Antitrust
Competition
Sherman Act and Unfair Competition
FTC
Section 5 of the FTC Act
Unfair Competition
Internet Advertisement
Search Advertising
Auctions Held by Companies That Operate Search Engines
Trademark Settlement Agreements
Does a Trademark Settlement Agreement Illegally Restrain Trade Under the Sherman Act?
Procompetitive Justification
Duress
Reverse Payment Patent Settlements
IP and Antitrust
1-800 Contacts, Inc., petitions from a Final Order of the Federal Trade Commission (FTC) finding that agreements between Petitioner 1-800 Contacts, Inc. and various competitors to, among other things, refrain from bidding on “keyword” search terms for internet advertisements, violate Section 5 of the FTC Act, 15 U.S.C. § 45. We hold that although trademark settlement agreements are not immune from antitrust scrutiny, the FTC (1) improperly considered the agreements to be “inherently suspect” and (2) incorrectly concluded that the challenged agreements are a violation of the FTC Act under the “rule of reason”. »
PETITION FOR REVIEW GRANTED, FINAL ORDER VACATED AND REMANDED.
Between 2004 and 2013, Petitioner 1-800 Contacts, Inc. (“1-800”) entered into thirteen trademark settlement agreements and one sourcing and services agreement with competitors (the “Challenged Agreements”). As explained below, the Challenged Agreements contained provisions restricting specific terms on which the parties could “bid” when participating in auctions held by companies that operate search engines. By restricting bidding on terms in these auctions, the competitors agreed not to advertise their products when consumers used the search engines’ platforms to search the specific terms at issue.
Petitioner and its competitors pay to advertise their sales of contact lenses on the internet. One way they do this is via “search advertising”. ”When an online shopper uses a search engine such as Google or Bing, the search engine’s program returns two types of results to the shopper: “sponsored” and “organic,” both of which provide links to web pages. Sponsored results are ads; they appear because the owner of the featured web page has paid for its page to appear in that space. Sponsored links are typically designated by a label like “Ad” or “Sponsored,” and by colored or shaded boxes around the link. Organic results, on the other hand, appear based exclusively on which results a search engine’s algorithm deems to be most relevant to the shopper’s search. Organic results are listed separately from the sponsored results.
Search engines determine which advertisements to display on a search results page based in part on the relevance or relation of the consumer’s search to various words or phrases called “keywords.” Advertisers bid on these keywords during auctions hosted by the search engines. The highest bidders’ ads are typically displayed most prominently on a page, though search engines consider other factors when determining where to place an ad on a results page, such as an ad’s quality and relevance to a consumer’s search. Search engines generally do not limit the keywords available to advertisers at auction. As a result, competitors often bid on each other’s brand names so that their ad runs when a consumer searches for a competitor. Brand name terms are often trademarked.
Via bidding on “negative keywords,” an advertiser may also prevent its ad from being displayed when a consumer searches for a particular keyword. These negative keywords preclude ads from being displayed even when the search engine independently determined that the ad would be relevant to the consumer. The Commission suggests that this is useful when, for example, a retailer selling eyeglasses has bid on the advertising keyword “glasses” but wants to prevent its ad from appearing in response to the term “wine glasses.”
Because Petitioner charges more than other online retailers, when its competitors’ ads appear in response to a search for 1-800’s trademark terms, Petitioner’s sales tend to decrease.
3 Section 5 of the FTC Act states that “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” 15 U.S.C. § 45(a)(1).
In Actavis, the Supreme Court analyzed what are known as “reverse payment” patent settlements. 570 U.S. at 141. In short, manufacturers of brand name drugs paid manufacturers of generic drugs to keep the generic manufacturers from litigating the validity of the brand name manufacturers’ patents. See id. at 145. This effectively allowed the brand name manufacturers to maintain exclusive sales of certain drugs for longer than they would have if the applicable patent, through litigation, was found to be invalid. Id. at 153-54. In Actavis, the Court rejected the idea that the conduct at issue was immune from antitrust scrutiny just because it occurred within the context of a patent litigation settlement. Id. at 146-48. The Court explained that “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy, rather than by measuring them against procompetitive antitrust policies as well.” Id.at 148.
As in Actavis, Petitioner’s trademark, “if valid and infringed, might have permitted it to” preclude competitors from bidding on its trademarked terms in search advertising auctions or running advertisements on those terms. Id. at 147. We “take this fact as evidence that the agreement’s anticompetitive effects fall within the scope of” the trademark protections. Id. (internal quotation marks omitted). But the mere fact that an agreement implicates intellectual property rights does not “immunize an agreement from antitrust attack.” Id.; see also In re Indep. Serv. Orgs. Antitrust Litig., 203 F.3d 1322, 1325 (Fed. Cir. 2000) (“Intellectual property rights do not confer a privilege to violate the antitrust laws.”); United States v. Microsoft Corp., 253 F.3d 34, 63 (D.C. Cir. 2001) (same). We have not shied away from considering antitrust claims that implicate trademark rights in the past, see, e.g.,Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50, 55-56 (2d Cir. 1997), and we decline to do so now. As in any antitrust case, we must “determine whether the restraints in the agreements are reasonable in light of their actual effects on the market and their pro-competitive justifications.” Id. at 56.
I. Sherman Act Framework
Because “the FTC Act's prohibition of unfair competition and deceptive acts or practices. . . overlaps the scope of § 1 of the Sherman Act. . . aimed at prohibiting restraint of trade,” California Dental Ass'n v. FTC (Cal. Dental), 526 U.S. 756, 762 n. 3 (1999), it was appropriate that the ALJ and the Commission consulted Sherman Act jurisprudence to determine whether the Challenged Agreements violated Section 5 of the FTC Act. See Realcomp II, Ltd. v. FTC, 635 F.3d 815, 824 (6th Cir. 2011); North Carolina Bd. of Dental Examiners v. FTC, 717 F.3d 359, 370-71 (4th Cir. 2013) (recognizing a Section 1 violation as a “species” of unfair competition prohibited under the FTC Act).
To prove a Sherman Act violation – and by extension, a Section 5 violation – the FTC must establish (1) a contract, combination, or conspiracy exists that (2) unreasonably restrains trade. See Major League Baseball Props., Inc. v. Salvino, Inc. (MLB), 542 F.3d 290, 315-16 (2d Cir. 2008). In this case, the Challenged Agreements are undeniably contracts between Petitioner and its competitors. We “presumptively apply” what is known as the “rule of reason” analysis to the Challenged Agreements to determine whether they restrain trade. Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006). Under that analysis an antitrust plaintiff “must demonstrate that a particular contract or combination is in fact unreasonable and anticompetitive before it will be found unlawful.” Id. As Justice Brandeis famously articulated:
The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts. This is not because a good intention will save an otherwise objectionable regulation or the reverse; but because knowledge of intent may help the court to interpret facts and to predict consequences. Chicago Board of Trade v. United States, 246 U.S. 231, 238 (1918).
The Supreme Court, however, has rejected fixed categories of analysis when considering the anticompetitive nature of a restraint. See Cal. Dental, 526 U.S. at 779. Some restraints, therefore, fall between the type of conduct typically labeled per se anticompetitive and that which is analyzed under a “full-blown” rule of reason analysis. MLB, 542 F.3d at 317. When “the great likelihood of anticompetitive effects can easily be ascertained,” courts apply an abbreviated rule of reason analysis sometimes known as the “quick-look” approach. Cal. Dental, 526 U.S. at 770. The Commission calls the standard it applies in these situations the “inherently suspect” framework. 5 JA 291. Under the Commission’s “inherently suspect” framework, neither direct evidence of harm nor proof of market power is needed to show the anticompetitive effect of the restraint because the “likely tendency to suppress competition” posed by the challenged conduct makes it “inherently suspect. ”Polygram Holding, Inc., 136 F.T.C. 310, 344-45 (2003), aff’d, 416 F.3d 29 (D.C. Cir. 2005). An “elaborate market analysis” is unnecessary, Polygram, 416 F.3d at 35, and once the government has identified a “suspect” agreement, the burden shifts directly to the defendant to show any procompetitive justifications it might have for the restraint. See United States v. Apple, 791 F.3d 290, 330 (2d Cir. 2015).
(…) But even if restraints on truthful advertising have a tendency to raise prices, “the fact that a practice may have a tangential relationship to the price of the commodity in question does not mean that a court should dispense with a full rule-of-reason analysis.” MLB, 542 F.3d at 317.
Crucially, the restraints at issue here could plausibly be thought to have a net procompetitive effect because they are derived from trademark settlement agreements. In Clorox, applying the rule of reason, we considered whether a trademark settlement agreement illegally restrained trade under the Sherman Act and we explained that “trademarks are by their nature non-exclusionary.” 117 F.3d at 55-56. Agreements to protect trademarks, then, should not immediately be assumed to be anticompetitive – in fact, Clorox tells us instead to presume they are procompetitive. Id. at 60. As the Challenged Agreements restrict the parties from running advertisements on Petitioner’s trademarked terms, they directly implicate trademark policy.
The Commission acknowledged as much, finding Petitioner’s proffered procompetitive justifications to be “cognizable and, at least, facially plausible.” JA 296. Rather than take that fact as an indication that it should not apply an abbreviated rule of reason analysis, as the Supreme Court instructed in California Dental, the Commission instead set out to show (i) that there was a theoretical basis for the alleged anticompetitive effect and that the restraints were likely, in this particular context, to harm competition and (ii) that Petitioner could have minimized the anticompetitive effects and accomplished its procompetitive justifications through less restrictive means. While this may be analytically acceptable in some situations, see Cal. Dental, 526 U.S. at 779 (noting to require a “more extended examination” does not always translate to a call for “plenary market examination”), it was not appropriate here.
Courts do not have sufficient experience with this type of conduct to permit the abbreviated analysis of the Challenged Agreements undertaken by the Commission. See Cal. Dental, 526 U.S. at 781 (explaining that the quick-look approach may be applicable if rule-of-reason analyses in case after case reach identical conclusions); Polygram, 416 F.3d at 36-37 (accepting the Commission’s definition of “inherently suspect” as describing restraints previously condemned by both “judicial experience and economic learning”). While both California Dental and Polygram consider advertising restraints, there are key differences between the restraints in those cases and the restraints here, and our own precedent suggests that trademark agreements like those at issue here need to be examined using a fuller analysis. See Clorox, 117 F.3d at 55-56, 59 (applying a rule of reason analysis and rejecting the alleged anticompetitive harm of a trademark agreement); see also Actavis, 570 U.S. at 158-59 (rejecting the application of a quick-look analysis for intellectual property agreements).
When, as here, not only are there cognizable procompetitive justifications but also the type of restraint has not been widely condemned in our “judicial experience,” see Polygram, 416 F.3d at 37, more is required. Cf. Bogan v. Hodgkins, 166 F.3d 509, 514 n.6 (2d Cir. 1999) (noting pre-California Dental that “under quick look, once the defendant has shown a procompetitive justification for the conduct, the court must proceed to weigh the overall reasonableness of the restraint using a full-scale rule of reason analysis” (internal quotation marks and citation omitted)). 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. 7 See Cal. Dental, 526 U.S. at 770. We are bound, then, to apply the rule of reason.
III. Application of the Rule of Reason
Under the rule of reason, the Commission bears the burden of establishing a prima facie case of anticompetitive effect. Direct evidence of anticompetitive effects establishes a prima facie case of a Sherman Act Section 1 violation and obviates the need for a detailed market analysis or showing of market power.
(We also reject the Commission and amici’s arguments that the restrictions constitute illegal bid rigging as support for their use of the inherently suspect framework. An absolute ban on competitive bidding, or bid rigging, would be anticompetitive on its face and may justify an abbreviated rule of reason analysis. Cal. Dental, 570 U.S. at 770 (citing Nat'l Soc'y of Prof'l Eng'rs v. FTC, 435 U.S. 679, 692-93 (1978)); see also United States v. Joyce, 895 F.3d 673, 679 (9th Cir. 2018) (finding bid rigging to be per se illegal). 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 and therefore does not justify analyzing the agreements under the inherently suspect framework. Nor, as amici in support of the government argue, is it obvious that the restrictions constitute market division, another type of restraint that would justify an abbreviated analysis. See Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990) (per curiam (fn. 8)).
A. Anticompetitive Effect
Anticompetitive effects in a relevant market may be shown through direct evidence of output reductions, increased prices, or reduced quality in the relevant market. Ohio v. Am Express Co. (Am. Express), 138 S. Ct. 2274, 2284 (2018); see also North Am. Soccer League, 883 F.3d at 42. The Commission has also defined sufficient evidence of anticompetitive harm to include evidence of “retarded innovation, or other manifestations of harm to consumer welfare.” In re Realcomp II Ltd., No. 9320, 2007 WL 6936319 (F.T.C. Oct. 30, 2009), aff’d 635 F.3d 815. We reject the Commission’s argument that it has established direct evidence of anticompetitive effect in the form of increased prices. When an antitrust plaintiff advances an antitrust claim based on direct evidence in the form of increased prices, the question is whether it can show an actual anticompetitive change in prices after the restraint was implemented. See Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 236-37 (1993); MacDermid, 833 F.3d at 184. The government could not make that showing because it did not conduct an empirical analysis of the Challenged Agreements’ effect on the price of contact lenses in the online market for contacts. The evidence offered by the government is theoretical and anecdotal; 10 it is not “direct.” Consequently, the Commission’s conclusion that differences between 1-800 Contacts’ prices and those of its competitors constitute direct evidence of the Challenged Agreements’ anticompetitive effects is not supported by substantial evidence.
10 The government argues, inter alia, that (a) Petitioner admits that it charges more than their competitors in the relevant market; (b) economic theory strongly suggests that advertising restrictions tend to increase prices of any given product; and (c) Petitioner offered to meet or beat any price offered by other online retailers. Even accepting all this as true, it is not direct evidence that the Challenged Agreements caused the price of contact lenses in the relevant market to rise, as our precedent requires. MacDermid, 833 F.3d at 184.
11 A slightly different issue plagues the government’s argument that there is direct evidence of reduced revenues for search engines. To show this, the government did not show that Google or Microsoft, the companies who control the two most popular search engines, had lower revenues after the Challenged Agreements were put into place. Nor did the government introduce evidence that Petitioner spent less money on search advertising than it did before the Challenged Agreements came into effect. Instead, the government offered empirical evidence that the Challenged Agreements reduced the price paid by Petitioner for each click on one of its keywords. JA 1096-99. Empirical evidence is, as noted, required under our caselaw to find direct evidence of an anticompetitive effect. K.M.B., 61 F.3d at 127. But showing that a price for certain keywords dropped is not direct evidence of the effect on the market as a whole. See Clorox, 117 F.3d at 56 (quoting K.M.B., 61 F.3d at 127). This snapshot shows only that Petitioner paid less for certain keyword advertisements, no more and no less.
(…) Blackburn v. Sweeney, 53 F.3d 825, 827-29 (7th Cir. 1995) (identifying an agreement not to advertise in certain geographic areas as a per se illegal attempt to allocate markets)
(…) We need not decide whether the Commission’s theory of harm is viable, however, because we conclude that Petitioner has shown a procompetitive justification and the Commission fails to carry its burden at the third step.
B. Procompetitive Justifications
Petitioner asserts that the Challenged Agreements are justified by two procompetitive effects: reduced litigation costs and protecting Petitioner’s trademark rights. The Commission found that, while both of these justifications were “cognizable and facially plausible,” Petitioner did not show that they “have a basis in fact,” and therefore they were not “valid.” JA 309. We disagree. The protection of Petitioner’s trademark interests constitutes a valid procompetitive justification for the Challenged Agreements. The Commission determined that, since “the Challenged Agreements restrict a type of competitive advertising that has never been found to violate the trademark laws, and the weight of authority overwhelmingly points to non-infringement,” trademark protection was not a valid procompetitive benefit that justified the Challenged Agreements. JA 313. This was incorrect. Trademarks are by their nature non-exclusionary, and agreements to protect trademark interests are “common, and favored, under the law.” Clorox, 117 F.3d at 55. As a result, “it is difficult to show that an unfavorable trademark agreement creates antitrust concerns.” Id.at 57. This is true even though trademark agreements inherently prevent competitors “from competing as effectively as they otherwise might.” Id.at 59.
In Clorox, we found that the plaintiff had failed to show adverse effects on the market as a whole because the restrictions at issue did not restrict competitors’ ability to enter into the relevant market. Id. at 59. Although we held that the plaintiff in that case failed to present a prima facie case of anticompetitive harm, we also went on to detail how the procompetitive justifications of the agreement weighed against finding an antitrust violation. Id. at 60. We stated that “trademark agreements are favored in the law as a means by which parties agree to market products in a way that reduces the likelihood of consumer confusion and avoids time-consuming litigation.” Id. And again, Clorox counsels that we should “presume” that trademark settlement agreements are procompetitive. Id 14. It has not been argued that exceptional circumstances exist in this case. We, therefore, need not decide what circumstances might qualify as exceptional, von Hofe v. United States, 492 F.3d 175, 185 n.3 (2d Cir. 2007), such as, for example, agreements between parties with unequal bargaining power. See Clorox, 117 F.3d at 60 (“There is no evidence that a party to the challenged agreement entered the agreement under duress.”).
C. Less Restrictive Alternatives
Because Petitioner has carried its burden of identifying a procompetitive justification, the government must show that a less restrictive alternative exists that achieves the same legitimate competitive benefits. 16 Am. Express, 138 S. Ct. at 2284; North Am. Soccer League, 883 F.3d at 42. That is, the restraint “only survives a rule of reason analysis if it is reasonably necessary to achieve the legitimate objectives proffered by the defendant.” United States v. Brown Univ., 5 F.3d 658, 678-79 (3d Cir. 1993). “Less restrictive alternatives are those that would be less prejudicial to competition as a whole. ”North Am. Soccer League, 883 F.3d at 45 (internal quotation marks omitted). The Commission found that the government had shown a viable less restrictive alternative, namely that the parties to the Challenged Agreements could have agreed to require clear disclosure in each search advertisement of the identity of the rival seller rather than prohibit all advertising on trademarked terms. According to the government, therefore, the Challenged Agreements are overbroad. In Clorox, however, we noted that “it is usually unwise for courts to second-guess” trademark agreements between competitors. 117 F.3d at 60. In this context, what is “reasonably necessary,” Brown Univ., 5 F.3d at 679, is likely to be determined by competitors during settlement negotiations, Clorox, 117 F.3d at 60. And, as articulated above, absent something that would negate the typically procompetitive nature of these agreements, “the parties’ determination of the scope of needed trademark protections is entitled to substantial weight.” Clorox, 117 F.3d at 60.
(…) When the restraint at issue in an antitrust action implicates IP rights, Actavis directs us to consider the policy goals of the relevant IP law. See 570 U.S. at 149. Here, those considerations must include the practical implications of the government’s proffered alternatives on the parties’ ability to protect and enforce their trademarks.
CONCLUSION
In this case, where the restrictions that arise are born of typical trademark settlement agreements, we cannot overlook the Challenged agreements’ procompetitive goal of promoting trademark policy. In light of the strong procompetitive justification of protecting Petitioner’s trademarks, we conclude the Challenged Agreements “merely regulate and perhaps thereby promote competition.” Chicago Bd. of Trade, 246 U.S. at 238. They do not constitute a violation of the Sherman Act, and therefore an asserted violation of the FTC Act fails of necessity. The petition for review is GRANTED, the Final Order of the Federal Trade Commission is VACATED, and the case is REMANDED with instructions to DISMISS the administrative complaint.
17 We acknowledge a concern that the Challenged Agreements require the parties to employ negative keywords, which prevent ads of competitors from appearing in a consumer search for each other’s trademarked terms – even absent purchase of a keyword (but rather due to a search engine’s independent determination that an ad is relevant to the consumer). Even if we were inclined to consider whether this aspect of the settlement agreement goes beyond any legitimate claim of trademark infringement, and therefore imposes a restraint on competition not justified by the procompetitive value of enforcing trademark rights, the Commission has neither made separate findings with respect to the specific anticompetitive effects of this narrow aspect of the settlement agreements, nor urged that we should evaluate this issue separately. Accordingly, we have no reason to consider that issue.
Secondary authority: Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 1502 (3rd & 4th eds., 2019 Cum. Supp. 2010-2018)
(U.S. Court of Appeals for the Second Circuit, June 11, 2021, 1-800 Contacts, Inc. v. Federal Trade Commission, Docket No. 18-3848)
