In November 2018, the Federal Trade Commission upheld an administrative law judge decision that 1-800 Contacts Inc., the largest online retailer of contacts lenses, violated Section 5 of the FTC Act by entering into a series of trademark settlement agreements with rivals restricting them from engaging in some online advertising practices.

The FTC found the agreements harmed competition by withholding certain critical information that would enable consumers to compare the prices and offerings of contact lens competitors.

This decision serves as yet another example of the FTC’s continued interest and enforcement of anticompetitive advertising agreements and provides important lessons for companies seeking to enter these types of agreements.

Accusations

1-800 Contacts was accused of entering into a series of anticompetitive settlement agreements that prevented its rivals from bidding on ad spaces using 1-800 Contacts’ trademarks as search engine keywords.

Paid advertising spots on search engines such as Google and Bing are awarded through an auction process in which the advertisers bid on certain keywords that would trigger the display of their ads when they are determined to match a user’s search. 1-800 Contacts alleged that its rivals would bid keywords that included “1-800 Contacts.”

The FTC found such agreements were anticompetitive and rejected both arguments put forth by 1-800 Contacts:

  1. the settlement agreements helped to avoid costly litigation costs, and
  2. the agreements facilitated trademark protection.

Tips for In-House Counsel

1. Consider Whether There Is a Legitimate Trademark Violation
In the 1-800 Contacts ruling, 1-800 Contacts could not justify its agreements based on a pro-competitive argument about trademark protection.

But in cases involving clear trademark violations, the regulators may be more willing to consider trademark protection as a legitimate pro-competitive justification and thereby uphold the restraints.

2. A Settlement Agreement, Like Any Other Agreement Between Competitors, Is Still Subject to Antitrust Laws
Even if an advertising restraint is agreed in the context of a settlement agreement, counsel must still pay extra caution that such an agreement does not amount to a price-fixing or market allocation conspiracy. They should also carefully consider whether the agreement could produce any anticompetitive effects, like the agreements at issue in 1-800 Contacts.

3. Avoid Using Broad Terms and Draft Provisions That Are Narrowly Tailored to Achieve Trademark Protection Goals
While the Commission was sympathetic to 1-800 Contact’s concerns about consumer confusion, it also found that the agreements at issue were more restrictive than necessary to achieve these goals. Counsel should therefore consider the narrowest and least restrictive way that would prevent consumers from confusing their trademark with those of their competitors.

4. Advertising Restraints Between Retailers and Distributors (e.g., Minimum Advertising Policies) May Be Permissible
In general, courts and regulators view vertical restraints as much less likely to produce anticompetitive harm in comparison to horizontal restraints between competitors.

To that end, advertising restraints between retailers and manufacturers, such as minimum advertising policies which allow a manufacturer to unilaterally terminate a dealer if the dealer advertises a product at a price lower than the minimum price set by the manufacturer, tend to be upheld by courts and regulators.

Manufacturers must, however, be sure to enforce their policies uniformly across all dealers, as enforcing them against a select few dealers could be viewed as anticompetitive.

5. Consider Antitrust Training for Marketing Teams
Based on the abundant empirical evidence that the FTC cites in 1-800 Contacts about the importance of online advertising in today’s digital age, it is clear that the FTC will continue to scrutinize firms’ conduct in the online advertising space, even in contexts outside IP settlement agreements. Marketing teams may therefore need to be provided the type of antitrust compliance training that is often provided only to sales teams.

Author Information

John Roberti is a partner at Allen & Overy LLP and the head of the firm’s Washington, D.C., Antitrust Practice and a member of the firm’s Investigations and Litigation Practice. Roberti focuses his practice on civil antitrust litigation and investigations, provides strategic guidance to clients on all issues that relate to antitrust, and represents companies in court and before the agencies in their most important matters.

Puja Patel is an associate at Allen & Overy LLP and a member of the firm’s Antitrust Practice, advising clients on a range of antitrust and competition issues. Her practice concentrates on antitrust clearance of mergers and acquisitions, antitrust litigation and non-merger antitrust investigations.