Yet Another NY Court Says Keyword Ads & Metatags Aren’t TM Use in Commerce–S&L Vitamins v. Australian Gold

By Eric Goldman

S & L Vitamins, Inc. v. Australian Gold, Inc., 2:05-cv-1217 (E.D.N.Y. Sept. 30, 2007)

If it wasn’t so painful for all involved, I would enjoy watching the legal contortions of companies whose outdated business models are being destroyed by the Internet. Typically, these companies go into a litigation frenzy to suppress Internet-mediated activity that is good for consumers and bad for profit-maximization. Most of these lawsuits can’t and don’t fix the architectural problems of the business model, so at best they are a futile last stand.

I don’t know much about the products of Australian Gold (I now live in the land of perpetual sun anyway), but the Internet appears to be ripping apart their business model. Australian Gold distributes its various tanning products exclusively through tanning salons, and they try to keep these products from leaking out of that channel so that they can support very high salon prices (according to the S&L case, Internet prices are 50% of salon prices). But with ridiculous overpricing like this, it’s inevitable that products will leak out of the chain and consumers will get the exact same products for less dough. But this is bad for profits, which has led to the courthouse. Australian Gold now has been involved in at least 2 enforcement actions against Internet resellers, including this ruling and last year’s big but analytically deficient win against one of the resellers. See Australian Gold v. Hatfield.

Keyword Ads, Metatags and Trademarks

In this case, S&L initiated a declaratory judgment against Australian Gold. By bringing a DJ, S&L kept the case in a Second Circuit jurisdiction–where courts recently have regularly rejected trademark lawsuits over keyword advertising and metatag inclusion. S&L’s move paid off when the court says that buying keyword advertising and using metatags, without more, doesn’t constitute a trademark use in commerce. This is now the fifth consecutive opinion in a NY federal court saying that advertisers don’t make a trademark use in commerce when buying keywords, joining the Merck, Hamzik, Site Pro-1 and FrangranceNet courts (a sixth NY federal court opinion, the Rescuecom case, reached the same conclusion with respect to keyword sales).

Other Issues

The remainder of the opinion includes lots of other interesting discussion, including:

* S&L took its own product shots of Australian Gold’s products. The court rejects Australian Gold’s claim that S&L declaring “All Rights Reserved” with respect to those product shots constituted false advertising.

* The “Australian Gold” trademark lacked sufficient fame to support a dilution claim.

* Australian Gold claimed that S&L violated its copyrights in its labels by taking the product shots. This is an obviously spurious claim because after-market product shots are exactly what 17 USC 113(c) was designed to permit–and Australian Gold’s effort to invoke copyright to restrict product shots shows its desperation to restrict legitimate after-market activities (as the court says, “AG is attempting to force a claim with facts that do not really fit”). Unfortunately, the court sidesteps 113(c). Fortunately, the court nevertheless finds that S&L’s product shots were fair use of the labels’ copyrights.

Conclusion

It’s not hard to see why Australian Gold is trying to control its channel–if it can get its retailers (tanning salons) to sell its products at 2X the price that would be charged in an open market, Australian Gold is minting some big profits for its retailers, which seems like it would motivate salon salespeople to push those products hard. Enjoy the ride while it lasts, guys, because the Internet will destroy this model, despite any regressive attempts to use IP rights to put the genie back in the bottle. If nothing else, the Internet has demonstrated how Australian Gold products are overpriced when sold through salons, and loyal buyers are probably going to be pretty mad when they realize just how much they’ve overpaid.

UPDATE: Matthew Sag also questions the 113(c) reading and discusses the fair use aspects in more detail.

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