Online shipping

Restrictions on Online Shipping Search Advertising

Internet advertising is big business. He can also be fierce. One of the ways businesses market their goods and services online is through “search advertising.” When an online shopper uses a search engine, the search engine program typically returns two types of search results to the shopper, both of which provide links to websites. The second type of results is considered “organic” and appears because the search engine’s algorithm considers them the most relevant to the buyer’s search. But the first type of search results are “sponsored” advertisements, which appear because the owner of the featured website has paid for their page to appear in that space. Sponsored ads almost always appear before organic search results.

Search engines determine which sponsored ads to display on a search results page based, in large part, on the relevance of the buyer’s search to various “keywords.” Advertisers bid on these keywords in auctions organized by search engines. Competitors frequently bid on each other’s brand names and brand terms so that their own advertisement is shown when a consumer searches for a competitor. Imagine, for example, that you search for “McDonald’s” and advertisements for Burger King appear first.

1-800 Contacts, Inc. (“1-800”) is an online contact lens seller and is perhaps the most recognizable name among many online contact lens retailers. Online competitors of 1-800 are therefore looking to buy “1-800 contacts” and other company-branded terms as keywords to ensure that when a consumer searches for 1-800, their own website appears high in sponsored search results, and potentially drives customers away from 1-800. 1-800 often charges more than other online retailers, so when its competitors’ ads appear in response to a search for 1-800 brand terms, its own online sales decline. Unsurprisingly, this doesn’t sit well with 1-800.

In response to this type of conduct, 1-800 has filed more than a dozen trademark infringement lawsuits against its competitors for alleged misuse of its trademarks, both in keywords and otherwise. Whether or not 1-800’s claims were ultimately substantiated, most competitors apparently preferred not to pursue those claims in court and entered into settlement agreements. Under the terms of the settlement agreements, competitors agreed not to bid on 1-800’s name, URLs or variations of its brands when participating in future search engine-driven keyword auctions. They also agreed to use “negative keywords”, so that a search including one party’s brands would not trigger the other party’s ads to appear. Indeed, 1-800’s competitors agreed not to advertise their products when consumers searched online using 1-800’s trademarks.

In 2016, the Federal Trade Commission (FTC) filed an administrative complaint against 1-800, alleging that its settlement agreements unreasonably restricted truthful and non-misleading advertising in violation of FTC Section 5, 15 USC § 45. (Section 5 of the FTC Act provides that “unfair or deceptive acts or practices in or affecting commerce[…]are[…]declared illegal. The FTC said the regulations unfairly prevent 1-800 competitors from running advertisements informing consumers the same contact lenses were available at a lower price from other online retailers, reducing competition and making more difficult for consumers to compare retail prices online.

The case was tried before an administrative law judge, who found that there had been a violation. 1-800 appealed to the FTC, but a majority of the Board agreed that the agreements violated Section 5 of the FTC Act. The majority called the settlement agreements “inherently suspect” and then analyzed the proposed 1-800 pro-competitive justifications. He rejected 1-800’s claim that the benefits of trademark protection and reduced legal costs outweighed any potential harm to consumers. 1-800 then turned to the second circuit.

The Second Circuit concluded that while “trademark settlement agreements are not automatically immune from antitrust review,” the FTC erred when it concluded that the agreements constituted an unfair method of competition by under the FTC law. According to the Second Circuit, the FTC erred in treating the 1-800 deals as “inherently suspicious,” thereby placing the initial charge on 1-800 to justify the deals. Instead, the FTC should have undertaken a “rule of reason” analysis to determine whether the agreements restricted trade. According to this analysis, the initial burden would have been on the FTC to prove that the agreements had an actual detrimental effect on competition as a whole before 1-800 had to offer pro-competitive justifications for the agreements. And, if 1-800 were able to provide such evidence, the onus would be on the FTC to prove that any legitimate pro-competitive advantage offered by 1-800 could have been obtained by less restrictive means. By erroneously treating the 1-800 settlement agreements as “inherently suspect,” the appeals court found that the FTC essentially found them to be anti-competitive per se, without having to demonstrate direct evidence of harm or impact. anti-competitive.

The appeals court observed that the restrictions imposed on 1-800 competitors via the settlement agreements “could conceivably be considered to have a net pro-competitive effect because they arise from trademark settlement agreements.” In fact, agreements to protect trademarks must be presumed to be pro-competitive, the court said, relying on Second Circuit precedent. “While trademark agreements prevent competitors from competing as effectively as they otherwise could, we owe great deference to the arm’s length user agreements negotiated by the parties to those agreements,” the court concluded. The 1-800 settlement agreements prevented the parties from running advertisements on the 1-800 brand terms, thereby directly implicating trademark politics; and the FTC failed to meet its burden of proving that they were anti-competitive.

The Second Circuit ruling does not give online retailers free rein to enter into agreements with other retailers limiting how they advertise their own goods and services. But in the context of a good faith trademark dispute, a settlement agreement that prevents one competitor from using the other’s trademarks for keyword advertising seems to benefit from the doubt.

Watchlist: 1,800 contact files New search engine

As this Kattison Avenue issue was about to go to press, 1-800 Contacts filed yet another federal lawsuit, this time alleging (among other allegations) that eyewear retailer Warby Parker infringed trademarks 1-800’s business by buying search engine keywords such as “1-800 Contacts”, “1800 contacts” and “1800contacts” in order to advertise its recently launched contact lens business. 800 Contacts Inc. v. JAND Inc., d/b/a Warby Parker, Case No. 21-cv06966 (SDNY, filed August 18, 2021).

We will keep an eye on this litigation and report on it in more detail in an upcoming issue.

—David Halberstadter