Can Use of Another’s Trademark in an AdWord Constitute Infringement?

You have just negotiated a settlement between your client and a trademark infringer. The bad guy has admitted infringement, and you are drafting a settlement agreement when a dispute arises. The bad guy refuses to agree not to purchase AdWords containing your client’s trademark to advertise his products through various search engines, arguing that the purchase of AdWords containing your client’s trademark does not constitute infringement. You are skeptical, believing that the infringer is attempting to engage in further nefarious behavior. Your client wants to know: can a trademark owner prevent others from purchasing AdWords or “Sponsored links” containing his trademark?

To find your answer, it is important to first understand a few principles of U.S. trademark law. The legislative intent of the Lanham Act, 15 USC §1051 et seq, is to give trademark owners broad latitude to protect their trademarks from would-be infringers. A fundamental objective guiding this intent is to protect American consumers from fraud. Consumers readily identify particular brands with quality, based on a reputation built through a history of consistency, integrity and honesty. Consumers place their trust, and thus, their purchasing power, in certain brands. Simply put: the more famous the brand, the more likely it is that consumers will buy it. Consumers rely on the advertising and marketing of each brand to identify authentic goods from counterfeits. Accordingly, the touchstone of whether infringement has occurred is the determination of whether a consumer is “likely to be confused” between the trademarked product or service and the alleged infringing product or service, based on the infringer’s illicit use of a trademark or service mark, or of a confusingly similar mark, in commerce.1 Federal courts nationwide employ a multi-factor test to determine whether a likelihood of confusion exists, which generally include some iteration of the following: (1) the strength of the trademark; (2) the proximity of the trademarked products and the infringing products in the marketplace; (3) the similarity of the infringing mark to the registered trademark; (4) evidence of actual consumer confusion; (5) the marketing channels used; (6) the type of goods and the degree of care likely to be exercised by consumers when purchasing the goods; (7) the alleged infringer’s intent in selecting the mark; and (8) the likelihood of expansion of either the trademark owner’s product line or the alleged infringer’s product line.2

Internet Advertising With AdWords

With the advent of the internet age, brand owners increasingly employ digital means to advertise and market their products and services. Internet search engines have developed a method of digital advertising by permitting the purchase of AdWords. An AdWord is a keyword contained within a “Sponsored link,” a website link to a business owner’s website, offered for purchase. When purchasing an AdWord, an advertiser may specify the application of the keyword as a “broad match” (the advertiser’s Sponsored link will result anytime a consumer searches for “the keyword, its plural forms, its synonyms, or phrases similar to the word.”3); as a “phrase match”(the advertiser’s Sponsored link “will appear when a user searches for a particular phrase”4); as an “exact match” (the advertiser’s Sponsored link will appear “only when the exact phrase bid on is searched on [a search engine]”5 ); or as a “negative match” (the advertiser’s Sponsored link will “not appear when certain terms are searched”6 ). The same AdWord may be purchased by multiple buyers with no affiliation to each other. The prominence of an AdWord, i.e. its ranking in a results list, will be determined by the price a buyer is willing to pay.

Currently, no state or federal regulation defines the boundaries of the scope and substance of AdWords. Accordingly, over the last five years, a proliferation of litigation has resulted, driven by the commercial interests of trademark owners who fear the dilution and diminishment of their brands and an increase in consumer confusion between authentic and counterfeit goods, and the commercial interests of digital ad buyers seeking to capitalize on a highly lucrative revenue stream.

A tension between the First Amendment right to free speech and the right of Congress to protect trademarks as an element of interstate commerce lies at the heart of the debate as to whether the purchase and commercial use of a trademark as an AdWord by a buyer who is not the mark owner is licit. A few notable cases contributing to the outcome of this debate are described below.

Instructive Recent Cases

With its decision in Mary Kay, Inc. v. Weber, et al., the Northern District of Texas was one of the first courts to articulate the principle that it is not a foregone conclusion that the purchase of an AdWord by an entity other than the trademark holder for the online sale of goods is automatically an infringing use, but that it may rather be a nominative, non-infringing use.7 To qualify as a fair use, the mark must be used in a manner that does not “create a likelihood of confusion as to source, sponsorship, affiliation, or approval.”8 The relationship between search terms and Sponsored links in and of itself is not strong enough to create an impression of affiliation in a consumer’s mind.9

In Network Automation, Inc. v. Advanced Systems Concepts, Inc., the Ninth Circuit considered whether the use of another’s trademark as an AdWord linking a consumer to one’s own sponsored website or advertisement violates the Lanham Act.10 Importantly, the Network court recognized that a previous test to determine the likelihood of consumer confusion on the Internet, known as the “Internet troika,” is “appropriate for domain name disputes” but is not applicable to all Internet infringement disputes.11 In fact, the court concluded that the “Internet troika” test is inadequate for analyzing trademark infringement claims based on search engine keyword advertising.12 The Network court carved out an analysis using the Sleekcraft factors, enabling it to examine the sine qua non of trademark infringement, namely, whether a consumer would be confused, not merely diverted, by the use of the marks at issue. The Network court identified the following Sleekcraft as those worthy of the most consideration in the context of determining a likelihood of confusion in a keyword/Ad Word case: (1) the strength of the mark; (2) the evidence of actual confusion; (3) the type of goods and degree of care to be exercised by the purchaser; and (4) the labeling and appearance of the advertisements and the surrounding context on the screen displaying the results page.13 Placing heavy emphasis on the last of these four factors, the appearance of the advertisements and the context on the screen displaying the results of the keyword search, the Ninth Circuit overturned the district court’s finding of infringement and remanded the case. This Ninth Circuit decision places evaluation of the visual appearance of an AdWord or Sponsored link at the center of the determination whether a consumer will be confused, and ultimately, whether infringement has occurred.

The Tenth Circuit has arrived at a similar conclusion as the Ninth Circuit in Network, with adopted a different approach. In a recent case, 1-800 Contacts, Inc. v. Lens.com, Inc., the Tenth Circuit affirmed the District Court of Utah’s decision that the Defendant’s purchase of AdWords containing confusingly similar marks to Plaintiff’s “1800Contacts” mark did not constitute trademark infringement. The District Court held that “as a matter of law, a defendant’s purchase of a search-engine keyword cannot, by itself, create the likelihood of confusion that is necessary for infringement liability…keyword use can generate a likelihood of confusion only in combination with the specific language of the resulting impressions.” 1-800 Contacts, Inc. v. Lens.com, Inc., 722 F.3d 1229, 1241 (2013). The Court carefully articulated its reasoning for this determination, stating that consumers only view the results of their searches, having no idea which keywords a particular advertiser has purchased. Thus, a consumer might obtain the same list of advertisements by typing in a keyword containing a trademark, in this case, “1 800 contacts”, or by simply typing in a generic keyword, i.e. “contacts,” and among the list of advertisements, might be the Lens.com advertisement containing no reference to “1-800 Contacts.” The Court concluded that such a consumer is not likely to be confused into thinking that Lens.com has a business association with 1-800 Contacts merely because an ad for Lens.com appears in a results list for a search on the keyword “1-800 Contacts.”

Summary

In the context of these recent AdWord cases, it is clear that courts will carefully weigh an advertiser’s First Amendment right to free speech against a trademark owner’s right of ownership in a mark. The mere purchase of a trademark by a non-owner advertiser does not equate to an automatic finding of infringement. Trademark owners may still be successful in pursuing advertisers not sanctioned to use a given mark, but only after clearly demonstrating a likelihood of consumer confusion by meeting the burden of providing evidence to satisfy each factor in the multi-factor test adopted by whichever circuit the trademark owner brings suit.

In conclusion, trademark owners like your client should remain vigilant in efforts to monitor the use of their marks by third party advertisers. If any misuse or infringement is suspected, your client should conduct further investigation and pursue advertisers until resolution is reached — doing nothing will ensure the erosion of your client’s ability to mitigate the consequences of illicit activities by third party infringers, and will likely result in dilution of your client’s mark.

Preparing For an Exit – What to Consider When Selling Your Business

For the owners of most private companies, selling is a new and daunting process. Capitalizing on the value of the business in such a situation can be difficult for the unprepared. If you are considering selling your business, careful planning early in the process can help you ensure the process runs smoothly and ends with the best results.

1. Know Your Goals.

Before taking any steps, you should first have a clear understanding of why you are selling. A sophisticated buyer will question why they should buy your business if you no longer want to own it. It is important to be prepared to answer this question both for the buyer and for yourself. If your goal is to retire, you should have a firm understanding of how much money you will need to receive for your business to maintain the lifestyle you want during retirement. A qualified financial planner can assist you in making that determination. If your goal is not to retire, you should carefully consider how selling the business will affect you. Most buyers will require you to sign a non-competition agreement, prohibiting you from competing with the business for several years after the sale. If you cannot retire on the sale proceeds, can you afford to be out of work in the industry for several years? If not, you may need to negotiate an exit that provides for your continued involvement in the business after the sale or reconsider whether a sale to a third party is the proper exit for you. Other options include an installment sale to a key employee or succession planning to a family member.

2. Understand your company’s value.

A realistic expectation of your company’s value is needed to make these tough decisions. While business owners typically have a general idea of their company’s worth, they may not have a firm grasp of its actual current market value. Obtaining a valuation from a professional source can provide you with a realistic expectation for your exit and help you negotiate proper value for your business based upon defensible information.

3. Put your house in order.

Before proceeding to market, make sure your business is ready to go under a microscope. Potential buyers will typically conduct in-depth due diligence on your business before acquiring it. If their review uncovers any potential risks, they could be scared off or reduce the purchase price. By carefully reviewing your business in advance, you can identify potential weaknesses, eliminate red flags, alleviate a buyer’s potential concerns and maintain your bargaining position. Make sure your corporate records and financial statements are accurate and up-to-date, important arrangements are properly documented, your key employees are retained, lawsuits have been settled and there are no skeletons likely to pop out of your company’s closet.

4. Keep it quiet

News of a potential sale may cause suppliers, customers or employees to look for opportunities elsewhere due to the company’s uncertain future, which can decrease the company’s value. It is important to maintain confidentiality by restricting disclosure of the proposed sale to those individuals needed for the sales process and requiring nondisclosure agreements when prudent.

5. Stay focused on your business.

Selling your business can be a full-time job. Don’t forget that potential buyers will be scrutinizing the profitability of your business. If revenues falter or other concerns arise because you have not concentrated sufficiently on your business, buyers may seek to reduce your purchase price or back out of the deal entirely.

6. Learn and manage the process.

Commencing the sales process, identifying the right buyer, negotiating the terms of the sale and closing the transaction can take longer than expected. Depending on the risk adversity of the buyer, due diligence alone may take 30 to 60 days, or in some cases longer. Understanding the sales process will allow you to be prepared, plan accordingly and start the process at the right time to maximize the marketability of your business. You should also identify upcoming issues, such the expiration of critical licenses, leases or other agreements, and be ready to deal with them. Don’t let surprises derail your transaction.

7. Get the right help.

Most business owners have little, if any, experience selling a business and find themselves negotiating with experienced buyers. Engaging professional advisors that are experienced in mergers and acquisitions early in this process will level the playing field, help maximize the value you receive for your business and ensure you are protected in the process. The sale of your business is not the time to hire a family friend or relative that is not an experienced mergers and acquisitions professional. The right professionals will guide you through the entire sales process and help you avoid common mistakes and pitfalls that can be difficult and expensive to fix in order to get your deal back on track.

It is never too early to begin this process. By taking the steps to evaluate your options, understand your company’s value, put your business in order and obtain professional assistance, you are strategically planning for the successful exit you want.

 

WHAT TO INCLUDE IN AN EXECUTIVE SUMMARY FOR INVESTORS?

In the last couple of days, I have had three first time CEO entrepreneurs present me with their initial draft of an executive summary that they planned to give to potential investors. I know the companies, and that they have compelling value propositions, but in each case they failed to address some of the critical elements that one would expect to see covered. And in each case, those missing elements may have been sufficient to make an investor pass on taking it any further or inviting the entrepreneurs for a meeting.

Although this posting might appear sublime to the seasoned entrepreneur, I believe it to be sufficiently important to address, since the life blood of a startup is the infusion of capital, and obtaining capital begins with presenting a potential investor  something that will hopefully make them “want a piece of what the entrepreneur is offering.”

Remember that an executive summary is usually just a two page document, designed to whet the appetite, so that the potential investor wants to hear and learn more. A summary is, by definition, incomplete, and can’t cover everything, and although there are no hard and fast rules as to its structure, there are certain topics that virtually every investor expects to see covered. Remember that you often only have one opportunity to make an indelible impression, and the following are the key elements that should be clearly and concisely addressed in the executive summary:

Introduction:  Include one or two sentences that communicate your compelling, unique value proposition to a really big problem. If you lose the potential investor here, they probably won’t make it any further into the summary. Think of your elevator pitch, and distil it into a sentence or two that makes the reader want to read more.

What is the pain in the market that you are addressing and why will customers pay for your solution?  Generally, little pains don’t result in large companies, and investors generally don’t want to invest in companies that don’t have significant upside potential. So, you have to clearly articulate the current or currently emerging problem or need that your product is going to address, and ultimately solve. By addressing your solution, which will solve the significant problem or pain to come, by making things quicker, faster, cheaper, more efficient, etc., you are building the case for a compelling value proposition.

What is your solution to the pain?  What is your product that you are developing to address the pain, and how will it in fact solve the problem that you have identified? Is the product disruptive and unique? If it doesn’t require significant behavioral change on the part of the target customer, be sure to convey this, as this will underscore that there may be early and widespread adoption of your product or service. Where are you in the life cycle of development? If you are post prototype and ready for commercial launch, let the investor know, because the risk profile of the investment may be significantly diminished and make yours a more attractive investment.

How does/will your company make money?   If you have customers, and are generating revenue–tell the investor. The investment proposition is different if you have started to gain some traction in the market, and are just looking for scale money, as opposed to the alternative. The risk profile is obviously diminished if the dogs have already shown that they will eat the dog food! If you are pre-revenue, you have to clearly articulate the way in which you are going to generate revenue from your product, and in so doing, articulate that yours is or will become, a scalable, predictable business model.

Addressable Market.   If the market you are going after is small, you will probably not generate any interest from investors. Even if you can demonstrate that you can capture 50% of a really small market, the upside potential for investors will make this an unattractive investment opportunity. Demonstrate a deep understanding of the size and growth of the overall market, and articulate the size of the market segment or vertical (the low hanging fruit) that you initially intend to address.

What is your unfair advantage?   In other words, what is your competitive advantage, and is it a sustainable competitive advantage. Is your competitive advantage based solely on the fact that you have the first mover advantage? Or do you have an IP portfolio/patent strategy that has or has the potential to result in an impregnable wall around your solution? If you are playing in a space, where it is simply a case of first to market wins, your targeted investors will be different to those where you have a sustainable competitive advantage. There are many investors that won’t invest in that race, or a race to get eyeballs, notwithstanding the recent frothiness of the market in the Valley.

What is the competitive landscape?  It is imperative that you should have a deep understanding of the competitive landscape, as this really goes to the heart of your ability to achieve success. Avoiding current or potential competitors, or demonstrating a fundamental lack of awareness of your actual or potential competition will, in all probability lead to an instant loss of your credibility. If there are actual or potential competitors, clearly convey why yours is or is going to be the alternative of choice. Even if there are no competitors, and you are creating a paradigm shift, the competition is the status quo, and how and why will you overcome it?

Who makes up the team?   In virtually every communication to investors that I reach out to on behalf of clients, I lead off by opening with the stellar team that has been assembled by the founder? Why?  Because every investor tells the same story–they back the jockey and not the horse. A weak to mediocre team with a stellar product may get funded, but I have seen, many times, serial entrepreneurs with half baked plans get funded almost immediately after an exit and the startup of a new venture. To that end, provide a brief synopsis of the team (or virtual team that will become the real team upon funding), to clearly articulate and demonstrate deep industry expertise, core competencies, and past experiences that are relevant. An investor should feel that your team has the depth and breadth of knowledge in the space you are in, and feel that, given the past experiences of the team, it is surely one that can execute to plan.

Funding to date and the amount you are currently seeking.  Describe how much money you have raised to date. This can, indirectly, be a great indication as to your innate abilities and ability to execute on future plans. If you have bootstrapped or achieved significant milestones on a meager or reasonable amount, this should provide an investor confidence in your ability to stretch the dollar and therefore maximize his or her return on the currently contemplated investment. How much are you looking for, and where will the company be once you have burned through the investor’s investment? Will it take you to product launch, or will it take you to break even? If projected to take you to break even, be sure to include this. Again, anything that you can describe that has the effect of diminishing the risk profile may make yours a more attractive investment. No investor is looking to help you build a bridge to nowhere, so be sure that the amount of funding that you are looking to raise will take you to some endpoint, whether its customers, break even or some meaningful value inflection point where you will do a follow on.

Exit Strategy. You may or may not want to include an exit strategy. For the most part–its always the same. M&A or IPO, and investors know the drill. However, if you have identified potential acquirors, where your solution might be a natural/accretive event, then I would advise that you include it. Also, if you have clearly identified companies in a particular industry/vertical that would benefit immensely from an acquisition of your technology, definitely include it. You should not convey a desire to build and flip, but demonstrate a thoughtfulness as to who the acquirors might be and why. If any competitors of these acquirors have made acquisitions of your competitors with an inferior solution for hundreds of millions of dollars, this too is sure to whet the appetite of any investor.