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From Antitrust Law Daily, October 30, 2017

1-800-Contacts found to have harmed competition by restricting advertising

By Jeffrey May, J.D.

FTC lawyers have convinced Chief Administrative Law Judge (ALJ) D. Michael Chappell that 1-800 Contacts, Inc. harmed consumers and competition by restricting advertisements for the sale of contact lenses on the Internet. 1-800 Contacts and rival online contact lens sellers agreed not to bid on each other’s trademarks as keywords in Internet-search-advertising auctions. These challenged agreements prohibited "competitors from presenting paid advertisements on the search engine results page in response to searches for 1-800 Contacts’ trademarks," according to the ALJ. The harm to competition established by the FTC was not outweighed by the respondent’s purported procompetitive justifications. Thus, the ALJ ordered 1-800 Contacts to refrain from agreeing with a seller to restrict, prohibit, regulate or otherwise limit that seller’s use of truthful, non-deceptive, and non-trademark-infringing advertising or promotion (In the Matter of 1-800-Contacts, Inc., FTC Dkt. No. 9372, File No. 141 0200).

The FTC filed an administrative complaint against 1-800 Contacts, the largest online seller of contact lenses in the United States, in August 2016. The FTC’s complaint challenged a number of bilateral agreements between 1-800 Contacts and at least 14 competing online sellers of contact lenses that allegedly prevented the parties from competing against one another in certain online search advertising auctions. In particular, the FTC alleged that online search engine companies like Google and Bing sell advertising space on their search engines results pages through computerized auctions. Beginning in 2004, 1-800 Contacts entered into bidding agreements with competing online contact lenses sellers that provided the parties would not bid against each other in certain search advertising auctions.

In February 2017, the Commission concluded that 1-800 Contact’s conduct was not immune under the Noerr-Pennington doctrine and the reasonableness of 1-800 Contacts’ trademark litigation was not an affirmative defense. Commission Counsel’s motion for partial summary judgment regarding 1-800 Contacts’ affirmative defenses was granted. An administrative trial was held in April and May of this year.

Anticompetitive effects. The FTC established that the agreements had actual anticompetitive effects in a properly defined relevant market limited to online retailers of contact lenses. The ALJ noted that restricting the availability of information in the marketplace was an anticompetitive harm. Although it was not necessary for the FTC to prove that prices increased, at least some consumers had paid, or would pay, prices that were higher than they would otherwise be, absent the challenged agreements. "[R]reducing the appearance of competitor ads appearing in response to a search for 1-800 Contacts’ trademark terms tends to increase sales for 1-800 Contacts, the higher-priced competitor," the ALJ pointed out. Rejected was the respondent’s assertion that the challenged agreements had a de minimis effect on competition.

Justifications. Once the FTC established its prima facie case of competitive harm, the burden shifted to the respondent to prove legitimate, countervailing justifications. The contact lens seller contended that the challenged agreements had the following procompetitive benefits: (1) the settlement agreements avoided litigation costs; (2) the challenged agreements protected the respondent’s trademarks and the incentives the trademarks created to invest in its brand and produce consistent products and services; (3) the challenged agreements prevented consumer confusion; (4) the challenged agreements reduced consumers’ search costs; and (5) the challenged agreements increased purchases of contact lenses by consumers who searched for 1-800 Contacts’ trademarks. The company failed to prove that these agreements had countervailing procompetitive benefits that outweigh or justify the demonstrated anticompetitive effects of the conduct.

Remedy. According to the FTC, the initial decision would bar 1-800 Contacts from agreeing with a marketer or seller of any contact lens product to restrict, prohibit, regulate, or otherwise limit that seller’s participation in search advertising auctions, and would also bar 1-800 Contacts from instructing search engines to restrict or prohibit any seller’s use of any keyword (a word or phrase used to instruct a search engine to display specified search advertising), or to require any seller to use any negative keyword (a word or phrase used to instruct a search engine not to display specified search advertising).

Also under the ALJ’s order, 1-800 Contacts would be barred from agreeing with a seller to restrict, prohibit, regulate or otherwise limit that seller’s use of truthful, non-deceptive, and non-trademark-infringing advertising or promotion. The order would also require the company to stop enforcing or attempting to enforce any and all provisions, terms, or requirements in any existing agreement or court order that impose a condition on a seller that would be inconsistent with the order.

The respondent has the right to appeal the decision to the full Commission.

Attorneys: Thomas H. Brock, FTC. Steven M. Perry (Munger, Tolles & Olson LLP) and Sean Gates (Charis Lex PC) for 1-800 Contacts, Inc.

Companies: 1-800 Contacts, Inc.

MainStory: TopStory Advertising Antitrust FederalTradeCommissionNews


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