Internet advertising is big business. He can also be fierce. One way for businesses to market their goods and services online is through “search advertising.” When an online shopper uses a search engine, the search engine program typically returns two types of search results to the shopper, both of which provide links to websites. The second type of results are considered “organic” and appear because the search engine’s algorithm considers them to be the most relevant to the buyer’s search. But the first type of search results are “sponsored” ads, which appear because the owner of the featured website has paid for their page to appear in that space. Sponsored ads almost always appear before organic search results.
Search engines determine which sponsored ads to show on a search results page based, in large part, on how relevant the buyer’s search is to various “keywords”. Advertisers bid on these keywords in auctions hosted by search engines. Competitors frequently bid on each other’s brand names and brand terms so that their own ad will appear when a consumer searches for a competitor. Imagine, for example, that you search for “McDonald’s” and the ads for Burger King appear first.
1-800 Contacts, Inc. (“1-800”) is an online contact lens vendor and is perhaps the most recognizable name among many online contact lens retailers. Therefore, 1-800’s online competitors seek to buy “1-800 Contacts” and other company-branded terms as key words to ensure that when a consumer searches for 1-800, its own website appears high in sponsored search results, and potentially turns customers away from 1-800. 1-800 is often more expensive than other online retailers. So when its competitors’ ads appear in response to a 1-800 branded term search, its own online sales decline. Unsurprisingly, this does not suit 1-800.
In response to this type of conduct, 1-800 has filed over a dozen trademark infringement actions against its competitors for the alleged abuse of its trademarks, both in keywords and otherwise. Whether the 1-800 claims were founded or not, most of the competitors apparently preferred not to dispute these claims and entered into settlement agreements. Pursuant to the settlement agreements, the competitors have agreed not to bid on the name, URLs or variations of its trademarks from 1-800 when participating in future keyword auctions conducted by search engines. They also agreed to use “negative keywords” so that a search that includes one party’s trademarks does not trigger the other party’s ads to appear. Indeed, 1-800’s competitors have agreed not to advertise their products when consumers search online using 1-800 brands.
In 2016, the Federal Trade Commission (FTC) filed an administrative complaint against 1-800, alleging that its settlement agreements unreasonably restricted truthful and non-misleading advertising in violation of Section 5 of the FTC Act, 15 USC § 45. (Section 5 of the FTC Act provides that “deceptive or deceptive acts or practices in or affecting commerce… are… declared illegal.” The FTC asserted that the regulations unfairly prevented 1-800’s competitors from broadcasting ads that the same contact lenses were available at a lower price from other online retailers, thereby reducing competition and making it more difficult for consumers to compare retail prices online.
The case was tried by an administrative judge, who found that there had been a violation. 1-800 appealed to the FTC, but a majority of the Commission agreed the agreements violated Section 5 of the FTC Act. The majority classified the settlement agreements as “inherently suspect” and then analyzed the 1-800 pro-competitive justifications offered. He rejected 1-800’s claim that the benefits of trademark protection and lower litigation costs outweighed any potential harm to consumers. 1-800 then turned to the second circuit.
The Second Circuit concluded that while “trademark settlement agreements are not automatically immune from antitrust scrutiny,” the FTC erred in concluding that the agreements constitute an unfair competition method. under FTC law. According to Circuit 2, the FTC erred in treating the 1-800 deals as “inherently suspect,” thus placing the initial onus on 1-800 to justify the deals. Instead, the FTC should have undertaken a “rule of reason” analysis to determine whether the regulations restricted trade. According to this analysis, the initial burden would have been on the FTC to prove that the agreements had a real negative effect on competition as a whole before 1-800 had to come up with pro-competitive justifications for the agreements. And, if 1-800 were able to provide such proof, the onus would have been on the FTC to prove that any legitimate pro-competitive advantage offered by 1-800 could have been obtained by less restrictive means. By wrongly treating the 1-800 settlement agreements as “inherently suspect,” the appeals court found that the FTC essentially found them anti-competitive per se, without having to show direct evidence of prejudice or anti-competitive impact. .
The appeals court observed that the restrictions imposed on 1-800 competitors through the settlement agreements “could likely be viewed as having a net pro-competitive effect as they flow from trademark settlement agreements.” In fact, agreements to protect trademarks should be presumed to be pro-competitive, the court said, relying on the Second Circuit precedent. “Although trademark agreements limit competition from competitors as effectively as they could otherwise, we owe great deference to the arm’s length user agreements negotiated by the parties to those agreements,” the court concluded. The 1-800 settlement agreements prevented the parties from serving advertisements under the terms of the 1-800 trademark, thus directly implicating the trademark policy; and the FTC failed to meet its obligation to prove that they were anti-competitive.
The Second Circuit ruling does not give online retailers a free hand to enter into agreements with other retailers restricting the way they advertise their own goods and services. But in the context of a good faith trademark dispute, a settlement agreement that prevents one competitor from using keyword advertising of the other’s brands seems to benefit from the doubt.
Watchlist: 1-800 contact files New search engine
As this issue of Kattison Avenue was about to go to press, 1-800 Contacts filed a new federal lawsuit, this time alleging (among other things) that eyewear retailer Warby Parker infringed on the brands of trades from 1-800 by purchasing search engine keywords such as “1-800 Contacts”, “1800 contacts” and “1800contacts” in order to advertise its recently launched contact lens business. 1-800 Contacts Inc. v. JAND Inc., d / b / a Warby Parker, Case No.21-cv06966 (SDNY, filed Aug. 18, 2021).
We’ll be keeping an eye on this litigation and discussing it in more detail in a future issue.