1-800 Contacts Can See Clearly Now: FTC Antitrust Decision Overturned

Background

Beginning in 2002, 1-800 Contacts began a series of trademark infringement lawsuits against its competitors. The cases largely settled, and between 2004 and 2013, 1-800 Contacts entered into thirteen settlement agreements (and one sourcing and services agreement) to resolve its trademark disputes. While the language of the agreements varied somewhat, each included some iteration of a provision that prohibited “causing a [competitor’s] website or Internet advertisement to appear in response to any Internet search for [1-800 Contacts’] branded name, trademark, or URLs.” The settlement agreements also required parties to use “negative” keywords to prevent their ads from being displayed whenever a search included 1-800 Contacts’ marks, but did not prevent parties from bidding on generic keywords like “contacts lens.”

In 2016, the FTC filed a complaint against 1-800 Contacts alleging that the settlement and sourcing agreements, and the subsequent enforcement of the agreements, “unreasonably restrain[ed] both price competition in search advertising auctions and the availability of truthful, non-misleading advertising.” Ultimately, the FTC reached a final decision holding that the agreements unreasonably restrained trade in violation of the FTC Act, Sec. 5. The FTC further issued a cease-and-desist order prohibiting 1-800-Contacts from enforcing the unlawful provisions in the existing agreements, and from entering into similar agreements in the future.

As part of its decision, the FTC found that as a result of the agreements, consumers did not have access to information necessary to compare and evaluate prices and other features of available sellers. Thus, the FTC found, the agreements have a likely tendency to suppress competition and were therefore “inherently suspect” under the antitrust laws.

The Second Circuit Decision

The Second Circuit overturned the FTC decision, finding that the “protection of [1-800 Contacts] trademark interests constitute[d] a valid procompetitive justification for the [challenged agreements]” and that “efforts to protect trademarks, even aggressive ones, serve the competitive purpose of furthering trademark policies.” Thus, the agreements “merely regulate and perhaps thereby promote competition.” The Court further asserted that while such agreements may limit competitors from competing as effectively as they otherwise might, significant deference is owed to the agreements negotiated between these parties. Ultimately, the Court held that “the FTC (1) improperly considered the agreements to be inherently suspect and (2) incorrectly concluded that the challenged agreements are a violation of the FTC Act.”

Notably, however, the Court cautioned that trademark settlement agreements are not automatically immune from antitrust scrutiny, and that if the trademark provisions of the challenged agreements were “auxiliary to an underlying illegal agreement…or if there were other exceptional circumstances, [the Court] would think twice before concluding that the challenged conduct has a procompetitive justification.”

Takeaways

This case affirms that courts tend to be sympathetic to trademark owners’ obligations to protect their trademark rights and are generally deferential to legitimate agreements borne out of this obligation. Nonetheless, trademark owners should be reminded that such agreements are not immune from scrutiny and should take care to ensure that these agreements do not go so far as to have anticompetitive effects.