A recent decision by the Second Circuit in an antitrust case involving advertising may have long-standing effects on how competitors use each other’s names and trademarks in advertising and on settlement agreements in the intellectual property space. The Second Circuit’s decision in 1-800 Contacts, Inc. v. FTC could allow competitors more freedom to agree on restraints on the use of their trademarks. While agreements between competitors should still be carefully considered from an antitrust perspective, this decision has signaled a deference to parties’ negotiated trademark settlements that could allow new and more robust approaches to trademark protection. This is especially true where, as here, competitors attempt to agree on limits to the use of their trademarks in search terms purchased for advertising purposes on search engines such as Google.
Background
In November of 2017, we discussed an Initial Decision by an FTC ALJ that 1-800 Contacts had violated Section 5 of the FTC Act by negotiating settlement agreements with its competitors that were anti-competitive in nature. Specifically, such agreements mutually limited each parties’ abilities to bid on search terms containing each other’s trademarks and URLs in auctions for placement in search results on websites such as Google. The ALJ found that 1-800 Contacts directly harmed competition and consumers in the online market for contact lenses and rejected 1-800 Contacts’ argument that such agreements were pro-competitive because, among other things, they efficiently protected trademark rights while avoiding expensive litigation.
Later, in November of 2018, we also covered the decision by the full Commission on 1-800 Contacts’ appeal, which affirmed the ALJ’s decision on alternate grounds. Additionally, the Commission found that the agreements also harmed competition in the market for search engine keywords by reducing the prices that search engines received for presenting ads in search results. This in turn harmed consumers by reducing the quality of the results they received.
Finally, on June 11, the Second Circuit published its decision in 1-800 Contacts’ appeal from the Commission’s decision. The Second Circuit vacated the Commission’s decision and remanded for dismissal of the administrative complaint, finding that the agreements were not anti-competitive and did not violate Section 5 of the FTC Act.
The Decision
As a threshold issue, the Court considered 1-800 Contacts’ argument, relying on the decision in FTC v. Actavis, 570 U.S. 136 (2013), that trademark settlement agreements generally have blanket immunity from antitrust review unless the settlement agreements fall into the narrow “unusual” category defined in Actavis. The Court rejected this argument, reasoning that while certain anti-competitive effects may necessarily fall into the scope of trademark protection, the Court must still evaluate whether such restraints are reasonable in light of the market and pro-competitive justifications.
The Second Circuit rejected the FTC’s effort to treat the settlement agreements as “inherently suspect” under the antitrust laws. Instead, the court found that a traditional rule of reason analysis was the proper framework. The Court found that the FTC erred in its finding that 1-800 Contacts’ use of the trademark settlement agreements was “inherently suspect” because: (1) such agreements can plausibly have a net pro-competitive effect; (2) courts lack sufficient experience with them to allow a limited “quick look” analysis; and (3) they have not been widely condemned as anti-competitive.
Here, the Court emphasized that trademark agreements are “common, and favored, under the law” and should be presumed to be pro-competitive. Since trademark agreements seek to reduce the likelihood of consumer confusion and avoid litigation, even aggressive trademark agreements should receive deference unless they are auxiliary to an underlying illegal agreement or involve “other exceptional circumstances.”
The Court held that the FTC’s suggestion of requiring disclosures in each search advertisement that identify the rival seller was inadequate. The Court reasoned that the FTC did not consider the practical effects or means of enforcing such a disclosure requirement. Indeed, the court gave great deference to the negotiating parties’ determinations on what was “reasonably necessary” to achieve each competitor’s goals. The court even went so far as to state that “absent something that would negate the typically pro-competitive nature of these agreements, the parties’ determination of the scope of needed trademark protections is entitled to substantial weight.”
Conclusion
Despite the Second Circuit’s decision, agreements between competitors should always be approached with the careful eye of counsel toward any unwanted anti-competitive effects. But the breadth of what may be possible as agreements between competitors has been significantly altered in this decision. Given the Second Circuit’s indication to be potentially deferential to the judgment of negotiating parties in settlement agreements, the parties themselves may be able to be more creative and aggressive in deciding what balance to strike when agreeing on protections against future infringement of their trademarks.