district court judge found that the pay-per-click ads didn't cause confusion.