Want to Engage in Anti-Competitive Trademark Bullying? Second Circuit Says: Great, Have a Nice Day!–1-800 Contacts v. FTC

June 14, 2021 · by Eric Goldman · in E-Commerce, Marketing, Trademark

Starting in the mid-2000s, 1-800 Contacts sought to control how its competitors bought search engine advertising triggered by its (so-called) trademarks, a process I call competitive keyword advertising. To do this, 1-800 Contacts typically sued its competitors and then quickly entered into a no-money settlement agreement that required each party to stop bidding on each others’ trademarks.

To property maximalists, 1-800 Contacts’ efforts may sound like run-of-the-mill trademark enforcement. However, the scheme was actually extremely unusual (few, if any, other trademark owners did anything similar), and it had several pernicious effects. The settlements deprived consumers of additional helpful information from competitive advertising. The settlements distorted the keyword ad auctions that the search engines were trying to conduct. Most importantly, the settlements helped 1-800 Contacts avoid competing on price, which has allowed 1-800 Contacts to systematically charge higher prices to consumers (a point 1-800 Contacts freely admits).

1-800 Contacts’ competitors “voluntarily” entered into the settlement agreements, but they were goaded in part by 1-800 Contacts’ threat to wage lawfare against them if they didn’t. This threat wasn’t idle. 1-800 Contacts likely spent $1M+ suing a holdout to its settlement “deal,” Lens.com, even though Lens.com made only $21 of profit from competitive keyword advertising. (Lens.com claimed it incurred at least $1.4M of defense costs). In other words, 1-800 Contacts proved to the industry that it would engage in economically irrational litigation to punish any competitors who tried to compete against it on price.

Five years ago, the FTC initiated an administrative complaint against 1-800 Contacts. The FTC won at the initial administrative hearing and then at the Commission level.

Last week, the Second Circuit reversed and dismissed the FTC’s administrative complaint, saying that the FTC misapplied the applicable antitrust standard and did not make a strong enough evidentiary showing of an antitrust violation. This opinion is mostly antitrust inside-baseball, but I want to highlight a few things.

The court treats trademark settlement agreements as virtually immune from antitrust scrutiny. Some examples:

“Agreements to protect trademarks, then, should not immediately be assumed to be anticompetitive – in fact, Clorox tells us instead to presume they are procompetitive.” I think many trademark academics would vigorously contest that pro-competition presumption, especially in light of the extensive literature on trademark bullying. In this case, 1-800 Contacts used lawfare as a bullying threat.
“The Challenged Agreements, therefore, are not so obviously anticompetitive to consumers that someone with only a basic understanding of economics would immediately recognize them to be so.” For reasons that Mark Lemley and I explained in an amicus brief in this case, competitive keyword advertising is obviously a Prisoner’s Dilemma where competitors have an incentive to collude with each other. I think any Econ 101 student would recognize that immediately.
“trademark agreements that ‘only marginally advance[] trademark policies’ can be procompetitive. Under Clorox, ‘[e]fforts to protect trademarks, even aggressive ones, serve the competitive purpose of furthering trademark policies.’ That does not mean that every trademark agreement has a legitimate procompetitive justification. If the ‘provisions relating to trademark protection are auxiliary to an underlying illegal agreement between competitors,’ or if there were other exceptional circumstances, we would think twice before concluding the challenged conduct has a procompetitive justification.” The agreements themselves were bid-rigging agreements. The illegal purpose wasn’t auxiliary, it was central. More generally, it seems like we ought to question the Clorox precedent. While it’s theoretically possible that trademark agreements can be pro-competitive when they “only marginally advance trademark policies,” most times I bet one or both parties to those agreements are engaging in sanctionable behavior.
“While trademark agreements limit competitors from competing as effectively as they otherwise might, we owe significant deference to arm’s length use agreements negotiated by parties to those agreements….forcing companies to be less aggressive in enforcing their trademarks is antithetical to the procompetitive goals of trademark policy.” The settlement agreements were “arms-length” because the parties were unrelated, but they were hardly voluntarily. They were coerced through bullying and the threat of lawfare. Most of 1-800 Contacts’ competitors never wanted to agree to the restrictions demanded by 1-800 Contacts, and the competitors left significant money on the table doing so. These are exactly the kinds of agreements that should NOT get “significant deference.” And I think many trademark academics believe that less aggressive trademark enforcement would in fact be pro-competitive, given how often trademark owners misuse their trademark rights to advance illegitimate goals. This is especially true among the owners of super-weak trademarks (…like “1-800 Contacts”…), who far too often become unreasonably pugnacious to mask the weakness of their ownership claims.

The court relies on a flawed assumption about competitive keyword ad auctions. It says “An absolute ban on competitive bidding, or bid rigging, would be anticompetitive on its face and may justify an abbreviated rule of reason analysis. It is not clear to us, however, that the restrictions constitute such a ban. The Challenged Agreements do not prevent the parties from participating in keyword auctions, only from bidding on trademarked terms. Whether restrictions on advertisers’ use of particular terms leads to overall harm to the search engines is not obvious.” Seriously? Even if it’s not a complete ban on participating in the keyword ad auctions, 1-800 Contacts’ scheme still constituted horizontal bid-rigging. To extend the court’s analogy, the scheme said auction rivals were free to attend a physical-space auction, but they pre-agreed not to bid against each other on specific items available at the auction. Because that deal removes bidders from the auction process for specific items, the court shouldn’t need much additional evidence to show how the seller was harmed in the process.

In bringing the enforcement action initially, the FTC took the position that competitive keyword advertising has always been legal, including during the mid-2000s, which made 1-800 Contacts’ litigation demands unreasonable from the beginning. The FTC has always been correct on this, but this court unnecessarily and unhelpfully says this is still a contestable issue: “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.” Are we really doing this again? As a court said in 2018, “Virtually no court has held that, on its own, a defendant’s purchase of a plaintiff’s mark as a keyword term is sufficient for liability.” Alzheimer’s Disease and Related Disorders Association, Inc. v. Alzheimer’s Foundation of America, Inc., 2018 WL 1918618 (S.D.N.Y. Apr. 20, 2018). Several other courts since have echoed this sentiment. It’s unfortunate for the Second Circuit to suggest it’s still a live issue.

While the FTC flamed out in this enforcement against 1-800 Contacts, 1-800 Contacts paid $15M to settle private antitrust claims against it. So 1-800 Contacts didn’t exactly escape accountability. For that reason, I doubt other trademark owners will consider this ruling as a green-light to engage in schemes like 1-800 Contacts’. Then again, from 1-800 Contacts’ perspective, $15M is a small price to pay for the ability to charge supra-competitive prices to consumers for 15+ years. With the Second Circuit’s help, they could very well get away with it. Maybe en banc or Supreme Court review will correct this.

Case citation: 1-800 Contacts, Inc. v. Federal Trade Commission, 2021 WL 2385274 (2d Cir. June 11, 2021)

1-800 Contacts v. FTC Case Library

The FTC maintains a page with public filings in this case (last updated Oct. 2019). A selected library of materials (including some not on the FTC page):

* Second Circuit decision. Blog post.

* Second Circuit Appeal. 1-800 Contacts’ appellant brief. Amicus briefs from AIPLA, USCIB, WLF/Academics. FTC Answering Brief. Amicus brief from IP/Internet/Antitrust professors.

* FTC opinions: majority by Commissioner Simons, concurrence by Commissioner Slaughter, dissent by Commissioner Phillips. Final order. Blog post: Restricting Competitive Keyword Ads Is Anti-Competitive–FTC v. 1-800 Contacts

* ALJ opinion. Blog post: Interesting Tidbits From FTC’s Antitrust Win Against 1-800 Contacts’ Keyword Ad Restrictions.

* Some expert reports and related material: Howard Hogan. Dr. William Landes. Rebecca Tushnet’s rebuttal report. Prof. Rebecca Tushnet Slides. Dr. Evans’ Slides. Dr. Susan Athey’s slides (see the exhibit).

* Respondent’s Second Corrected Pretrial Brief. Blog post: 1-800 Contacts Charges Higher Prices Than Its Online Competitors, But They Are OK With That–FTC v. 1-800 Contacts

* Complaint Counsel’s Corrected Pre-Trial Brief and Exhibits. Blog post: FTC Explains Why It Thinks 1-800 Contacts’ Keyword Ad Settlements Were Anti-Competitive–FTC v. 1-800 Contacts

* FTC Complaint from Aug. 2016. Blog post: FTC Sues 1-800 Contacts For Restricting Competitive Keyword Advertising

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