BRIEF OF RICHARD A. EPSTEIN, KEITH N. HYLTON, THOMAS A. LAMBERT, GEOFFREY A. MANNE, HAL SINGER, AND WASHINGTON LEGAL FOUNDATION, IN SUPPORT OF Petitioner in 1-800 CONTACTS, Inc. v. Federal Trade Commission
Introduction and Summary of Argument
Building and maintaining a successful brand is no small task. First you must spot a widespread need or desire that no one else can see—or can even feel yet. “People don’t know what they want until you show it to them,” Steve Jobs said. An entrepreneur must aim, therefore, “to read things that are not yet on the page.” Walter Isaacson, Steve Jobs 567 (2011). This, believe it or not, is sometimes the easy part.
Next, you must get people to notice you and your great idea. You must raise your voice above the modern din. This usually requires advertisements. Lots of advertisements. “Half the money I spend on advertising is wasted,” nineteenth-century retailer John Wanamaker is supposed to have said; “the trouble is I don’t know which half.”
Finally, you must maintain your momentum. During a train ride, a friend asked William Wrigley why he spent so much advertising his chewing gum when he already dominated the market. “How fast do you think this train is going?” Wrigley replied. “About ninety miles an hour,” answered the friend. “Well,” said Wrigley, “do you suggest we unhitch the engine?” David Ogilvy, Ogilvy on Advertising 171-72 (1985).
All this assumes, of course, that after you have innovated, invested, and risked all to climb to the top, the antitrust laws will not thwart your efforts to recoup a reward commensurate to your sacrifices. To read the Sherman Act as “making everyone fight but forbidding anyone to be victorious” would, observed Justice Holmes, turn it into an “imbecile statute.” Ron Collins, Ask the Author: “The Great Oracle of American Legal Thought”—Revisiting the Life and Times of Justice Holmes, SCOTUSblog, http://bit.ly/2Phv3qh (Mar. 28, 2019).
With pluck, daring, and dedication, 1-800 Contacts built the online contact lens market. People had assumed that contact lenses were available only at an optometrist’s office or a brick-and-mortar store. Spending many millions of dollars on advertising, 1-800 raised awareness that contact lenses could be bought—and bought cheaply—on the web. And 1-800 did not stop there. Thanks in no small part to its continuing to advertise widely to this day, the online lens market remains a thriving one.
Many copycat firms wisely followed 1-800 into the online contact lens market. Unfortunately, however, some of these firms sought not just to share in the successful market 1-800 created, but also to directly piggyback on 1-800’s advertising. Instead of following 1-800’s lead by doing the hard and expensive work of advertising broadly—on television, in print, on the radio, and so on—these firms just bought the advertising space at the top of internet search results for terms like “1-800 Contacts.” Rather than attract new customers of their own, in other words, the firms just tried to divert 1-800’s.
1-800 sued (or threatened to sue) each of the free-riding firms for trademark infringement, and each lawsuit settled. As part of the settlements, the parties agreed not to buy advertisements keyed to navigational searches of brand names like “1-800 Contacts.” Generic search terms like “cheap contact lenses” remained fair game for all, as did advertising in all other forms of media.
The Federal Trade Commission examined whether the settlements are an antitrust violation under the Sherman Act (as applied through the FTC Act). Assuming the settlements are even a proper subject of antitrust scrutiny 1-800 argues they are not—the FTC needed at the outset to decide the standard under which to perform its review. It could choose to conduct either (a) a “quick look” analysis of the settlements’ effect on competition, or (b) a more complete “rule of reason” analysis of it. The FTC erred, we contend in this brief, in electing to take only a “quick look” before condemning the settlements:
A. The quick-look standard governs only when the conduct at issue is obviously anticompetitive. The Supreme Court has accordingly applied the quick-look standard only to agreements that explicitly suppress competition. The settlements here, which leave almost the entire universe of contact-lens advertising intact, do nothing like that. What is more, the Supreme Court has declined to apply the quick-look standard to conduct accompanied by suspicious elements, such as a de facto advertising ban or a payment to delay entry into a market, that do not exist here.
B. Even without the Supreme Court’s guidance, the need for a rule-of-reason analysis would still be clear. The FTC cited no case or research that finds behavior analogous to the settlements an unreasonable restraint of trade. This is hardly surprising given that, as the FTC itself acknowledged, search-engine keyword advertising is “relatively new.” The lack of consensus about the settlements’ effect on competition should have driven the FTC toward the rule-of-reason standard.
Not only do the settlements serve no anticompetitive ends; they serve procompetitive ones. As 1-800 and Commissioner Phillips, writing in dissent below, explain, the settlements save litigation costs and protect trademark rights.
We home in on one vital benefit of trademark protection: the suppression of advertisement free riding. 1-800’s advertising attracted customers both to purchase contact lenses online and to purchase them from 1-800 specifically. The settlements did nothing to stop the general shoppers from finding the cheapest online contact lenses, but they did stop firms from diverting customers searching for 1-800. The settlements thus helped ensure that when 1-800’s broad (and expensive) advertising attracted new customers specifically to 1-800, competitors could not poach those customers on the cheap. By foreclosing a form of advertisement free riding, the settlements preserved the incentives that lead firms to invest in advertising in the first place. And because they therefore may have promoted, rather than suppressed, advertising, the settlements should not have been declared “obviously” anticompetitive and then subjected to a mere quick look.
C. The FTC claimed that, although it need not have done so, it ultimately conducted a rule-of-reason analysis. But the FTC never defined a market. And although it looked at prices, output, and quality, its analysis was abbreviated and defective. It plainly both adopted and applied the quick-look standard. This was error.
Read the full brief here.