We're not referring to just any keyword ad. But 1-800-Contacts is suing Lensworld for buying search link advertising using the keyword: 1-800-Contacts. The downstream effect of a win for 1-800-Contacts would essentially make buying keyword ads that feature things like your competitor's name or trademarks illegal. Google, call your lawyers.
In one of best-publicized cases dealing with trademarks in online ads, Google prevailed over insurance giant Geico after trial in 2004. A federal district court judge in that case ruled that Geico hadn't proven that consumers were confused when they were shown links to Geico rivals after typing "Geico" into the query box.
Google in 2006 also won a major case brought by computer repair company Rescuecom. A federal district court dismissed that case before trial, ruling that rival companies' use of Rescuecom to trigger keyword ads doesn't violate trademark law. An appeal in that case is still pending.
But in another closely watched case, a judge in Texas in October ruled that an American Airlines trademark infringement lawsuit against Google could proceed to trial.
Internet advertising is fundamentally different than print advertising because you can ask for one thing, but be shown another thing automatically. It's a little like mugging your competitor's customers when they reach for the door of their store, and dragging them off to your own. Some states are already passing laws against using other people's trademarked terms to trigger such ads.