June 15, 2021
On June 11, 2021, the United States Court of Appeals for the Second Circuit issued a decision in a closely watched case regarding the intersection of IP and antitrust principles. See 1-800 Contacts, Inc. vs. Federal Trade Commission, 2021 WL 2385274, Case No. 18-3848 (2nd Cir. Jun. 11, 2021). In its decision, the Second Circuit vacated the U.S. Federal Trade Commission’s (FTC) decision finding that 1-800 Contacts’ (1-800) settlement agreements regulating the use of its trademarks in search advertising auctions violated the antitrust laws. The Second Circuit held that, while trademark settlements are not immune from antitrust scrutiny, the FTC improperly deemed the agreements “inherently suspect” and also wrongly concluded that they violated the antitrust “rule of reason.” In so doing, the Second Circuit touted the procompetitive benefits of trademark enforcement and made clear the FTC’s decision was “antithetical to the procompetitive goals of trademark policy.”
Between 2004 and 2013, 1-800 Contacts, the leading online retailer of contact lenses, settled trademark infringement claims against competitors using 1-800’s trademarks in search advertising auctions. The trademark settlement agreements prohibited the use of 1-800’s trademarks as a bidding term in internet search auctions, such as Google. In effect, the settlement agreements ensured that when a person searched for the term “1-800 Contacts,” the search engine would not display paid advertisements of the settling counterparties. The settlement agreements had no effect on organic results. Moreover, the settlements did not affect the courterparties’ ability to bid on generic terms such as, “contact lenses” or “discount contacts” in search advertising auctions, and they did not apply to any other form of advertising.
In 2016, the FTC filed an administrative complaint against 1-800 alleging that the settlement agreements violated the antitrust laws by restricting access to truthful advertising, preventing consumers from discovering lower priced sellers and reducing the revenues of search engines like Google. In 2018, the FTC applied an abbreviated antitrust analysis that presumed these trademark agreements were inherently anticompetitive and issued an opinion finding that 1-800 violated the antitrust laws. 1-800 hired Shearman & Sterling to appeal that decision to the Second Circuit.
In reviewing the FTC’s decision, the Second Circuit rejected the FTC’s finding that the trademark settlements were inherently anticompetitive and thus held that the FTC improperly applied a truncated analysis. Applying the standard “rule of reason” analysis, the Court first found that the FTC failed to provide direct evidence that any difference in price between 1-800 and its online competitors was a result of the settlement agreements.
Next, the Court found that, even if there were some possible anticompetitive effect, 1-800’s interest in protecting its trademarks was a valid procompetitive justification for the settlement agreements. Although subject to antitrust scrutiny, the Court held that trademark settlements are “common, and favored, under the law.” Because the settlements promoted important trademark policies, the Court observed that it would be “difficult to show that an unfavorable trademark agreement creates antitrust concerns.” The Court further reasoned that even trademark settlements that “only marginally advance trademark policies can be procompetitive.”
Finally, the Court rejected the FTC’s claim that the settlements should have been structured differently—in a way the FTC after-the-fact deemed “less restrictive” of competition. The Court reaffirmed that litigants are in the best position to know what is “reasonably necessary” to resolve their trademark disputes and that it is “unwise for courts to second-guess trademark agreements between competitors” absent “something that would negate the typically procompetitive nature of these agreements.”
Because the trademark settlement agreements were supported by strong procompetitive benefits, and the FTC erred in second-guessing how the parties structured those agreements, the Court determined that the FTC had erred in finding these agreements to violate the antitrust laws.
The key takeaway is that, while trademark settlements that merely regulate the use of the at-issue trademarks are not per se immune from antitrust laws, challenges to legitimate trademark settlements will be difficult to substantiate. As this opinion indicates, courts will typically provide deferential treatment to those kinds of settlements in subsequent antitrust challenges.