IP Law Daily FTC ordered to dismiss case against online contact lens distributor for anticompetitive trademark settlement agreements
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Monday, June 14, 2021

FTC ordered to dismiss case against online contact lens distributor for anticompetitive trademark settlement agreements

By Steven D. Cole, J.D.

Because the competitors’ trademark settlement agreements had the procompetitive goal of promoting trademark policy, the Commission wrongly employed the "inherently suspect" standard rather than the "rule of reason" standard to evaluate the alleged anticompetitive activity.

The trademark settlement agreements at issue did not have an obvious anticompetitive effect on the market, thus the "rule of reason" was the correct analytical standard, and under this approach, no violation of the Sherman Act or Federal Trade Commission Act was found to have occurred, held the U.S. Court of Appeals in New York City. 1-800 Contacts, Inc. ("1-800 Contacts") entered into agreements with several competitors whereby all parties agreed not to advertise their products on certain search engines by restricting their bidding on keywords at search engine auctions. The court found that the procompetitive justification for this conduct—protecting trademarks—outweighed any anticompetitive effect these agreements might have in the contact lens market (1-800 Contacts, Inc. v. FTCJune 11, 2021, per curiam).

Online search engines determine which advertisements to display on their search results pages based in part on the of the consumer’s search of certain keywords. Advertisers bid on these keywords during auctions hosted by the search engines. Competitors often bid on each other’s brand names so that their advertisements will run when a consumer searches for a competitor’s product. Between 2004 and 2013, online retailer 1-800 Contacts resolved disputes with competitors in the contact lens market by entering into 13 settlement agreements, each of which precluded the parties from bidding on each other’s trademarks. The agreements also required the parties to employ negative keywords so that a search including one party’s trademarks would not trigger a display of the other party’s advertisements.

The FTC issued an administrative complaint against 1-800 Contacts in 2016, alleging that the settlement agreements unreasonably restrained price competition in the search advertising auctions, as well as reducing the availability of information for contact lens consumers, thereby making it more difficult and costlier for them to compare prices. In 2017, an administrative law judge found in favor of the government, and in 2018, a Commission majority affirmed.

Agreements not immune from scrutiny. As an initial matter, the Second Circuit clarified that trademark litigation settlement agreements are not automatically immune from antitrust scrutiny. 1-800 Contacts argued that the Supreme Court’s decision in FTC v. Actavis, Inc., 570 U.S. 136 (2013), confined the courts’ antitrust scrutiny to the "unusual" intellectual property settlements at issue in that case and did not intend to implicate "commonplace" settlements. The court was not persuaded, stating, "the mere fact that an agreement implicates intellectual property rights does not immunize an agreement from antitrust attack."

Using the correct analytical framework. The appeals court then held that the "rule of reason" burden-shifting framework was the correct interpretive approach here. The Commission assumed that the agreements at issue were "inherently suspect"—that is, their anticompetitive nature was patently obvious. Thus, it conducted an abbreviated analysis whereby it immediately shifted the burden to 1-800 Contacts to show any procompetitive justifications to overcome the restraints imposed by the agreements. The Commission erred in doing so, said the court. Agreements to protect trademarks are not immediately assumed to be anticompetitive. In fact, under Second Circuit precedent, such agreements could plausibly be procompetitive since they implicate important trademark policy, and as such, should be analyzed under the "rule of reason" standard.

Applying the "rule of reason." Under this standard, the government must first demonstrate the anticompetitive effects of the challenged conduct. Here, the Commission erroneously found direct evidence in the form of higher contact lens prices. But since the government offered no empirical evidence to back its theoretical and anecdotal claims of increased prices, such evidence was not "direct," and the alleged anticompetitive effects of the settlement agreements were not supported by substantial evidence. On the other hand, 1-800 Contacts’ procompetitive justifications of protecting its trademark rights and reducing litigation costs were both valid and strong. Citing Clorox, the court emphasized that "[t]rademarks are by their nature non-exclusionary, and agreements to protect trademark interests are ‘common, and favored, under the law.’ . . . This is true even though trademark agreements inherently prevent competitors ‘from competing as effectively as [they] otherwise might.’" Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50, 59 (2d Cir. 1997). In sum, there was a lack of evidence that the challenged agreements were "the product of anything other than hard-nosed trademark negotiations."

The government had offered a less restrictive alternative to what the parties had agreed upon, proposing that they could have agreed to require clear disclosure in each search advertisement of the identity of the rival seller rather than prohibit all advertising on trademarked terms. The Commission had a favorable impression of this idea, but failed to consider how the parties might enforce such a requirement or how onerous such enforcement efforts would be. Instead, the court thought it best to grant the parties deference to determine what was "reasonably necessary" to achieve their objectives.

Finding that the government failed to show that 1-800 Contacts’ trademark settlement agreements violated of the Sherman Act or the FTC Act, the court vacated the Commission’s order and remanded the case with instructions to dismiss the administrative complaint.

The case is No. 18-3848.

Attorneys: Stephen Fishbein (Shearman & Sterling LLP) for 1-800 Contacts, Inc. Imad Abyad for the FTC.

Companies: 1-800 Contacts, Inc.

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