In Support of Utah’s HB450

When a user searches for Hertz, may a search engine show ads for Avis instead?* A natural libertarian instinct might reply yes, sure, do whatever you want. I want to push back on that, offering reasons why such ads are improper.

Modern search engines are notable for their striking ability to give users exactly what they ask for. Search for Hertz, and most of the links will indeed take you to Hertz or bona fide Hertz-related sites (like booking agents or consumer reviews). In this context, what is a user to think when a search engine serves up an ad for something altogether different from a user’s request? Because search engines are generally so good at providing just what users requested, there’s likely user confusion any time a search engine instead replies with links to competitors. After all, if a user asked for Hertz, it’s perfectly reasonable for the user to expect that resulting links will be responsive to the user’s request.

Now, search engines often say their ad labels cure any possible use confusion. I disagree. For one, the labels are easily overlooked — all the way off to the side, all the way in the corner. Moreover, while the words “sponsored links” may be clear to an attorney or an advertising professional, I’ve found that the wording is deeply ambiguous to ordinary users. Sponsored by whom? The search engine? The company the user just asked for? A different label, like “advertisements” or “paid advertisements” would be more effective in curing confusion. But that’s not on the table.

Meanwhile, litigation does not lend itself to resolving these questions. Consider typical litigation about these ads: Blow up an exemplar onto a big posterboard, analyze it from every angle, and discuss it for days on end. The very process of litigating the case makes it amply clearly what’s going on. So it’s hard for a court to get into the mindset of an ordinary user who’s confused, who didn’t know what “sponsored links” meant, and who didn’t really see that label in any case. In this context, it comes as no great surprise that US courts reach mixed results on the question of whether a search engine may show ads for one company when a user requests a direct competitor. European courts, for whatever it’s worth, tend to say search engines must not do so.

Search engines also often claim users benefit from ads for competitors. I guess it’s possible that some users might search for Hertz, not knowing that Avis even exists. But how many users does this really describe? If a consumer actually wants offers from multiple providers, those are easy to get; just search for “car rental” or “rental car deals” to get plenty of choices. In contrast, as described above, when a user searches for a specific provider, competitors’ ads are more likely to be confusing, and less likely to be useful.

Despite lofty claims about consumer benefits, I’ve always thought search engines let advertisers bid on each others’ trademarks for one simple reason: Money. If the only advertiser allowed to bid on ads for “Hertz” is Hertz, a search engine won’t be able to sell many ads. (They’ll sell at most one, to Hertz. But even that one will garner a low price, reflecting that Hertz did not have to outbid anyone else. Furthermore, why should Hertz buy an ad for its own trademark, when it already gets top position through organic listings?) In contrast, if a search engine can get ten different car rental advertisers competing for slots, revenues will increase dramatically. (See my revenue analyses through simulations and counterfactuals.) Now, I don’t mean to say increasing revenue isn’t a laudable goal for search engines. But the financial implications frame my assessment of search engines’ arguments. They say “consumers” and “competition”; I hear “revenues” and “profits.”

The HB450 Approach

Against that backdrop, Utah offers HB450 which seeks to provide an alternative. In those narrow circumstances when Utah has proper cause to regulate — among the key conditions, an advertiser using a search service that knows users are in Utah — Utah would require that advertisers not trigger ads based on competitors’ trademarks. The results? Less confusion for consumers who just want to get what they asked for. Plus, companies can reap where they’ve sowed. If a company invests in offline advertising (like ads on TV or in newspapers) to get users to search for its brand, those searches will show the company’s ads, not offers from competitors. It’s a perfectly natural, sensible approach.

Indeed, HB450 is a narrow approach. HB450 imposes no possible liability on search engines, no matter what. Rather, HB450 applies only to advertisers. Furthermore, an advertiser’s duty under HB450 is only to take down the offending ads, and even that only after notice. In addition, HB450 grants a successful plaintiff no monetary damages; HB450 allows only an injunction requiring that a defendant take down the offending ads, and attorneys fees to cover the cost of the action, but no further payments. In short, HB450 uses a minimalist approach, grounded in private-sector self-regulation and companies notifying each other of ads they believe cross the line. Far from the intrusive morass Eric Goldman seems to envision, this is sensible and appropriate, protecting consumers from confusing or deceptive ads, and protecting advertisers from competitors trading on their good names.

Nor is HB450 any kind of comprehensive Internet regulation, as AT&T spokesman claimed in statements to ClickZ. Trademark law and consumer protection are both traditional subjects of state regulation, and there’s no reason why states’ advertising regulations shouldn’t apply online too — particularly as geolocation systems become increasingly widespread and as it therefore becomes feasible, indeed easy and the norm, to present ads differently in one state versus in others.

In due course, I’d like to see federal regulation expand HB450 to national scope. After all, HB450’s protections ought not be limited to consumers and advertisers in Utah, and it would be perfectly natural to offer HB450 nationwide. But it’s perfectly normal for new regulatory approaches to begin in individual states — letting experience in a few states guide the decision to expand more broadly. That’s an appropriate approach here, and my hope is that that’s what will happen.


* – My Hertz/Avis example is purely hypothetical. While many advertisers ads targeting competitors’ trademarks, I do not mean to suggest that Avis does so.