Last month in In the Matter of 1-800 Contacts, Inc., the Federal Trade Commission (“FTC”) provided insight into the circumstances under which retail price competition may take place in the 21st century internet economy. In the Opinion authored by Chairman Joseph J. Simons (“Commission’s Opinion”) the Commission decided that 1-800 Contacts, the country’s largest online retailer of contact lenses, unlawfully entered into anticompetitive agreements with 14 rival online sellers (“Agreements”). The Agreements, which, in most cases were trademark litigation settlements, required the parties, when bidding as part of search engine advertising auctions, to take measures ensuring their advertisements do not appear in response to searches for the other party’s trademark terms. According to the Commission’s Opinion, approved 3-1-1, the “decision will affect not only the price that consumers pay for some contact lenses but also the very manner in which substantial parts of price competition will occur throughout consumer markets today and tomorrow.” This week, 1-800 Contacts filed an application with the FTC for a partial stay pending review by the U.S. Court of Appeals.

The Agreements between 1-800 Contacts and Rival Retailers

By way of background, more than a decade ago, 1-800 Contacts began bringing trademark infringement actions against rival contact retailers, who were selling lenses at lower prices. The infringement claims were based on the retailers’ online advertisements appearing in response to consumers’ searches for “1-800 Contacts.” The Agreements, which resulted from the litigation, restricted the parties’ ability to bid on certain “keywords” in search engine auctions. “Keywords” are words or phrases that trigger the display of a party’s advertisements as “sponsored links” on a search engine when the words or phrases “match” a user’s search. As relevant here, the Agreements specifically prohibited each party from bidding on keywords that allegedly infringe upon the other party’s trademarks and additionally required the parties to employ “negative” keywords to prevent their advertisements from displaying whenever a search included the other party’s trademarks.

The Commission’s Opinion: The Agreements, which are not Immune from Antitrust Review, are Unlawful

In the Matter of 1-800 Contacts, Inc. was initiated in August 2016 when the FTC filed an administrative complaint, alleging that the Agreements “unreasonably restrain both price competition in search advertising auctions and the availability of truthful, non-misleading advertising” in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 (“Section 5”). In an Initial Decision, the Administrative Law Judge concluded that the Agreements violated Section 5. The Commission’s Opinion also decided the Agreements violated Section 5 and ordered, inter alia, that 1-800 Contacts cease and desist from enforcing the unlawful provisions in its existing agreements and from entering into similar agreements in the future.

In reaching this conclusion, the Commission’s Opinion initially decided that 1-800 Contacts’ settlements were not immune from antitrust review under FTC v. Actavis, 570 U.S. 136 (2013). According to the Commission’s Opinion, the Court in Actavis “did not state a general rule that removes settlement agreements from antitrust scrutiny, but rather characterized two specific types of settlements as commonplace, and made it clear that the form of the settlement alone is not what subjects an agreement to antitrust scrutiny.” The Commission’s Opinion first found that “from the perspective of substance,” the Agreements at issue were “unusual” because, while “[t]rademark litigation typically seeks to bar the use on the infringer’s labels, ads, or other promotional materials of the plaintiff’s trademark or a similar mark in a way likely to confuse consumers,” the Agreements in this case reached “farther” by “effectively eliminating an entire channel of competitive advertising at the key moment when the consumer is considering a purchase,” and “systematically applied similar restrictions to rival after rival that sought to challenge its position.” The Commission’s Opinion then announced, based on five “considerations” (which it clarified were not “requirements”) from Actavis, that “antitrust liability can be found without the need to relitigate trademark infringement issues in situations such as this, where the challenged restraints are not reasonably necessary to achieve procompetitive benefits.”

After establishing, based on the foregoing, that the Agreements were not immune from antitrust review, the Commission’s Opinion proceeded to evaluate the Agreements’ bidding restraints under Section 1 of the Sherman Act’s rule of reason. First, the Commission’s Opinion determined that the plaintiff (FTC counsel) sufficiently demonstrated that the challenged restraints resulted in anticompetitive effects by showing that the bidding restrictions were “inherently suspect,” largely because the provisions at issue restricted the ability of lower cost online retailers to show their advertisements to consumers. Although the Commission’s Opinion then found that 1-800 Contacts had advanced legitimate procompetitive justifications for the challenged constraints (i.e., that entering the Agreements helped avoid litigation costs and ensure trademark protections), the Commission’s Opinion ultimately decided that 1-800 Contacts did not present “sufficient evidence to establish the validity of a procompetitive benefit that might outweigh the anticompetitive harm of the [ ] Agreements, and that any such benefit could have been achieved by less anticompetitive means” (e.g., by requiring rival online sellers to use text that is clearly different from “1-800 Contacts” and include clear disclosures about the identity of the rival seller). As a result, the Commission’s Opinion concluded that the Agreements violated Section 5.

The Commission’s Opinion found two other independent bases for liability, in addition to determining that the challenged restraints were “inherently suspect.” For one, the Commission’s Opinion decided that the plaintiff showed that the challenged restraints resulted in harm to consumers by providing “direct evidence” of reduced advertising and increased cost of online contacts. Additionally, the Commission’s Opinion concluded that the plaintiff presented a prima facie case of anticompetitive harm to search engines because the plaintiffs demonstrated that the Agreements’ bidding restrictions reduced the number of bidders participating in search engine auctions, ultimately reducing the price auction winners paid and the revenue gained by search engines.

Concurrence: Emphasizing Consumer Harm

In a short concurring statement, Commissioner Rebecca Kelly Slaughter announced that she “strongly support[s] the Commission’s decision and order,” but she wrote separately to explain that she “would not have supported pursuing this case based on harm to search engines alone.” Commissioner Slaughter emphasized the “depth and precedential significance of the consumer-facing harm in this case” because, in her view, “[t]he resources of the Commission are limited, and should generally be used to protect consumers, not large companies with substantial market share.”

Dissent: Concern over Uncertainty in Trademark Policy

Commissioner Noah Joshua Phillips filed a dissenting statement, expressing a “fear the majority’s approach will foster uncertainty and undermine trademark policy.” Although Commissioner Phillips explained in a footnote that he agrees “with the majority’s conclusion that the Supreme Court’s ruling in Actavis does not immunize the [Agreements] from liability,” he stated that he does “not believe the majority opinion applies Actavis properly to the facts of this case” and that “we should follow Actavis and (a) refrain from making a judgment on the underlying infringement claim and (b) apply the traditional rule of reason.” According to Commissioner Phillips, “[a]pplicable precedent requires the more thorough rule of reason analysis, with more credence given to the intellectual property at the heart of the case.” Commissioner Phillips also disagreed with the majority’s “separate holding that the settlements are anticompetitive based on a showing of direct effects” because “[t]he majority’s finding of direct price effects rests almost entirely on the unremarkable fact that 1-800 Contacts’ prices were higher than some of its competitors’ prices.” In the view of Commissioner Phillips, the plaintiff “failed to prove that the [Agreements] caused the price differential.” He determined, “the record is clear that that price differential predated the [Agreements],” and the plaintiff “put forward no evidence that the price gap increased as a result of the [Agreements].”

Following the Commission’s Opinion, 1-800 Contacts announced: “We will appeal this ruling in court and are confident that our right to protect our trademarks will be upheld.”

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Photo of Rebecca Yergin Rebecca Yergin

Rebecca Yergin practice focuses on a broad range of privacy, data security, technology, and communications issues. In particular, Ms. Yergin counsels technology companies on federal and state privacy and data security laws and regulations, including in the healthcare space. She also assists clients…

Rebecca Yergin practice focuses on a broad range of privacy, data security, technology, and communications issues. In particular, Ms. Yergin counsels technology companies on federal and state privacy and data security laws and regulations, including in the healthcare space. She also assists clients in negotiating commercial transactions relating to content distribution, and she advises clients on Federal Communications Commission compliance issues. Ms. Yergin’s practice furthermore focuses on the regulatory ecosystem for the Internet of Things (“IoT”), including connected and automated vehicles.