Over a spirited dissent, and in a 3–1 decision issued on November 14, the Federal Trade Commission (FTC) Commissioners held that 1-800 Contacts violated Section 5 of the FTC Action by entering into settlement agreements with competitors that (1) harmed consumers in the online sale of contact lenses and (2) harmed search engines by artificially reducing the prices paid for online advertisements.
The settlement agreements at issue resolved allegations by 1-800 Contacts that its competitors were infringing upon its trademark by bidding on paid search advertising with 1-800 Contacts’ trademark as keywords. Search engines hold auctions for ads placed as results of certain search terms, and the settlement agreements prohibited competitors from bidding on keywords containing 1-800 Contacts’ trademark and also required competitors, when applicable, to employ 1-800 Contacts’ trademark as a “negative keyword” (which prevents competitors’ ads from populating the results of a keyword search for 1-800 Contacts’ trademark). From 2004 to 2013, 1-800 Contacts entered into 13 such agreements with competitors, and the FTC challenged this practice, reasoning that the agreements were inhibiting competition in a “very important” channel of advertising that “effectively eliminat[ed] an entire channel of competitive advertising at the key moment when the consumer is considering a purchase.”
Last October, as we have previously reported, ALJ D. Michael Chappell issued an Initial Decision upholding the FTC’s complaint. Judge Chappell concluded that, per the Supreme Court’s ruling in FTC v. Actavis, 570 U.S. 136 (2013), parties entering into trademark settlements are not immune from antitrust liability. Upon de novo review, the Commissioners, in an opinion authored by Chairman Simons, agreed with Judge Chappell and engaged in an analysis of the conduct under the burden-shifting framework of the Rule of Reason. The Commissioners first found that there was prima facie evidence that the settlement agreements resulted in anticompetitive effects: (1) that this specific type of restriction on advertising is “inherently suspect” and therefore does not require an elaborate analysis to show anticompetitive effects and (2) that the settlement agreements resulted in direct evidence of consumer harm, in the form of higher prices and a restriction of truthful advertising. And while the Commissioners found that 1-800 Contacts had two legitimate, plausible justifications for entering into the settlement agreements – the avoidance of litigation costs through settlement and trademark protection – the Commissioners ultimately reasoned that these justifications were not valid in the face of a showing that competition would likely be harmed by the settlement agreements.
In dissent, Commissioner Phillips criticized the majority’s finding of an anticompetitive effect, arguing that the settlement agreements were not “inherently suspect” because the likelihood of anticompetitive effects of such agreements could not easily be ascertained, especially when considering the competing federal policy of trademarks. Further, Commissioner Phillips, like the majority, engaged in an extensive review of the factual record. But he concluded that there did not exist evidence of direct price effects.
Key takeaways: By categorizing these settlement agreements as “inherently suspect” under the antitrust laws, the FTC Commissioners are identifying conduct of this type as a “close neighbor” of a per se violation, the most serious violation of the antitrust laws. And even though the majority is careful to limit its holding to a specific fact-pattern, marketers and advertisers should be wary of any agreement among competitors to restrict advertising, even when entered into as part of a legitimate settlement agreement. Indeed, this is an increasingly hot issue and not just with antitrust enforcers. Earlier this year, a proposed class action was filed against a group of companies in the hospitality industry asserting violations of Sherman Act Section 1 for alleged agreements to limit the use of branded keyword searches on prominent search engines. Thus, marketers should be aware that agreements to restrict or limit advertising terms – particularly when entered by competitors – could very well face antitrust or other scrutiny, whether by antitrust enforcers or even private plaintiffs.