Recent Second Circuit 1-800 Contacts Decision Helps Brands See More Clearly How to Pay Less per Click

Introduction

Have you ever searched for a brand’s name online only to find that the first link leads to a competitor’s or reseller’s website? This can be a major problem for direct-to-consumer manufacturers and brands. However, the Second Circuit’s recent decision in 1-800 Contacts v. Federal Trade Commission has cleared the way for manufacturers to employ “search term ad agreements” or “keyword bidding agreements” with reseller partners and even competitors to protect their brand names and trademarks on the internet in certain contexts.

Background

Search engines generally display “organic” and “sponsored” categories of links in search results. “Sponsored” links are advertisements that brands pay to appear at the top of consumers’ searches on internet search engines or internet marketplaces. Search term advertising has become a key marketing tool for manufacturers, and brands have spent increasing amounts of their marketing budget to bid on search engine keywords for their brand name and associated terms. Not only do brands bid on their own trademarks, but they also may bid on keywords or search terms associated with their competitors’ products as a marketing tactic. Paid search works a bit like an auction—the more money bid on a word, the more likely an ad will appear at the top of a consumer’s search results. 

With the rise of keyword or search term advertising, many manufacturers have considered keyword bidding agreements and restrictions with their resellers with the twofold purpose of (1) protecting their brands’ trademarks by limiting confusion and controlling where and how their brand and products are being advertised and promoted and (2) keeping costs of search term advertising down while driving more direct-to-consumer sales.

However, keyword bidding or search term ad agreements with competitors and even with reseller partners can raise the risk of antitrust liability. Manufacturers and other brands must be aware of the legal landscape surrounding this developing area of law to ensure that they do not run afoul of U.S. antitrust laws. 

Legal Landscape – A Comparative Analysis of US vs. EU Antitrust Laws

Unlike the European Union, recent case law indicates that keyword bidding agreements can be considered pro-competitive and permissible under U.S. jurisprudence. 

As established in the European Commission’s Guess decision, keyword agreements can raise serious concerns under European antitrust laws. Specifically, in 2018, the European Commission fined Guess, the clothing manufacturer, for imposing restrictions on its authorized retailers prohibiting them from bidding on Guess’ brand names and trademarks as keywords in search engine ads. This was in the context of a system that was found to restrict cross-border selling within the European Union and to limit the feasibility of authorized retailers making online sales altogether, both of which are serious violations of European antitrust laws.¹ Furthermore, the European Commission rejected the argument that the restrictions were imposed in favor of brand protection when the restrictions were imposed on authorized resellers. Following the Guess decision, some uncertainty remains as to the limits of lawful restrictions in Europe, and any policy intended to limit resellers from bidding on brand names in search advertising requires careful assessment. 

This, however, is not the case under U.S. case law, as highlighted in the recent Second Circuit 1-800 Contacts decision issued in June 2021.² The Second Circuit’s 2021 order overturned a decision of the Federal Trade Commission (FTC) finding that 1-800 Contacts had violated antitrust laws by entering into trademark dispute settlement agreements with thirteen of its rival competitors to refrain from bidding on keyword search terms for internet advertisements, such as “1-800 Contacts,” on various search engines. The FTC concluded that the agreements violated antitrust law, hurting consumers by blocking ads that would inform them that identical products were available at lower prices and reducing competition for keywords. The Second Circuit disagreed. 

In reversing the FTC’s decision, the Court found that the agreements should not be viewed as “inherently suspect” but rather analyzed under the more lenient “rule of reason.”³ Under the rule of reason approach, a court must weigh the pro-competitive and anti-competitive effects of a challenged action to determine whether it violates antitrust laws. The Court concluded that keyword bidding agreements can offer pro-competitive justifications, including protecting trademarks, such as the case here, and preventing confusion in the marketplace. The Court therefore held in this case that 1-800 Contacts’ agreements did not violate U.S. competition laws.⁴

Notably, however, the Court issued a few words of caution. The Court acknowledged that “our sister circuits have occasionally considered advertising restraints in different contexts and have found the conduct in question to have anti-competitive effects.”⁵ Moreover, the Court explained that “[if] the provisions relating to trademark protection are auxiliary to an underlying illegal agreement between competitors, or if there were other exceptional circumstances, we would think twice before concluding the challenged conduct has a pro-competitive justification.”⁶  

Conclusion

The Second Circuit’s 1-800 Contacts decision confirms that keyword bidding agreements between competitors may be permissible in the United States under certain circumstances and that such agreements are analyzed under the rule of reason by U.S. courts. As explained by the 1-800 Contacts Court, keyword bidding agreements can offer pro-competitive justifications, including protecting intellectual property rights and limiting consumer confusion in the marketplace, and in such cases, may be permissible. This signals a much more permissive approach than the European authorities are likely to take based on the Guess case. 

It is important to note, however, that while the 1-800 Contacts decision offers support for the use of keyword bidding agreements with distributors, resellers, and even competitors, it is yet to be seen how lower courts, other circuit courts, and federal agencies such as the FTC will approach the issue in the future when faced with other scenarios. Additionally, as dual distribution models become more prevalent, it is important to consult with antitrust counsel before entering into keyword bidding agreements and continue monitoring the area of law in the coming months and years.