Three Federal Court judges unanimously overturned a lower court's ruling from September last year that Google was not responsible for advertisers' breaches of Australia's Trade Practices Act.
The appeal court ruled that Google had engaged in misleading or deceptive conduct with four ads that appeared on its Google Australia website. The advertisers used the names of competitors as keywords to trigger their own ads appearing.
The court ruled this was likely to mislead people searching for information about those competitors. Google's "AdWords" system posts small text-only advertisements next to search results based on search keywords selected by the advertisers.
The section of the law that Google breached does not impose a fine. But the court ordered Google to make changes to prevent future breaches and to pay court costs to the Australian Competition and Consumer Commission, which appealed the September ruling.
Google said it was disappointed by the decision and considering its options, which include a High Court appeal.
"Google AdWords is an ads hosting platform and we believe that advertisers should be responsible for the ads they create on the AdWords platform," Google said in a statement.
ACCC chairman Rod Sims said he had appealed the original ruling because it raised important issues about the role of search engine providers as publishers of paid content.
"This is an important outcome because it makes it clear that Google and other search engine providers which use similar technology to Google will be directly accountable for misleading or deceptive paid search results," Sims said in a statement.