In a defeat for the Federal Trade Commission, a federal appeals court in New York on Thursday rejected a request to reconsider its earlier decision to clear 1-800 Contacts of antitrust charges involving agreements to restrict search advertising.
The 2nd Circuit Court of Appeals didn't give a reason for denying the FTC's request.
Unless the Supreme Court intervenes, the 2nd Circuit decision will remain on the books -- and could well encourage other companies to sue competitors over search advertising tactics. An FTC spokesperson declined to comment Thursday on whether the agency will seek to appeal to the Supreme Court.
The legal dispute between the FTC and 1-800 Contacts stems from a series of lawsuits brought by the contact lens retailer between 2004 and 2013. During that time, the company sued (or threatened to sue) at least 14 competitors, on the theory that they infringed 1-800 Contacts' trademark by using it to trigger paid search ads.
Thirteen of the companies 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 those deals 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, noting that the deals may have deprived consumers of the ability to comparison shop.
“When an agreement limits truthful price advertising on the basis of trademark protection, it must be narrowly tailored to protecting the asserted trademark right,” former Chairman Joe Simons wrote for the majority. “The agreements here are not -- they restrict advertising regardless of whether the ads are likely to be confusing.”
1-800 Contacts subsequently appealed to the 2nd Circuit, arguing that the settlements were valid, and that the FTC's theories would undermine companies' investments in their brand names.
A two-judge panel of the 2nd Circuit sided against the FTC, ruling that the settlements promoted trademark policy.
Those judges also noted that courts haven't definitively resolved legal questions surrounding the use of trademarks to trigger search ads.
“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 appellate judges wrote. “The fact that the law was unsettled at the time is one reason a party might enter into a settlement agreement.”
(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 several other lawsuits between advertisers to proceed to jury trials.)
Earlier this month, the FTC urged the 2nd Circuit to reconsider its ruling, arguing that the decision will harm online competition.
“The decision was wrong and will likely have nationwide repercussions,” the FTC said in its request. “Restricting search-based advertising can harm competition by leaving consumers in the dark.”
The ruling already appears to have encouraged 1-800 Contacts to bring new litigation. Just last week, 1-800 Contacts brought a trademark infringement lawsuit against eyewear company Warby Parker, in part over Warby Parker's alleged use of the keyword “1-800 Contacts” to trigger search ads.