It looks like we’ll have to wait a little longer before we find out if using a trademark in a subdomain is legal or not. The lawsuit that would have helped define the situation has been settled out of court, according to ClickZ.
According to attorney and Santa Clara University law professor Eric Goldman, the case could have set some precedent about third-level subdomains (like the “blog” part of http://blog.clickz.com). While trademark law has been shown to apply to a regular domain name, it has not yet been applied to third-level ones, and it’s not clear that it would apply, he said. It would also help define Google’s responsibility in what subdomains it allows to be registered.
It will be a brave judge that rules that subdomains can violate a trademark. There’s very little distinction between a subdomain and a subdirectory (e.g. mydomain.com/google/).