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I find this odd, since it seems to absolutely violate the priciple of ads deceiving users. Including a recognizable brand name in a display URL (that's highlighted, no less) that leads a user astray seems to be considerably more deceitful that using the name in any of the preceding three lines of Ad Text.
Our individual situation didn't seem to raise eyebrows. Check your compeitor's ads - if you see it - complain. Loudly. Perhaps, if it received more attention, the policy might have a better chance of being reconsidered.
Using trademarks you don't own does not inherently deceive consumers. If you think you have a case where it is being used in a deceptive manner, it's not an issue you should take up with Google. It's an issue you should take up with the advertiser. I recommend a cease and disist lettter.
You cannot sue the advertiser for "unfair business practices". There's nothing unfair about citing a competitor's trademark. You can sue for trademark violation, but you'll need to prove that reasonable people would actually be decieved by what the advertiser was doing. Just because your trademark has been registred does not mean you will win. You'll have to prove that consumers were harmed.
It's just that Google has a policy of prohibiting it if the trademark holder complains about it.
And my trademark is filed with Google. An exemption request is required by Google for anyone who wishes to use my trademark - including me. Google oversees my trademark with such fervor that oftentimes my own exemptions are inappropriately denied (then, upon review - ultimately approved). And, Google always responds to reports of violations of my trademark's use in an expeditious manner.
Which leads me to my point: Why prohibit use in the Headline and Description lines to then allow it in the display URL - where it is moreso going to be associated with the site that the searcher expects to be directed to?
If they don't own it, they're breaking the rules (since they're using a false URL).
If they DO own it, it's your fault for not registering your brand name.