Updated: October 28, 2021
Trademark registrants secured a major victory in the recent 1-800 Contacts v. The Federal Trade Commission decision by the Second Circuit Court of Appeals. The court ruled that trademark settlement agreements do not violate the Sherman Antitrust Act. This decision may be a blanket invitation for more aggressive trademark enforcement.
The Sherman Antitrust Act was enacted in 1890 with the goal of preventing harmful business practices and preserving a competitive marketplace. Both the Federal Trade Commission (FTC) and private citizens can bring suits against businesses who engage in anticompetitive conduct violating the Sherman Act.
To establish a Sherman Act violation, the FTC or a private citizen must establish that (1) a contract, combination or conspiracy exists that (2) unreasonably restrains trade.
The FTC alleged that 1-800 Contacts violated the Sherman Act by entering into thirteen settlement agreements and one sourcing and services agreement with its competitors. These agreements restricted bidding on certain keywords and terms in search engine auctions, effectively preventing competitors from advertising competing products. The FTC argued that the agreements unreasonably restrained truthful, non-misleading advertising and restrained price competition in search advertising auctions. Additionally, the FTC argued the agreements were inherently suspect, meaning the agreements were obviously anticompetitive.
The Second Circuit sided with 1-800 Contacts, finding that settlement agreements to protect trademarks do not violate the Sherman Antitrust Act. The court applied a “Rule of Reason” balancing analysis, under which the FTC was tasked with demonstrating that the settlement agreements were in fact unreasonable and anticompetitive.
Although the FTC argued that the challenged agreements were overbroad, the court reasoned that trademark settlement agreements are procompetitive, rather than anticompetitive. The Second Circuit noted that the law has traditionally favored agreements to protect trademarks, even where the agreement could prevent competitors from competing as they otherwise might.
The Second Circuit’s decision indicates that future trademark settlement agreements will be analyzed under the “Rule of Reason,” requiring a court to balance the agreement’s benefits to competition against the harms to competition. Because the court found agreements protecting trademarks are generally procompetitive, the person or entity challenging the trademark settlement agreement will need to provide direct evidence of the settlement’s anticompetitive effects. This evidentiary requirement could make it more difficult for a challenger to prove an agreement is in fact anticompetitive.
While the 1-800 Contacts decision may allow for more aggressive trademark enforcement, trademark holders do not have blanket immunity from antitrust laws. The Second Circuit noted some circumstances where a settlement agreement might be deemed anticompetitive, including situations where an agreement is entered into under duress or an agreement is between parties with unequal bargaining power.
Any business, new or established, should take the necessary steps to protect its trademarks in light of the 1-800 Contacts decision. Consult with experienced legal counsel to assist with your trademark settlement agreements.