U.S. Court of Appeals for the Second Circuit Vacates Final Order of the Federal Trade Commission in 1-800 Contacts Case

On June 11, 2021, the United States Court of Appeals for the Second Circuit vacated a Final Order of the Federal Trade Commission (FTC), finding that 1-800 Contact’s “typical trademark settlement agreements” did not unreasonably restrain trade in violation the Section 5 of the FTC Act given the lack of direct evidence of an anticompetitive effect and the strong procompetitive justification of protecting 1-800 Contract’s trademarks. 1-800 Contacts, Inc. v. Federal Trade Commission, 2d Cir., No. 18-3848, 6/11/2021. The Court of Appeals also found that it did not have sufficient experience with the type of conduct at issue to permit the abbreviated antitrust analysis favored by the Commission, applying a full-blown rule of reason analysis instead. The Court remanded the case to the Commission with instructions to dismiss it.

In June 2019, the American Intellectual Property Law Association (AIPLA) filed an amicus brief in the case, urging the court to vacate the Commission’s order and remand the action for an application of the traditional rule-of-reason standard. The project was a joint effort of AIPLA’s Antitrust Law Committee, Amicus Committee and Trademarks Committee. The lead brief drafters were Philip Giordano, partner at Hughes Hubbard & Reed, and Ted Davis, partner at Kilpatrick Townsend & Stockton. 

The case involved 13 settlement agreements that resolved trademark infringement claims brought by 1-800 Contacts against competing online contact lens retailers, which had purchased search advertisements using 1-800 Contacts’ trademarks as keywords. As part of the settlements, the alleged trademark infringers agreed to refrain from engaging in search advertising using specific keywords and to employ 1-800 Contacts’ trademarks as negative keywords. A 14th agreement with a distributor imposed similar restrictions. The FTC challenged the agreements as unreasonably restraints on advertising competition as well as price competition in search advertising auctions.

The Court of Appeals for the Second Circuit did not go so far as to say that ordinary trademark infringement settlements with no unusual features are immune from antitrust scrutiny. But the Court did affirm the principle that a settlement within the scope of the trademark right should receive deferential antitrust treatment to encourage the enforcement of trademark rights. The Court observed that “we owe significant deference to arm’s length use agreements negotiated by parties to those agreements. Doing so may give rise to collateral harm in a relevant market. But forcing companies to be less aggressive in enforcing their trademarks is antithetical to the procompetitive goals of trademark policy.”

The ruling is expected to reduce the risk of ex post review or re-litigation of trademark infringement settlements, encourage trademark enforcement, and foster settlement of trademark infringement disputes.