Siding against the Federal Trade Commission, a federal appellate court said Friday the agency failed to prove that 1-800 Contacts' advertising agreements with rivals -- which prohibited them from using 1-800 Contacts' trademarks to trigger paid-search ads -- violated antitrust law.
The ruling reversed an FTC finding that the agreements between 1-800 Contacts and its rivals harmed competition by limiting the information available to consumers who were searching online for contact lenses.
In a 35-page decision, a two-judge panel of the 2nd Circuit Court of Appeals said the search agreements had a “procompetitive goal of promoting trademark policy.”
“Agreements to protect trademarks ... should not immediately be assumed to be
anticompetitive,” Circuit Judges Gerard Lynch and Steven Menashi wrote.
The FTC can seek to appeal to the Supreme Court, or can ask the entire 2nd Circuit to reconsider the case.
Maribeth Petrizzi, acting director of the FTC Bureau of Competition, said Friday the agency is disappointed in the decision and will consider its options.
The ruling stemmed from a series of lawsuits brought by 1-800 Contacts against rivals, dating to 2004. Between that year and 2013, the contact lens retailer sued or threatened to sue at least 14 competitors over trademark infringement on search engines. 1-800 Contacts argued in those matters that its trademark was violated when rivals used the phrase “1-800 Contacts” to trigger a paid search ad.
Thirteen of the competitors settled with 1-800 Contacts by agreeing to restrict the use of its trademark in search advertising. Only Lens.com fought the lawsuit, which ended in a ruling largely in Lens.com's favor.
In 2016, the FTC alleged in an administrative complaint that the settlement agreements between 1 800 Contacts and its competitors violated antitrust law.
An administrative judge found in the FTC's favor. The contact lens retailer appealed that ruling to the FTC, which concluded 4-1 that 1-800 Contacts acted anticompetitively.
Former Chairman Joe Simons wrote in the majority opinion that the settlement agreements may have deprived consumers of the ability to compare brands.
“When an agreement limits truthful price advertising on the basis of trademark protection, it must be narrowly tailored to protecting the asserted trademark right,” Simons wrote. “The agreements here are not -- they restrict advertising regardless of whether the ads are likely to be confusing.”
1-800 Contacts then appealed to the 2nd Circuit, arguing that the settlements were valid, and that the FTC's theories would undermine trademark policy and companies' investments in their brand names.
The company also said its settlement agreements didn't prevent consumers from learning about other sellers.
“If a consumer wanted to learn about her options for purchasing contact lenses, all she had to do is type 'contact lenses,' 'contact lens retailers,' 'discount contacts,' the name of a contact lens product, or any one of thousands of non-trademarked words into a search engine,” the company wrote in its appeal.
The 2nd Circuit judges agreed with 1-800 Contacts, writing that even though trademark agreements “limit competitors from competing as effectively as they otherwise might,” courts still “owe significant deference to arm’s length use agreements negotiated by parties to those agreements.”
The judges also said the FTC didn't prove the search agreements resulted in increases prices for consumers.
“The government could not make that showing because it did not conduct an empirical analysis of the challenged agreements’effect on the price of contact lenses in the online market for contacts,” the appellate judges wrote. “The evidence offered by the government is theoretical and anecdotal.”
The appellate court noted that questions surrounding the use of trademarks in search advertising haven't been definitively resolved.
“At the time the agreements were entered into, the law regarding the validity of petitioner’s trademark claims was unsettled, and it remains so in this Circuit,” the judges wrote. “The fact that the law was unsettled at the time is one reason a party might enter into a settlement agreement.”
Judges across the country have struggled with questions involving trademarks in search ads for more than a decade. Google has prevailed in several lawsuits alleging that they wrongly allowed a trademarked term to trigger pay-per-click ads, as have several advertisers. But judges have allowed several other lawsuits between advertisers to proceed to jury trials.
Santa Clara University law professor Eric Goldman, who has closely followed legal battles over the use of trademarks in search ads, says the court's ruling could spur more companies to enter into agreements governing their use of rivals' trademarks in search advertising.
“We might see more horizontal bid-rigging agreements about bidding on each other's trademarks -- which the FTC's action put a chill on,” he says.
At the same time, he notes that companies that engage in bid-rigging could still be vulnerable to antitrust lawsuits by consumers.
1-800 Contacts and the companies it entered into agreements with were sued by consumers in federal court in Utah.
All of those companies agreed to settle that matter for $40 million, with 1-800 Contacts agreeing to pay $15 million of that figure.