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Brand owners beware: agreements with distributors and competitors that restrict bidding on keywords may be anticompetitive

Brand owners beware: agreements restricting bidding on search terms may be anticompetitive

Posted on 17 April 2019

In order to maintain or enhance the volume of products sold via their own website, brand owners oftern seek to limit the ability of authorised distributors (and in some cases their competitors) to bid on the brand owners' trade marks as keywords or logos.

Following a European Commission (the "Commission") decision in December 2018 to fine Guess, the American clothing firm, just under €40 million for preventing its authorised distributors from bidding for search terms including its trade marks, the Commission has made it clear that such practices are likely to face increased scrutiny.

Thomas Kramler, the new head of a Commission unit responsible for e-commerce, told an antitrust conference in Washington DC in March 2019 that restricting bidding for online advertising was becoming a 'space to watch' and 'something that antitrust authorities will have to grapple with going forward'.

Guess: restriction on authorised distributors

The Commission's decision against Guess is the first in the EU on the issue and may set a precedent for future Commission and national competition authority decisions.  

The Commission found that Guess' practice of stopping its authorised distributors, by virtue of provisions in its wholesale agreements, retail store sublicense agreements and its General Sales Terms, from bidding for search terms which included its trade marks, had restricted competition by object and so had infringed Article 101(1) of the Treaty on the Functioning of the European Union. By their own nature, the restrictions imposed by Guess were harmful and it was likely that there would have been a negative effect on competition, so the Commission decided that they did not need to demonstrate any actual or potential anticompetitive effect to impose a fine on Guess. The restrictions were 'by object' a restriction of competition and were therefore unlawful.

The Commission did not accept Guess' argument that the need to protect their brand image provided a legitimate objective for the restrictions, as Guess themselves had entered into the agreements with distributors and therefore had accepted that the distributors would sell their products.

Since they were able to draw the Commission's attention to the infringement in the first instance and cooperated fully with the Commission's investigation, Guess benefited from the Commission's leniency regime and received a 50% fine reduction.  

I-800 Contacts: restriction between rivals

A decision by the US Federal Trade Commission (the "FTC") against online contact lens retailer 1-800 Contacts, in November 2018, reveals that brand owners may also be sanctioned for entering into agreements which restrict bidding on search terms amongst competitors.

1-800 Contacts had entered into settlement agreements with its rivals whereby the companies agreed not to bid on keyword search ads related to their rivals' trade mark terms. Such practices were deemed by the FTC to be 'restrictions on a consumer's opportunity to see a competitor's ad in the first place.'

The FTC did not accept 1-800 Contacts' argument that the agreements were entered into with the object of preventing future trade mark litigation and so provided a legitimate justification for their anticompetitive behaviour, as they saw no reason why 1-800 Contacts could not have explained, in a brief statement placed beside the advertisement, that the ad sponsor was in no way affiliated with the company.

How to protect your brand

The Guess and 1-800 Contacts decisions, combined with Thomas Kramler's comments, display an appetite amongst competition authorities to clamp down on anticompetitive agreements which restrict bidding for search terms. This is part of a wider initiative by the Commission and national competition authorities to challenge any provisions which appear to restrict online selling by distributors and retailers.

Therefore brand owners would be well-advised to review any agreements made with both distributors and competitors in order to identify any provisions which restrict bidding for search terms and which may be considered anti-competitive. Should any such provisions be identified, brand owners should consider waiving the provisions by amending the agreements or as a minimum, not enforcing such provisions.

Going forward, brand owners should ensure that any future agreements exclude such provisions or that legal advice is taken prior to including any restriction on bidding for search terms.

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