1-800 Contacts’ Trademark Agreements with Rivals Not Safe from Antitrust Scrutiny

Alert |
Steven J. Cernak

Last August, the Federal Trade Commission issued an administrative complaint against 1-800 Contacts alleging that the company’s agreements with its competitors over the use of trademarks in search advertising violated FTC Act Section 5. (For more details, see our original alert here.) Last week, the FTC commissioners rejected the company’s affirmative defense that its conduct was protected from antitrust scrutiny by the Noerr-Pennington doctrine’s protection for government petitioning. As a result, this interesting case on the intersection of intellectual property and antitrust is on track for an administrative trial this spring.

According to the FTC’s complaint, 1-800 Contacts was a pioneer in the online sale of contact lenses and maintains about a 50 percent share of such sales. The complaint alleges that 1-800 Contacts has for years entered agreements with many of its competitors regarding the use of keywords in search advertising.

Search engines like Google or Bing generate two types of results in response to a search query. “Organic” or “natural” results are those that the engine’s algorithm deems most useful based on past queries. Displayed near those organic results are “search advertising”: links to sites of advertisers that paid the search engine to display their material in response to those keywords. Advertisers can also specify “negative keywords.” For instance, a seller of eyeglasses might bid on “glasses” but list “wine” as a negative keyword to prevent its ad from displaying in response to a query for “wine glasses.”

The FTC alleges that beginning in 2004, 1-800 Contacts began sending cease and desist letters alleging trademark infringement to competitors whose search advertising displayed in response to queries involving “1-800 Contacts” and variations. To settle such claims, 1-800 Contacts entered into at least 14 agreements that prevented the competitor from bidding on search advertising involving “1-800 Contacts” and similar terms. In nearly all the agreements, the competitor also agreed to list those same “1-800 Contacts” terms as negative keywords. The settlement agreements were reciprocal: 1-800 Contracts agreed to the same bidding prohibitions and negative keyword requirements for the competitor’s trademarks.

One competitor, Lens.com, did not settle and prevailed against the claims of trademark infringement when an appellate court found that there was no consumer confusion, and so no trademark infringement, when an advertisement for Lens.com appeared in response to a query for “1-800 Contacts.”

In August, the FTC alleged that these agreements with rivals restrain price competition and truthful advertising and negatively affect the markets for both the sale of search advertising and the retail sale of contact lenses. In its answer to the complaint, the company raised two affirmative defenses. FTC counsel moved for partial summary decision as to those defenses. Last week, the three sitting commissioners unanimously rejected the company’s defenses and granted the motion.

First, the company asserted that its conduct was protected by the Noerr-Pennington doctrine, which immunizes non-sham petitioning of the government—legislative, judicial, and executive branches—from antitrust liability. The commissioners’ opinion pointed out, however, that courts have declined to extend Noerr-Pennington protection to private agreements that harm competition independent of governmental action. While the FTC’s complaint describes 1-800 Contacts’ cease and desist letters, threats to sue, lawsuit filings, threats of further litigation, and other acts that could be considered part of petitions to the government, the only acts actually challenged by the complaint are the private agreements with rivals. The commissioners found that those agreements, while settlements of alleged legal claims, did not amount to petitions to government and so were not immune from antitrust challenge under Noerr-Pennington.

Second, 1-800 Contacts asserted that, given the general legal policy favoring settlement of disputes, earlier cases like the Supreme Court’s 2013 FTC v. Actavis case required the FTC to show that the claims being settled by the agreements were objectively and subjectively unreasonable—that is, shams—before antitrust liability was possible. The commissioners rejected the company’s reading of the cases, pointing to language from Actavis that even intellectual property-related settlements can sometimes violate the antitrust laws.

Exemptions and immunities like Noerr-Pennington often are not read expansively by courts. This FTC opinion is another example of a narrow reading, and is a warning to any defendants relying on such exemptions to immunize their conduct from antitrust scrutiny.

As a result of this decision, the underlying matter is on track to go forward to an administrative trial at the FTC, perhaps as soon as April. That forthcoming opinion of the administrative law judge (and, assuming appeals, of the commissioners and any appellate court) will help answer broader questions about the breadth of FTC Act Section 5 coverage and the liability that should attach to these settlements of intellectual property disputes.

Companies looking to agree with rivals on limitations on competitive tactics, even if seemingly small or linked to legal disputes, should first consult with trusted advisers like those in the Schiff Hardin Antitrust & Trade Regulation group