2nd Circuit Appeals Court Upholds Trademark Settlements As Valid Under Antitrust Law

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The Second Circuit’s recent decision in 1-800 Contacts, Inc. v. FTC signals that trademark holders can aggressively enforce their rights and pursue settlements with competitors that are not “inherently suspect” under the antitrust laws. See — F.3d —, 2021 WL 2385274 (2d Cir. June 11, 2021). From 2004 to 2013, 1-800 Contacts entered into a series of trademark settlement agreements (the challenged agreements) with competitors it alleged had infringed its trademark by bidding on trademarked keywords at search engine auctions. Id. at *1. The challenged agreements restricted the terms that 1-800 Contact’s competitors could bid on when participating in search engine auctions, preventing them from bidding on trademarked keywords. See id. In August 2016, the Federal Trade Commission (FTC) filed a complaint against 1-800 Contacts, claiming that the challenged agreements restricted advertising and reduced competition in violation of the antitrust laws. Id. at *3. Both an Administrative Law Judge (ALJ) and, on appeal, the FTC, found that the challenged agreements violated the antitrust laws, with the latter analyzing the challenged agreements under the less onerous framework for agreements that are “inherently suspect.” Id. On appeal, the Second Circuit found that the FTC improperly applied the “inherently suspect” framework and that the challenged agreements were not “an unfair method of competition[.]”. Id. at *1. Applying the “Rule of Reason” analysis, the court found that the challenged agreements did not violate the antitrust laws, vacated the FTC’s order, and remanded the case for dismissal. Id.

1-800 Contacts, Inc. v. FTC clarifies several important issues surrounding antitrust challenges to trademark settlement agreements:

  • Trademark settlements, particularly those that implicate search engine auction bidding, require detailed analysis in which benefits to competition are weighed against harms to competition under the Rule of Reason, because courts have insufficient experience with these types of restraints. See id. at *7.
  • 1-800 Contacts confirmed that agreements protecting trademarks are generally procompetitive and entitled to “substantial weight” absent evidence of underlying illegality within the agreement. See id. at *10. The challenger of such a settlement must provide direct evidence of the settlement’s anticompetitive effects. See id. at *6.
  • Trademark holders must still be mindful that these agreements are not afforded blanket immunity from the antitrust laws. See id. at *4. Trademark holders can aggressively enforce settlements that are the result of “hard-nosed trademark negotiations,” but the 1-800 Contacts court expressly contemplated that “exceptional circumstances,” like agreements entered into under duress or between parties with unequal bargaining power, could render an agreement anticompetitive. See id. at *10.

As in all antitrust matters, the circumstances and market facts informing a particular settlement are going to be closely analyzed by a court or agency. Still, the 1-800 Contacts decision gives parties to such a settlement a degree of reassurance that there will be no negative presumptions applied and the analysis will be based on the specific facts at hand.

Eric Silverstein, a summer associate at Cozen O'Connor, assisted with the drafting of this Alert.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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