The recent 1-800 Contacts v. The Federal Trade Commission ruling by the Second Circuit Court of Appeals has been a significant win for trademark registrants. The court held that trademark settlement agreements do not breach the Sherman Antitrust Act. As a result, this decision may encourage more aggressive trademark enforcement efforts.
The Sherman Antitrust Act, established in 1890, aims to prevent detrimental business practices and maintain a competitive marketplace. The Federal Trade Commission (FTC) and private citizens can take legal action against businesses engaged in anticompetitive conduct that violates the Sherman Act. To establish a violation, a contract, combination or conspiracy that unreasonably restrains trade must exist.
In the 1-800 Contacts case, the FTC accused the company of violating the Sherman Act by signing thirteen settlement agreements and one sourcing and services agreement with its competitors. These agreements restricted bidding on particular keywords and terms in search engine auctions, effectively blocking competitors from promoting similar products. The FTC claimed that these agreements unreasonably restrained truthful, non-misleading advertising and price competition in search advertising auctions. The FTC also contended that the agreements were inherently suspicious.
The Second Circuit Court of Appeals, however, sided with 1-800 Contacts, concluding that settlement agreements designed to protect trademarks do not breach the Sherman Antitrust Act. The court utilized a “Rule of Reason” balancing analysis, which required the FTC to prove that the settlement agreements were unreasonable and anticompetitive. Although the FTC argued that the agreements were too broad, the court concluded that trademark settlement agreements were generally procompetitive. The court acknowledged that the law traditionally favors agreements to protect trademarks, even if it means preventing competitors from competing as they otherwise might.
The Second Circuit’s decision means that future trademark settlement agreements will be evaluated under the “Rule of Reason.” This approach necessitates that a court weigh the benefits of the agreement to competition against the harms to competition. Since the court deemed agreements to protect trademarks to be generally procompetitive, any party challenging such an agreement would need to provide direct proof of its anticompetitive consequences. This evidentiary requirement could make it more difficult for challengers to prove that an agreement is anticompetitive.
While the 1-800 Contacts ruling may result in more vigorous trademark enforcement efforts, trademark owners are not immune from antitrust laws. The Second Circuit noted that certain situations, such as entering into an agreement under duress or between parties with unequal bargaining power, might result in an agreement being deemed anticompetitive.
As a result of the 1-800 Contacts ruling, businesses, whether new or established, must take appropriate measures to protect their trademarks. Seeking the assistance of experienced legal counsel with trademark settlement agreements is highly recommended.