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FTC’s Antitrust Ruling on 1-800 Contacts Gets Overturned (1)

June 11, 2021, 3:43 PM; Updated: June 11, 2021, 7:08 PM

1-800 Contacts Inc. convinced the Second Circuit to reverse an FTC ruling that the contact lens retailer used trademark agreements with rivals to manipulate online ads and inflate prices.

The Federal Trade Commission failed to provide evidence of anticompetitive price increases that resulted from 1-800 Contacts’ agreements with rivals to allegedly restrict competition in online ad auctions, the U.S. Court of Appeals for the Second Circuit said in a ruling Friday.

Between 2004 and 2013, 1-800 Contacts pressured competitors to strike 13 agreements to settle disputes over trademark infringements related to their online advertisements, the appellate court said in an unsigned opinion.

The agreements prohibited the competitors from using each other’s trademarks and URLs, such as “1-800 Contacts,” as advertising keywords to prompt displays of competing products.

The commission ruled in 2018 that the agreements violated antitrust law. It banned 1-800 Contacts from entering agreements that limit competitors’ participation in search advertising auctions. The Draper, Utah-based company enforced the agreements to “unreasonably restrain truthful, non-misleading advertising as well as price competition in search advertising auctions,” the FTC said in its complaint.

But the appeals court said the commission’s evidence was “theoretical and anecdotal” and didn’t directly prove anticompetitive behavior, the appeals court said.

The restraints alleged by the FTC could actually have pro-competitive effect because they are derived from agreements that promote trademark policy, the order said. “Forcing companies to be less aggressive in enforcing their trademarks is antithetical to the procompetitive goals of trademark policy,” it said.

The FTC’s ruling warrants reversal because the agency failed to prove that less restrictive practices by the company would have achieved the same result the trademark agreements sought, the order said.

“We disappointed in the ruling, and we will be considering our options,” the FTC said in a statement provided to Bloomberg Law.

More Onerous Standard

Any antitrust plaintiff, whether it’s a private or government entity, will need to prove its case under the more onerous rule of reason standard with empirical economic evidence of anticompetitive harm, Lucy Clippinger, an antitrust attorney at Baker & Miller PLLC, said in an email.

The decision makes clear that intellectual property settlements aren’t generally immune from antitrust scrutiny, she said.

But “the Second Circuit will treat agreements to protect trademarks (and perhaps agreements to protect other intellectual property rights) as presumptively pro-competitive because they support the policies underlying intellectual property rights,” she said.

Judges Gerard E. Lynch and Steven J. Menashi joined the opinion. Judge Peter W. Hall, an original member of the panel, died before the decision was issued.

The case is 1-800 Contacts, Inc., v. FTC, 2021 BL 217823, 2d Cir., No. 18-3848, 6/11/21.

(Updated with additional reporting throughout.)

To contact the reporter on this story: Siri Bulusu in Washington at sbulusu@bloombergtax.com

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com

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