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  • Writer's picturePaul Peter Nicolai

Decision Helps Brands Pay Less per Click

Updated: May 10, 2022

Have you ever searched for a brand online only to find that the first link leads to a competitor or reseller website? This can be a significant problem for direct-to-consumer manufacturers and brands.

The Second Circuit’s recent decision in 1-800 Contacts v. Federal Trade Commission has cleared the way for manufacturers to use search term ad agreements or keyword bidding agreements with reseller partners and competitors to protect their brand names and trademarks on the internet in specific contexts.

Search engines generally display organic and sponsored categories of links in search results. Sponsored links are advertisements that brands pay to appear at the top of searches. Search term advertising is a key marketing tool for manufacturers. Brands have spent increasing portions of their marketing budget to bid on search engine keywords for brand names and associated terms. Not only do brands bid on their trademarks, but they also may bid on keywords or search terms related to competitor products as a marketing tactic. Paid search works like an auction — the more money bid on a word, the more likely an ad will appear at the top of a consumer’s search results.

With the rise of keyword or search term advertising, many manufacturers have considered keyword bidding agreements and restrictions with their resellers with the purpose of (1) protecting their brands’ trademarks by limiting confusion and controlling where and how their brand and products are being advertised and promoted and (2) keeping costs of search term advertising down while driving more direct-to-consumer sales.

However, these agreements with competitors and reseller partners can raise antitrust issues.

Unlike the European Union, recent case law indicates keyword bidding agreements can be permissible under U.S. jurisprudence.

Keyword agreements can raise serious concerns under European antitrust laws. The European Commission fined a clothing manufacturer for imposing restrictions on its authorized retailers, prohibiting them from bidding on its brand names and trademarks as keywords in search engine ads. This was in the context of a system found to restrict cross-border selling within the European Union and limit the feasibility of authorized retailers making online sales altogether, both of which are serious violations of European antitrust laws.

The European Commission rejected the argument that the restrictions were imposed in favor of brand protection when the limits were imposed on authorized resellers. Following that decision, uncertainty remains regarding the limits of lawful limits in Europe. Any policy that limits resellers from bidding on brand names in search advertising requires careful assessment.

This is not the case under U.S. case law. The Second Circuit overturned an FTC decision finding that 1-800 Contacts had violated antitrust laws by entering into trademark dispute settlement agreements with thirteen of its competitors to refrain from bidding on keyword search terms for internet advertisements on various search engines. The FTC concluded the agreements violated antitrust law, hurting consumers by blocking ads that would inform them that identical products were available at lower prices and reducing competition for keywords.

In reversing the FTC’s decision, the Court found the agreements should not be viewed as inherently suspect but rather analyzed under the more lenient rule of reason. Under the rule of reason approach, a court must weigh an action’s pro-competitive and anti-competitive effects to determine whether it violates antitrust laws. The Court concluded keyword bidding agreements could offer pro-competitive justifications, including protecting trademarks and preventing confusion in the marketplace. The Court held that 1-800 Contacts’ contracts did not violate U.S. competition laws.

The Court issued a few words of caution. The Court acknowledged that other circuits have considered advertising restraints in different contexts and have found this conduct to have anti-competitive effects. The Court also explained that if the provisions relating to trademark protection are auxiliary to an underlying illegal agreement between competitors, or if there were other exceptional circumstances, it would think twice before concluding the challenged conduct has a pro-competitive justification.

This decision confirms that keyword bidding agreements between competitors may be permissible in the US under certain circumstances and that such agreements are analyzed under the rule of reason. This is a much more permissive approach than the European authorities are likely to take.

It is important to note that it is yet to be seen how lower courts, other circuit courts, and federal agencies will approach the issue in the future when faced with different scenarios.

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