1-800 Contacts sued over anti-competitive agreements

1-800 Contacts Sued by FTC1-800 Contacts, the United States’ largest online contact lenses retailer, has been sued by the FTC over charges that “it unlawfully orchestrated and now maintains a web of anti-competitive agreements with rival online contact lens sellers.”  The FTC said in a press release that the anti-competitive agreements “suppress competition in certain online search advertising auctions and that restrict truthful and non-misleading internet advertising to consumers, resulting in some consumers paying higher retail prices for contact lenses.”

FTC Says Bidding Agreements Eliminated Competition

In its administrative complaint, the FTC alleges that 1-800 Contacts entered into bidding agreements with approximately 14 other competing online contact lens retailers.  As a result of those bidding agreements, the FTC said that the competition in auctions to place advertisements on search results pages for Google and Bing was eliminated.

1-800 Contacts Sends Host of Cease-And-Desist Letters to Competitors

According to the FTC’s complaint, in about 2004, 1-800 Contacts started sending cease-and-desist letters to competing online contact lens retailers whose search advertisements appeared in response to searches containing the term “1-800 Contacts.”  In those cease-and-desist letters, 1-800 Contacts accused its competitors of trademark infringement.  The FTC says that 1-800 Contacts “claimed—inaccurately—that the mere fact that a rival’s advertisement appeared on the results page in response to a query containing a 1-800 Contacts trademark constituted infringement.”  1-800 Contacts would then threaten to sue any competitor that would not agree to the cease-and-desist request.

Most often, the competitors would quickly agree to the cease-and-desist request from 1-800 Contacts, “in order to avoid prolonged and costly litigation,” the FTC alleges.  However, the FTC says that one of the competitors refused to settle with 1-800 Contacts, and instead proceeded to litigation, albeit very costly.

FTC Alleges 1-800 Contacts Entered Into at Least 14 Bidding Agreements

The FTC alleges that between 2004 and 2013, 1-800 Contacts entered into “at least fourteen agreements with rival online sellers of contact lenses settling 1-800 Contacts’ purported trademark claims by restricting bidding in search advertising auctions.”  The FTC says these bidding agreements “go well beyond prohibiting trademark infringing conduct,” and instead “restrain a broad range of truthful, non-misleading, and non-confusing advertising.”

The Contents of 1-800 Contacts’ Bidding Agreements

As it relates to the content of the bidding agreements, the FTC alleges that all 14 bidding agreements “bar 1-800 Contacts’ competitors from bidding in a search advertising auction for any 1-800 Contracts’ trademarked terms … or variations thereof.”  Likewise, the bidding agreements are “reciprocal,” meaning they also bar 1-800 Contacts from “bidding for the competitors’ trademarked terms or variations thereof.”  13 of the 14 bidding agreements “also require 1-800 Contacts’ competitor to employ ‘negative keywords’ directing the search engines not to display the competitor’s advertisement in response to a search query that includes any of 1-800 Contacts’ trademarked terms or variations thereof, even if the search engines’ algorithms determine that the advertisement would be relevant and useful to the user.”  This provision of the agreements is also reciprocal.

Lens.com Defeats 1-800 Contacts After costly Litigation

The FTC sets forth that 1-800 Contacts “aggressively policed the Bidding Agreements, complaining to competitors when the company has suspected a violation, threatening further litigation, and demanding compliance.”  As noted, only one competitor stood up to the demands of 1-800 Contacts, Lens.com.  Lens.com opted to battle it out with 1-800 Contacts, engaging in costly litigation that ultimately ended with the Tenth Circuit Court of Appeals rejecting 1-800 Contacts’ trademark infringement claims.  There, the Tenth Circuit concluded that “consumers were not confused when an advertisement for Lens.com appeared on the search results page in response to a user query for ‘1-800 Contacts.’”

FTC’s Allegations of Anti-Competitive Effects of Bidding Agreements

When it comes to the alleged anti-competitive effects of the bidding agreements, the FTC alleges the following injuries to consumers:

  1. Unreasonably restraining price competition in certain search advertising auctions;
  2. Distorting prices in, and undermining the efficiency of, certain search advertising auctions;
  3. Preventing search engine companies from displaying to users on the results page the array of advertisements that are most responsive to a user’s search;
  4. Impairing the quality of the service provided to consumers by search engine companies, including the results page;
  5. Depriving consumers of truthful and non-misleading information about the prices, products, and services offered by online sellers of contact lenses;
  6. Depriving consumers of the benefits of vigorous price and service competition among online sellers of contact lenses;
  7. Preventing online sellers of contact lenses from disseminating truthful and non-confusing information about the availability of, and prices for, their products and services;
  8. Increasing consumers’ search costs relating to the online purchase of contact lenses; and
  9. Causing at least some consumers to pay higher prices for contact lenses than they would pay absent the agreements, acts, and practices of 1-800 Contacts.

1-800 Contacts Denies FTC’s Allegations

In the wake of the FTC’s complaint, 1-800 Contacts issued a statement denying the FTC’s claims of anti-competitive business practices:

1-800 Contacts strongly disagrees with the Federal Trade Commission’s (FTC) contention that settlement agreements designed to protect its trademark hinder competition. 1-800 Contacts is confident in its legal position and will vigorously defend its intellectual property rights in response to the administrative complaint filed today by the FTC.

The contact lens company also said:

1-800 Contacts has a long history of advocating for increased competition and consumer rights, including championing the passage of the landmark Fairness to Contact Lens Consumers Act of 2003 that increased convenience and lowered prices for consumers, and opposing recent price fixing by manufacturers. 1-800 Contacts strongly believes in a competitive contact lens marketplace and will continue to be a leading advocate for providing consumers with more choice, greater convenience and lower prices.

Lawsuit Over Alleged “Price-Fixing” Law

The company is also involved in several lawsuits challenging a Utah law that other contact lens manufacturers say was targeted at protecting 1-800 Contacts’ stronghold on the contact lens market in Utah.  The contentious Utah law prohibits “price fixing” by manufacturers that refuse to provide products to retailers that sell below a minimum price set by the lens makers.  U.S. District Judge Dee Benson denied the manufacturers’ motions for preliminary injunctions that would have halted enforcement of the law, a decision the companies have appealed.  Time will only tell whether the “price fixing” law will stand muster.  However, in the interim, 1-800 Contacts will be tied up with the FTC’s newly initiated litigation.

Companies Seeking to Enforce Trademark Rights Should Pay Attention to 1-800 Contacts Suit

While many online sellers have traditionally diligently enforced their trademark rights when competitors used search ad keywords targeting one the companies’ valuable trademarks or brands, the FTC’s suit against 1-800 Contacts makes clear that the FTC is against certain trademark enforcement practices related to search advertising.  As a result, online sellers should be careful about what tactics they employ in trying to enforce their trademark rights, and should consider how any efforts to enforce those trademarks efforts may impact competition in the eyes of the FTC.

* Photo Cred.: avensonline.org

Copyright 2016