kidcobra - 10:51 am on Mar 28, 2011 (gmt 0)

The current state of the law, at least in the Ninth Circuit (Federal appeals court for places like California and Arizona), is as follows (non-lawyer, layman's summary): In this case on keyword advertising just decided: [docs.justia.com...]

The Ninth Circuit held that the pillar of trademark infringement is consumer confusion and that the relevant factors for deciding the confusion issues in a keyword ad case are: likelihood of consumer confusion, the strength of the trademark; any evidence of actual confusion; the types of goods and the
degree of care likely to be exercised by the purchaser (more expensive usually means greater care and less chance confusion); the labeling and appearance of the advertisements and the surrounding context on the results page (if an ad area clearly says ADVERTISEMENT, if the ads are away from the search results, and for example but not always needed depending on all the factors as a whole, the ad says that the advertiser is someone other than the trademark holder, these can be factors in favor of NO confusion, but if the ads are mixed in with search results and not clearly labeled, then it might be a factor toward more confusion).

If you read the decision in the case, which is Network Automation, Inc. v. Advanced Systems Concepts, Inc. No: 10-55840 (March 8, 2011), it gives a pretty plain english explanation of how it works.