By Andrew Chung

WASHINGTON (Reuters) - Supreme Court justices walked a tightrope on Wednesday over government approval of offensive trademarks, expressing concern about endorsing racial slurs in brands and slogans while also worrying about protecting only positive words.

The eight justices heard arguments in a case involving a Portland, Oregon-based Asian-American dance-rock band called The Slants that was denied a trademark on their name because the government deemed it offensive to people of Asian descent. The band challenged the rejection as violating free speech rights.

The case, one of the most closely watched of the court's current term, could impact another high-profile dispute over the government's cancellation of the trademarks of the Washington Redskins of the National Football League for disparaging Native Americans.

The band's attorney, John Connell, told the justices the government cannot use trademark law to impose burdens on free speech to protect listeners from offense.

"There was no suggestion that this was a politeness statute," Connell told the justices.

The Obama administration appealed after a lower court agreed with the band that part of the 1946 law governing federal trademarks that barred those that may disparage certain people ran afoul of the U.S. Constitution's guarantee of free speech.

Justice Sonia Sotomayor said no one is stopping the band from calling and advertising themselves as The Slants.

"You are asking the government to endorse your name" in a way that the government chooses not to do, Sotomayor said.

The band's legal dispute began when the U.S. Patent and Trademark Office refused to grant trademark protection for The Slants' name in 2013. Some consider it a racial slur referring to Asian people's eyes.

The court's ruling could set parameters for trademark registration, which can help protect product and company names and commercial slogans in court and block the import and sale of counterfeit goods.

Justice Anthony Kennedy asked the band's attorney, John Connell, whether a group of non-Asians using the name The Slants to mock Asians could be denied a trademark. Connell said they could not.

Kennedy questioned whether the trademark system should be considered like a public park "where you can say anything you want."

The justices seemed to agree with the band that the government was favoring some trademarks while disapproving others, a kind of discrimination based on viewpoint traditionally forbidden by the First Amendment.

'CLASSIC CASE'

Justice Elena Kagan said that if the government granted trademarks only for positive messages like "all politicians are virtuous" and not negative ones like "all politicians are corrupt," that would be a "fairly classic case of viewpoint discrimination."

While rejecting The Slants for a trademark, the government has registered other potentially offensive trademarks such as "Baked By a Negro" baked goods, "Retardipedia" and "Boobs as Beer Holders" adult videos, according to court papers.

The justices appeared to struggle over whether banning offensive slurs is reasonable in the trademark system, which is used to promote commerce and identify where products come from.

The Slants' frontman Simon Tam appealed the government's trademark rejection, saying the name was chosen as a way to reclaim the term and wear it as a "badge of pride."

The U.S. Court of Appeals for the Federal Circuit in Washington ruled in 2015 that the disparagement provision of the 1946 Lanham Act was unconstitutional.

The government should not be required to approve trademarks "containing crude references to women based on parts of their anatomy; the most repellent racial slurs and white-supremacist slogans; and demeaning illustrations of the prophet Mohammed and other religious figures," the Obama administration said in a written brief to the Supreme Court.

Several justices wondered how to avoid problems of slander or libel if offensive trademarks can never be rejected. Referring to President-elect Donald Trump, Sotomayor offered the example of someone trademarking the words "Trump is a thief."

Even if a court considered that to be slander, the trademark could still be used because it would be protected by the First Amendment, she said. "That makes no sense," Sotomayor said.

Justice Stephen Breyer said the trademark law is not meant to provoke people into arguments, which officially registering insults and slurs would do.

A decision in is expected by the end of June.

In the separate Redskins' case, a trademark board in 2014 canceled the team's six trademarks at the request of Native American activists on grounds that the team name disparaged Native Americans. The team's appeal, also on free speech grounds, is on hold in the 4th Circuit Court of Appeals in Richmond, Virginia, pending the outcome of The Slants' case. 

The case is in the Supreme Court of the United States is Michelle K. Lee v. Simon Shiao Tam, No. 15-1293.

(Reporting by Andrew Chung; Editing by Will Dunham)