1-800-Contacts, Inc. v. Federal Trade Comission
1f4th102
2d Cir.2021Background:
- From 2004–2013 1-800 Contacts entered into 13 trademark settlement agreements and a 2013 sourcing/services agreement (with Luxottica) that barred parties from bidding on each other’s trademarked search-ad keywords and required use of negative keywords.
- Search-ad auctions (Google, Bing) allocate sponsored ad placement based on bidders and relevance; competitors bidding on a rival’s trademark terms can display lower-priced alternatives to consumers searching that mark.
- FTC charged that the Challenged Agreements and their enforcement unreasonably restrained truthful advertising and price competition in violation of Section 5 of the FTC Act; an ALJ found a violation under the rule of reason and the full Commission (3–1) affirmed using an "inherently suspect" framework.
- 1-800 argued trademark-settlement agreements are not subject to abbreviated antitrust treatment and defended procompetitive justifications (trademark protection, reduced litigation); FTC relied on theoretical and empirical evidence of higher prices and reduced ad quantity/quality.
- The Second Circuit concluded trademark settlements are not categorically immune but held the FTC erred by (1) treating these agreements as “inherently suspect” (quick-look) and (2) failing to carry its burden under a full rule-of-reason analysis; it vacated the Commission’s Final Order and remanded with instructions to dismiss the complaint.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether trademark settlement agreements are categorically immune from antitrust scrutiny | 1-800: Actavis should be limited; commonplace trademark settlements are immune or at least deserve deference | FTC: Actavis rejects blanket immunity; IP settlements can be examined for anticompetitive effects | Held: No categorical immunity; trademark settlements can be scrutinized under antitrust law (Actavis governs) |
| Whether the Commission properly applied an "inherently suspect" / quick-look analysis | 1-800: Quick-look improper because trademark protections provide plausible procompetitive benefits | FTC: Restraints on advertising likely harm consumers and search engines; quick-look appropriate | Held: Quick-look/inherently suspect framework was improper here; rule of reason required |
| Whether the FTC proved direct anticompetitive effects (prices, ad reductions) sufficient for a prima facie case | 1-800: No direct evidence that agreements increased market prices or harmed competition as a whole | FTC: Offered theoretical, anecdotal, and some empirical evidence (e.g., lower keyword prices, fewer ads) to show harm | Held: FTC failed to show direct evidence of market-wide price increases; evidence of reduced ad quantity/quality insufficient to carry prima facie burden for whole market |
| Whether procompetitive justifications and less-restrictive-alternative analysis favor defendant | 1-800: Agreements validly protect trademarks and reduce litigation costs; parties’ negotiated scope is entitled to deference; alternatives may be impractical | FTC: Trademark protection is marginal; less-restrictive alternatives (e.g., disclosure requirements) are available and should be used | Held: Protecting trademarks is a cognizable, valid procompetitive justification; FTC failed to prove substantially less restrictive alternatives that achieve the same benefits |
Key Cases Cited
- FTC v. Actavis, Inc., 570 U.S. 136 (2013) (reverse-payment patent settlements not categorically immune from antitrust review)
- California Dental Ass’n v. FTC, 526 U.S. 756 (1999) (limits on quick-look where plausible procompetitive justifications exist)
- Chicago Board of Trade v. United States, 246 U.S. 231 (1918) (rule-of-reason framework articulated)
- Northern Pacific Ry. Co. v. United States, 356 U.S. 1 (1958) (per se rule for certain restraints)
- Texaco Inc. v. Dagher, 547 U.S. 1 (2006) (rule-of-reason presumptive application)
- Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290 (2d Cir. 2008) (rule-of-reason and ancillary-restraint considerations)
- Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50 (2d Cir. 1997) (trademark agreements presumptively procompetitive; apply rule of reason)
- Polygram Holding, Inc. v. FTC, 416 F.3d 29 (D.C. Cir. 2005) (application of inherently suspect framework where restraint resembled condemned practices)
- Ohio v. American Express Co., 138 S. Ct. 2274 (2018) (direct evidence of anticompetitive effects includes output reductions, price increases, or quality decline)
- FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) (Commission factfinding entitled deference; direct evidence can obviate market-power proof)