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Competition law implications of search engine advertising and agreed negative listing between competitors

There is an ongoing controversy relating to search engine advertising. In particular regarding the legality of purchasing search terms incorporating third-party trademarks. In seeking a reasonable legal standard, this article discusses the latest legal development in trademark, unfair trading practices, marketing, and competition law.
Business woman using laptop computer do online activity on wood table at home office.

Current status – The use of third party trademarks in search engine adveritsing

The use of competitors’ trademarks as search terms is predominantly considered acceptable practice in several jurisdictions. This includes the United States, Sweden, Germany, England, and Norway. The European Court of Justice has rejected a trademark holder’s infringement claim based on such use in case C-323/09, Interflora. Google Ads’ guidelines currently explicitly permit the use of paid search terms in the EU and EFTA. There seems to be a general consensus that the benefit of such use exceeds potential disadvantages. The provision of consumer information and choice outweighs trademark holders’ monopoly on use of its mark in certain situations, such as the marketing of competing products and services.

Despite settled EU trademark law permitting such advertising practices, we see a trend where trademark holders apply national rules on unfair trading practices and marketing in challenging the legality. They argue that a competitor’s use of one’s trademark in Google Ads (and similar) may lead the consumer to believe that there is a commercial link between the trademark holder and the competitor. This is particularly prevalent if the mark itself is used in the questioned advertisement, and not only the underlying search term.

If the advertisement states or implies that the owner of the mark has approved the association of the competing product or service with its own product or service, or implies an association of the advertiser’s business with the business that uses the mark, a breach of unfair trading practices and marketing law may be established. The slight irony is that the same would also be the result in under traditional trademark law, and in accordance with the Courts reasoning in Interflora, which ruling specifically states that trademark holders are unentitled to legally prevent “advertisements displayed by competitors on the basis of keywords corresponding to that trade mark, which put forward – without offering a mere imitation of the goods or services of the proprietor of that trade mark, without causing dilution or tarnishment and without, moreover, adversely affecting the functions of the trade mark with a reputation – an alternative to the goods or services of the proprietor of that mark.”

To establish a breach of the rules on unfair trading practices and marketing, it should be necessary to meet an additional threshold. It makes little sense to permit a particular use under the more specialized trademark law, while concurrently prohibiting the exact same use under the law of unfair trading practices and marketing. That is of course not to say that it theoretically could be possible in certain instances.

The main rule, however, should be that the trademark holder’s burden of proof must exceed the mere fact that a competitor’s purchase of its trademarks as Google Ads might constitute subjective bad faith. The trademark holder must also provide a showing of actual consumer confusion or at least an elevated risk of such consumer confusion. Keyword advertising is fair play and not free-riding unless the consumer is misled. There should be no encumbrances for competitors to use trademarks in triggering truthful, nondeceptive advertising. Such access constitutes the foundation of marketing, trademark and competition law.

Why competition law may impact search engine advertising practices

Most advertising practices and strategies are per se unilateral, meaning that the decision by the advertiser to refrain from using, or utilizing competitors’ trademarks in search engine advertising is a decision taken independently without colluding with competitors. Advertising strategies are a vital part of strategic decision-making and may influence the marketing costs of a company. Because of this, there is a strong presumption that cooperation, concerted practices, and information sharing among competitors about advertising strategies may impact competition in a manner that leads to a breach of competition law.

The so-called “negative listing,” i.e. the usage of negative keywords in search engine advertising, enables the advertiser to exclude search terms from advertising campaigns and help the advertiser to focus on only the keywords that matter the most. This typically leads to better targeting of an advertising campaign. If negative listing takes place on a unilateral basis, there is no collusion between competitors. If, however, negative listing takes place as a result of and agreement or concerted practice between competitors, there might be direct impact on the competitive relationship between competitors. Such concerted practices are likely regulated by Article 101 of the TFEU and national prohibitions prohibiting collaborative practices in Europe. Coordination of advertising practices will most likely be classified as restrictions that have as their object to weaken competition, thus leading to the conclusion that such coordination is a hardcore restriction which cannot be justified.

There has not been much focus on negative listing and coordination among competition authorities so far. Investigations seem to focus more on the role of the major search engine providers, in particular, Google. That may hardly come as a surprise due to Google’s dominance in the search engine advertising market. That said, the issue has not gone entirely unnoticed. In June 2019, The Netherlands Authority for Consumers and Markets published a study on the price effects of non-brand bidding agreements in the Dutch hotel sector. The report concluded that advertising restrictions were likely to lead to higher prices on hotel websites and that potential ad spend savings are not passed on to consumers in the form of lower prices.

The most high profile case where competition authorities have enforced against agreed restrictions in the form of negative listing between competitors is the 1-800 Contacts case. The U.S. Federal Trade Commission found that the leading U.S. online retailer of contact lenses violated Section 5 of the FTC Act by entering into negative listing agreements with fourteen of its competitors. The firms had agreed to refrain from keyword bidding to avoid own hits where the user’s search phrase contained a competitor’s brand name. According to the FTC, competitors cannot legally collude to use negative keywords since such agreements harm competition because they prevent consumers from obtaining information that would permit price and service comparisons. There seems to be no reason to interpret European competition law differently.

The UK’s Competition and Markets Authority has earlier pointed out (in 2016 – case reference 50332) that agreements restricting bidding behavior in paid online search advertising may have harmful effects on competition. The Authority noted that this is particularly the case where one or more similar agreements include parties that collectively represent a material share of the relevant markets and, in the context of brand bidding restrictions, as a result of negative matching obligations in relation to brand terms which an advertiser would not negatively match if it had not been for the agreement. Although from a slightly different angle, the European Commission also recently imposed a fine on Guess, a manufacturer of clothing apparel for prohibiting its distributors from bidding on Guess’ brand name in paid search auctions.

Collusion may lead to severe competition law breaches

Cooperation between competitors is typically deemed to harm competition if there are no established relevant grounds for justifying the collaboration. In our opinion, agreed negative listing by its very nature has the potential to restrict competition. The objectives such coordination seeks to attain, and the economic and legal context of negative listing based on agreements must lead to the conclusion that such agreements are, as the main rule, indefensible under EU competition law. The Commission’s horizontal guidelines explicitly mention information exchanges regarding marketing plans and production costs as strategic information. Agreeing on the method and extent of search engine advertising and negative listing must be deemed to give rise to restrictive effects on competition. This also extends to recommendations or agreed practices in trade associations that limit the members’ freedom to advertise. Such concerted practices reduce the parties’ decision-making independence by decreasing their incentives to compete when advertising for their goods and services.

On the premise that Article 101 (1) TFEU applies to negative listing agreed between competitors, which is a seemingly reasonable conclusion, such concerted practices should likely be classified as a core competition law infringement. We furthermore see no apparent valid or objective justification for such practices under the exemption in Article 101 (3) because the restriction does not contribute to improving the production or distribution of while allowing consumers a fair share of the resulting benefit. It is also hard to see how such restrictions would be indispensable to the attainment of the objectives enshrined in that provision. After the decision in Interflora, trademark defenses hold little value. This must lead to the conclusion that such defenses of collusive negative listing practices cannot be defended under European trademark law, in particular not where collusion is established. Also, due to the principle of primacy of EU law, national unfair trading practices or marketing laws cannot be applied as a defense either in cases where the negative listing is based on a concerted practice between competitors.

About the authors

Jan Magne Langseth, partner and lawyer, is the head of SVW’s competition practice. He is ranked as a leading competition lawyer in Chambers, EL500 and Who’s who/GCR.

Dr. Nicholas Foss Barbantonis is a trademark specialist and lawyer working for the technology and media team.