Could pricey handbags dent Google's money machine?

(Fortune) -- Tomorrow morning the European Court of Justice in Luxembourg is expected to decide whether Google, and, by inference, other search engines, can continue to auction off other companies' trademarks for use as search "keywords" in connection with their sponsored advertising programs.

An adverse ruling would force a permanent change to the engine that accounts for 97% of Google's revenues, which were more than $23 billion in 2009. And while this decision probably won't cut into that, the massive interest in this case shows just how central Google (GOOG, Fortune 500) has become to world economies: Although the European Court of Justice usually hears cases in five-judge panels, the entire 15-judge court has convened to decide this one because of its enormous significance. U.S. lawyers and judges, too, are watching closely to see if there are lessons to be mined here.

The fight revolves around Google's ad serving system. When a surfer looks something up in Google -- or Yahoo (YHOO, Fortune 500) or Microsoft's (MSFT, Fortune 500) Bing -- the company generates a list of "sponsored links," whose sequence is largely determined by how much the advertiser bid for the search term. The controversy comes, because advertisers are allowed to bid on competitors' tradenames for use as keywords without obtaining prior permission from the trademark owner.

While only a small percentage of keywords sold are trademarks, how the European court rules could carry big implications. The use of trademarked keywords is one of the simplest ways for a small competitor to promote an alternative to the brand-leader. In addition, numerous software-referencing programs besides search engines currently allow trademarks to be used as keywords and could also be impacted by the ruling.

The lead plaintiff challenging the practice is Paris-based luxury conglomerate LVMH's Louis Vuitton Malletier unit, which sued Google and its French subsidiary in Paris in 2004.

Similar cases were later filed in French courts by owners of trademarks in an online travel agency known as Bourse des Voyages, and an international matrimonial service called Eurochallenges.

The lower courts and the Court of Appeal of Paris ruled against Google in all cases, although Google's AdWords program has been approved by courts in other European Union countries, including Austria, Belgium, Germany, Italy, the Netherlands, and the United Kingdom. In 2008 the Court of Appeal referred key Europe-wide legal questions from the three cases to the European Court of Justice for final resolution. (Because of earlier adverse rulings in French courts, Google is currently blocking trademarks from being used as keywords in all EU countries except the United Kingdom and Ireland.)

The decision, though not binding on U.S. courts, could nevertheless color their approach to the question. A series of major test cases -- brought by Geico, American Blind and Wallpaper Factory, and American Airlines (AMR, Fortune 500) -- all ended in settlements before juries or appeals courts could rule on the key questions. And last April, a federal appeals court in New York reinstated a trademark suit against Google brought by computer repair and support company Rescuecom Corp., after a lower court had summarily dismissed it. Rescuecom withdrew the case without explanation earlier this month. (A spokesman for Google and a lawyer for Rescuecom did not return calls.)

Brand owners don't just have a problem with competitors or counterfeiters buying up their names. They're also furious at Google for helping the process along. Google's automated Keyword Suggestion Tool, which offers optimal search terms, will sometimes prompt advertisers to use trademarks, proposing, say, "LV inspired handbags," or "fake Louis Vuitton bags," or "imitation Louis Vuitton," to cite actual keyword recommendations generated in the Louis Vuitton case.

"If a consumer is searching for information about a particular car," Google says in a prepared statement, "he or she will want more than just that car's website. They might be looking for different dealers that sell the car, second-hand cars, reviews about the car, or ... information about other cars in the same category.... Our aim is to ensure that users are shown useful and relevant ads."

Brand owners, on the other hand, say that many consumers do not understand the difference between Google's natural listings and its sponsored advertisements, and that Google allows deceptive ads to be listed. If a consumer types in "Louis Vuitton," for instance, and sees an ad saying "get handbags here," he may assume he's being linked to a site that sells Louis Vuitton handbags, says David Bernstein, a trademark lawyer at New York's Debevoise & Plimpton. "It ends up being a bait and switch," he says. Bernstein has represented Louis Vuitton in the U.S., but is not involved in the European case.

The court asked the parties to address a series of questions, hinting at the judges' possible train of thought in analyzing the issue. The first is whether advertisers (as opposed to search engines) violate trademark rights when they bid on a trademark at an AdWords auction. The distinction is important: since search engines are merely selling advertising a strong argument can be made that they are not infringing in any traditional sense; advertisers who are buying another brand's name, however, might be out to confuse consumers. The second question is whether Google directly violates trademark rights when it auctions off others' trademarks as search keywords.

And the third question is a natural follow-up to the first two: Assuming for the sake of argument that the court were to rule that Google was not directly infringing the trademark owners' rights, but that Google's advertisers were violating those rights, can Google be held liable for what in the U.S. would be called "contributory" or "vicarious" infringement, for having enabled and benefited from the advertisers' infringements. A subsidiary question, wrapped into this one, is whether Google is acting as a passive "hosting" service. Such services, under European law, are exempt from liability for users' infringements, so long as they promptly take down users' offending posts once notified of them.

Last September, following standard ECJ procedures, the court's advocate general, Poiares Maduro, issued an interim, advisory opinion. Maduro recommended a ruling largely in Google's favor, finding that neither Google nor its advertisers were violating trademarks. Maduro's opinion, however, is nonbinding on the court.

Tomorrow's ECJ ruling will be final, as there is no higher EU court for such disputes.