Second Circuit Gives Deference to Competitor Contracts with Keyword Bidding Restrictions

The Second Circuit made headlines earlier this month by overturning a Federal Trade Commission (“FTC”) decision to pursue litigation over trademark agreements made between 1-800 Contacts and thirteen of its competitors.

Keyword Bidding and Competitor Agreements

At issue were agreements that 1-800 Contacts had made with thirteen of its competitors over how to deal with the trademarks of 1-800 Contacts when it came to online advertising and search engine auctions. Specifically, 1-800 Contacts and its competitors contracted to set guidelines that limited the competitors of 1-800 Contacts from bidding on trademarks in such auctions while simultaneously requiring these same competitors to bid on negative keywords. Such bidding would effectively prevent the ads of the competitors from being displayed when consumers searched for 1-800 Contacts on popular search engines.

In reviewing the agreements, the FTC found them to be “inherently suspect” and stated that such agreements prevented competitors from informing consumers about prices or deals that could be potentially lower or better than 1-800 Contacts when consumers searched online. An Administrative Law Judge agreed with the FTC’s finding and allowed the litigation to proceed. 1-800 Contacts then appealed to the Second Circuit.

Second Circuit Ruling Gives Deference to Competitor Agreements with Keyword Bidding Restrictions

On review, the Second Circuit disagreed with the FTC that the agreements involving keyword bidding restrictions between 1-800 Contacts and its competitors were problematic from its inception. Instead, the Second Circuit held that the intent of trademark settlement agreements should be given deference and likewise benefit from a presumption of being pro-competition.

The Second Circuit then went further, giving significant leeway to the contracting parties to pursue the means that they had deemed necessary to achieve the outcome of protecting the trademark rights of 1-800 Contacts. More significantly, the Second Circuit also found that the FTC did not provide a less restrictive alternative than 1-800 Contacts could have pursued to have reached the same result.

Key Takeaways Regarding the Second Circuit’s Findings Overruling the FTC on Competitor Agreements with Keyword Bidding Restrictions

The Second Circuit overruled the FTC’s decision to bring antitrust suits against 1-800 Contacts because it found:

• That the FTC did not provide a less restrictive alternative for 1-800 Contacts to use in order to achieve the same means;

• The agreements between 1-800 Contacts and its competitors were not suspect on their face; and

• Trademark settlement agreements should be given a presumption of being pro-competitive.

For more information on trademark litigation, see our Trademark Services and Industry Focused Legal Solutions pages.