The simple answer is: this is a new, evolving, and unsettled area of law. So, the activity does entail risk. But, recent court decisions are ruling that it may be lawful.
As background, it is helpful to understand trademark infringement at a basic level. Trademark infringement is one’s unlawful use of another’s mark that confuses consumers into looking at, or buying, one’s products. Such conduct is broadly prohibited by state and federal law. In order for infringement to occur, there must be a likelihood of consumer confusion. Likelihood of confusion, in turn, is determined by an analysis of eight or more other factors. You see that infringement can be a many-layered onion, and I won’t cause tears by going into the details.
But, in 2011, the Ninth Circuit Federal Court of Appeals opened the door on the AdWords issue by reversing a trial court’s entry of a preliminary injunction against Company A for trademark infringement. (Network Automation v. Advanced Systems Concepts). Company A was using the trademarks of Company B—an obvious competitor—in Company A’s AdWords. Although the ruling did not conclusively decide the issue—particularly because it was made in a preliminary injunction context—it did nod towards the practice. Companies A and B settled after the decision. I must assume that it was in a manner favorable to Company A.
Then, in late October 2012, a federal court in the Eastern District of Pennsylvania went further. (CollegeSource, Inc. v. AcademyOne, Inc.). It basically found that in an era of increasingly sophisticated Internet advertising, trademark infringement claims fail when they are based on assertions of consumer confusion from the use of another’s trademarks in AdWords. The court found that confusion is avoided when AdWords advertising doesn’t actually display the competitor’s mark in the result, and when it is set off from the organic search results in a separate, differently colored “sponsored” section.