A recent Second Circuit ruling in an antitrust case involving advertising may have long-standing effects on how competitors use their names and trademarks in advertising and on intellectual property settlement agreements . The decision of the Second Circuit in 1-800 Contacts, Inc. vs. FTC could give competitors more freedom to agree on restrictions on the use of their marks. While agreements between competitors must always be carefully scrutinized from an antitrust perspective, this ruling signaled deference to trademark agreements negotiated by parties that could allow new, more robust approaches to trademark protection. This is especially true when, as here, competitors are trying to agree on limits on the use of their brands in search terms purchased for advertising purposes on search engines such as Google.
In November 2017, We talked an initial ruling by an FTC ALJ that 1-800 Contacts violated Section 5 of the FTC Act by negotiating settlement agreements with its competitors that were anti-competitive in nature. Specifically, these agreements mutually limited each party’s ability to bid on search terms containing the other’s brands and URLs in auctions for placement in search results on websites such as Google. The ALJ found that 1-800 Contacts directly harms competition and consumers in the online contact lens market and rejected 1-800 Contacts’ argument that such agreements were pro-competitive because, among other things, they effectively protected trademark rights while avoiding costly litigation. .
Later, in November 2018, we also covered the Commission of the Whole decision on the 1-800 Contacts appeal, which upheld the ALJ’s decision on other grounds. In addition, the Commission found that the agreements also undermined competition in the search engine keyword market by reducing the prices search engines charge for showing 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 against the Commission’s decision. The Second Circuit overturned 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.
As a preliminary issue, the Court considered the argument of 1-800 Contacts, relying on the decision of the FTC c. Actavis, 570 US 136 (2013), that trademark settlement agreements generally enjoy general immunity from antitrust reviews, unless settlement agreements fall into the narrow âunusualâ category defined in Actavis. The Court rejected this argument, finding that even though certain anti-competitive effects may necessarily fall within the scope of trademark protection, the Court must still assess whether such restrictions are reasonable in light of the market and pro-competitive justifications.
The Second Circuit rejected the FTC’s efforts to treat settlement agreements as “inherently suspect” under antitrust laws. Instead, the court concluded that a traditional rule of reason analysis was the appropriate framework. The Court found that the FTC erred in finding that 1-800 Contacts’ use of trademark settlement agreements was “inherently suspect” because: (1) such agreements are likely to have a net pro -competitive; (2) courts do not have enough experience with them to allow a limited âquickâ analysis; and (3) they have not been widely condemned as anti-competitive.
Here, the Court emphasized that trademark agreements are “common and privileged under the law” and should be presumed to be pro-competitive. Since trademark agreements aim to reduce the likelihood of consumer confusion and avoid litigation, even aggressive trademark agreements should be deferenced, unless they are ancillary to an illegal agreement. underlying or imply âother exceptional circumstancesâ.
The court ruled that the FTC’s suggestion to require disclosures in every search ad that identify the rival seller was inadequate. The Court found that the FTC had not considered the practical effects or means of enforcing such a disclosure requirement. Indeed, the court accorded great deference to the decisions of the negotiating parties as to what was “reasonably necessary” to achieve the objectives of each competitor. The court even went so far as to declare that “in the absence of something which would negate the typically pro-competitive nature of these agreements, the determination by the parties of the extent of necessary trademark protections is entitled to weight. substantial â.
Despite the Second Circuit ruling, agreements between competitors should always be approached with the watchful eye of a lawyer for any unwanted anti-competitive effects. But the scope of what may be possible as agreements between competitors has been significantly altered in this decision. Given the indication of the Second Circuit as potentially deferential to the judgment of the negotiating parties in settlement agreements, the parties themselves can be more creative and aggressive in deciding what balance to strike when agreeing on protection against harm. future infringement of their trademarks.