FTC's Antitrust Complaint Against 1-800 Contacts - Clear or Blurred Vision of Antitrust Scrutiny of Settlement Agreements Entered to Protect Trademarks in Advertising?

On October 27, 2017, Chief Administrative Law Judge D. Michael Chappell rendered his Initial Decision in the FTC's Complaint against 1-800 Contacts, a complaint challenging as a violation of Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45) and as an unfair method of competition 1-800 Contacts' settlement agreements with numerous competitors that prohibit competitors from bidding on 1-800 Contacts' trademark terms in search advertising on the Internet and that also require competitors to employ "negative keywords" directing search engines not to display the competitors' advertisements in response to any search inquiry that includes 1-800 Contacts' trademarks.  The challenged settlement agreements were the product of 1-800 Contacts' cease-and-desist letters sent to and several lawsuits filed against competitors beginning in 2004 that asserted that the competitors' search advertisements that appeared in response to a user's query on Internet search engines containing the term "1-800 Contacts" or variations thereof constituted trademark infringement.

The Initial Decision

The Initial Decision sided with the FTC, upholding the FTC's complaint and finding that the FTC "met its burden of proving that the Challenged Agreements unreasonably restrain trade in violation of Section 5 of the FTC Act….  The evidence in this case demonstrates that the advertising restraints imposed by the Challenged Agreements cause harm to consumers and competition in the market for the sale of contact lenses online.  This is sufficient to establish [the FTC's] prima facie case that the agreements are anticompetitive.  The evidence fails to prove that the Challenged Agreements have countervailing procompetitive benefits that outweigh or justify the demonstrated anticompetitive effects …."  Initial Decision, p. 7.  The Initial Decision ordered 1-800 Contacts to cease and desist from entering into any new agreements or enforcing its existing agreements with competitors restricting the competitors' search advertising.  Initial Decision, pp. 203-04.  The Initial Decision resulted from a month long evidentiary hearing (hearing began on April 11, 2017 and ended on May 12, 2017) where "[o]ver 1,250 exhibits were admitted into evidence, 43 witnesses [included experts] testified, either live or by deposition, and there [was] 4,554 pages of trial transcript.  The Parties' post-trial briefs, proposed findings of fact and conclusions of law, reply briefs and replies to proposed findings of fact and conclusions of law total 3,514 pages."  Initial Decision, p. 3 & n.2.

1-800 Contacts Fights Back 

In December, 2017, 1-800 Contacts filed a Brief on Appeal.  In its appeal, 1-800 Contacts argued first that the challenged agreements are commonplace settlement agreements to protect trademarks that are not subject to antitrust scrutiny at all under FTC v. Actavis, Inc., 133 S. Ct. 2223, 2233 (2013).  Brief, pp. 1-3.  1-800 Contacts argued, among other points, that each of the settlement agreements "was a standard non-use agreement whereby a party agreed not to use another's trademark, which is 'the order of the day' in trademark infringement actions."  Brief, p. 11.  In addition, "while the outcome of the settled claims was uncertain, the challenged settlements provided for relief that a court could have ordered if 1-800 Contacts had prevailed" and that was the proper focus, not whether 1-800 Contacts actually prevailed or would have prevailed in litigation.  Brief, p. 12 (The ALJ rejected 1-800 Contacts' argument that the settlement agreements were procompetitive as protecting trademarks, highlighting that one competitor of 1-800 Contacts – Lens.com – did not settle and eventually was granted summary judgment in its favor, with the court finding that the conduct which 1-800 Contacts believed constituted trademark infringement actually did not.  Initial Decision, pp. 46, 147-51, 169-71).  1-800 Contacts argued that antitrust scrutiny of settlements like the ones it entered into with its competitors to protect against trademark infringement would lead "to a regime that presumptively condemns intellectual property settlements, turning on its head a century of precedent instructing courts to uphold settlements 'whenever possible.'"  Brief, p. 3.

Then, 1-800 Contacts argued (Brief, pp. 3-4) that even if the agreements were subject to antitrust scrutiny, they do not violate the antitrust laws for multiple reasons, including (1) there is no evidence that the agreements had any anticompetitive effects, i.e., no evidence that they "resulted in lower output or supracompetitive prices for contact lenses", (2) 1-800 Contacts does not have market power – "it accounts for only 10% of contact lens sales in the United States" if the market is defined as such, and even if the market is only just online sales of contact lenses (the market as defined by the ALJ in his decision), there are no barriers to entry or expansion so 1-800 Contacts 50%+ share of online sales does not prove market power, and (3) there was no showing that the challenged settlement agreements "were not reasonably necessary to obtain the procompetitive benefits of settling litigation and protecting trademarks" because there was no proof that there was any other practical way for 1-800 Contacts to settle and at the same time protect its trademark rights.  1-800 Contacts also argued that the Initial Decision is unconstitutional because "[i]t invades Article III courts' inherent power to supervise the existing settlements and retroactively deprives 1-800 Contacts of the ability to enforce its trademark rights in violation of the Fifth Amendment."  Brief, p. 4.

What to Expect 

According to the scheduling order for briefing the appeal, the FTC was supposed to file an Answering Brief on or before January 24, 2018, and then 1-800 Contacts would file its Reply Brief on or before February 9, 2018.  However, the recent government shut-down has extended the deadlines.  Briefing was stayed during the shutdown and for an additional five business days afterwards.  Check back here for updates on the appeal briefing and to see where this case goes next.

About The Author

Melinda Burton | Faruki Attorney