Banner Ads on the Web Spark a Trademark Battle

Though few Internet users know it, the simple act of typing a keyword into a search engine typically produces not only a list of Web sites, but also a carefully targeted banner advertisement.

How search engines sell those ads, and to whom, is at the heart of an emerging legal battle that could jeopardize one of the most lucrative advertising practices online.

Two of the leading portal sites on the Internet, Excite Inc. and Netscape Communications Corp., are the targets of recent suits filed by companies who say their trademarks and reputations have been damaged by this sales tactic.

Legal sources say similar suits are in the works, and that they could have a devastating effect on portal sites that depend on keyword-based ads for up to 25% of the hundreds of millions of dollars in advertising revenue they collect each year.

At issue is the marketing of so-called keywords, terms users type into search engines to find information on the Net. Excite and others have long sold these words to advertisers, who want their banner ads to pop up whenever certain keywords are entered.

But Estee Lauder Inc. and Playboy Enterprises Inc., plaintiffs in separate federal suits, argue that portal sites should be restricted in their ability to sell keywords--”Estee Lauder” and “Playboy,” for instance--that are trademarked.

Portals have become gateways for millions of Internet users by bundling search capabilities, e-mail, shopping and other popular services.

“If Excite is held liable, this sets a dangerous precedent for all of the portals,” said Drew Ianni, an online advertising analyst for Jupiter Communications in New York. “Banner ads and keyword searches have always been the meat and potatoes of their business.”

The issue is increasingly significant as companies direct more and more of their marketing dollars to cyberspace. Ad spending online reached $2 billion last year, and is expected to double again this year, according to the Internet Advertising Bureau.

Many companies pay hundreds of thousands of dollars to lock up keywords. General Motors, for example, has paid for the right to have its vehicles featured when users type “Chevrolet” on Excite.

That is not what happens when users type “Estee Lauder” on Excite. Instead, an ad appears for a company called Fragrance Counter, a New York firm that sells Estee Lauder products but also sells cosmetics from many other manufacturers.

Estee Lauder’s suit accuses Excite and Fragrance Counter of trademark infringement, false representation, unfair competition and false advertising. The suit seeks to compel Excite to stop selling the trademarked words and to pay unspecified damages.

The Playboy suit goes even further, alleging that Excite not only infringed the magazine’s trademark, but also sullied the company’s name, because many of the ads that pop up in response to “Playboy” or “Playmate” are for raunchy, X-rated sites.

“Excite has hijacked and usurped Playboy Enterprises’ good will and reputation,” the suit alleges. “In most cases, the advertisements [produced by typing in ‘Playboy’] are for hard-core pornography.”

Attorneys for Estee Lauder, Playboy and Excite declined to comment.

The lawsuits are the latest in a series of conflicts over how much protection trademarks should be given in cyberspace.

Courts have generally held that companies have the exclusive right to domain names, or Internet addresses, based on their trademarks. Firms also have been prevented from littering their Web sites with hidden text that uses a rival’s trademark to catch the attention of search engines trolling the Net.

These latest suits mark the first time that courts will be asked to decide whether search engines can sell trademarked keywords without restriction.

Jonathan Rosenoer, a San Francisco attorney and cyber law expert, said courts are likely to rule against search engines. “A holder of a trademark has a legal monopoly to protect its trademark and its product. It’s highly unlikely that courts will hold against a company seeking to prevent competitors from trading off its own name,” he said.

Other legal scholars aren’t so sure. Elliot Brown, an intellectual property lawyer at Irell & Manella in Los Angeles, said courts will have to determine whether the search engines’ practices mislead the public or are unfair to the trademark owners.

“In Internet cases, courts have been sensitive to the fact that this is a developing medium,” Brown said. “They are likely to consider how their decision will affect the public’s interest, not just the rights of the trademark owner.”

For most Internet users, the practice at the heart of the lawsuits is as obscure as the technology and financial mechanisms behind the search engines themselves.

Portals such as Yahoo, Netscape, Excite and Lycos have become huge online hits largely because of the help they offer users in navigating the Internet. Most use powerful software to comb the Internet, compiling enormous lists of sites that users can search by scanning for keywords embedded in their text.

But the portals’ financial success hinges on advertising revenue, and keyword ad sales enable them to offer advertisers access to users according to their interests. Prices vary according to the popularity of the keyword, but generally sell at a premium over more arbitrary banner placements.

The average price for a keyword deal is about $40 for every thousand times the ad is displayed, analysts said, while non-targeted banner advertising runs about $25 per thousand impressions.

Some portal sites offer companies the first opportunity to buy their trademarks as keywords, and Yahoo, the most popular portal, said it does not sell a company’s keyword to rival advertisers.

“We wouldn’t sell Nike’s name to Reebok,” said Diane Hunt, a spokeswoman for Santa Clara, Calif.-based Yahoo. “We just thought it would be bad for business.”

The suits do not threaten portal sites’ ability to sell generic keywords such as “car” or “book” or “compact disc.” But the portal sites could lose significant revenue if they are prohibited from selling a trademarked keyword to anyone but the mark’s holder.

“It would change the economics of the big sites and how the portals are run,” said Mark Stephens, a marketing executive at Lot21 Interactive Advertising in San Francisco.