Second Circuit: Trademark Agreements Restricting Keyword Advertising Are Not Anti-Competitive

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[co-author: Sofiya Andreyeva]

In a recent decision, the U.S. Court of Appeals for the Second Circuit clarified the legal standing of trademark settlement agreements and upheld agreements prohibiting a competitor’s use of a trademarked term in keyword search advertising. On June 11, 2021, the Second Circuit reversed the Federal Trade Commission’s Final Order that 1-800 Contact’s entry into and enforcement of trademark settlement agreements (Agreements) violated Section 5 of the FTC Act, 15 U.S.C. § 45. The Agreements, in relevant part: (1) prohibited parties from bidding on each other’s trademarked terms as keywords on online advertising search engines auctions, and (2) required parties to purchase negative keywords to prevent ads from appearing when consumers searched a trademarked term specified in the agreement.

The Second Circuit’s reversal creates a more favorable legal landscape, both for trademark rightsholders seeking to settle disputes by entering into trademark agreements and the parties interested in enforcing them.

In 2016, the FTC challenged the Agreements, alleging they unreasonably restrained truthful, non-misleading advertising and price competition in search engine auctions. An FTC administrative law judge determined the Agreements violated Section 5. 1-800 Contacts appealed to the full FTC, which affirmed the judge’s decision. 1-800 Contacts then appealed the FTC’s Final Order to the Second Circuit.

The Second Circuit rejected the FTC’s antitrust analysis. The court first agreed with the FTC that intellectual property rights are not complete shields to antitrust liability and reasoned that trademark settlement agreements, therefore, cannot categorically escape antitrust scrutiny. However, the court faulted the FTC’s application of the “inherently suspect” or “quick look” analysis and found the Agreements were “not so obviously anticompetitive to consumers” and that trademark settlement agreements, categorically, have “not been widely condemned in [the court’s] judicial experience.”

The Second Circuit then applied a rule of reason analysis and determined there was insufficient evidence of anticompetitive harm. The court also concluded the Agreements had “cognizable procompetitive justifications” and emphasized that trademark agreements should be presumed procompetitive because they “are favored in the law as a means by which parties agree to market products in a way that reduces the likelihood of consumer confusion and avoids time-consuming litigation.”

Although most trademark agreements with procompetitive justifications, including those with keyword search restrictions, will not implicate antitrust concerns, the Second Circuit’s opinion is not an absolute green light. The court cautioned that not every trademark agreement has a valid procompetitive justification. Antitrust liability may still result when the “provisions relating to trademark are auxiliary to an underlying illegal agreement between competitors.”

As a result of the opinion, junior rights holders could see an uptick in requests to place limitations on their keyword advertising as part of the resolution of trademark disputes. While courts are likely to be deferential in future cases involving similar agreements, antitrust liability involves a fact-intensive inquiry. Companies seeking to protect their trademark rights by restricting their competitors’ uses of trademarked terms should consider not just the trademark issues, but also whether any anticompetitive concerns might arise from such agreements.

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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