Let it not be said that Utah-based 1-800 Contacts is not persistent. Once it began losing sales to lower-priced online competitors, the nation’s largest online seller of contact lenses has engaged in a protracted battle against competitive search advertisements to avoid having to compete on the basis of price.
In 2004, 1-800 Contacts was behind Utah’s Spyware Control act that principally sought to block adware from triggering popup ads in response to trademarked terms. When courts refused to enforce that law, Utah followed up with the Trademark Protection Act in 2007 which essentially banned competitive keyword search ads even if legitimately used for comparative advertising. The law was widely condemned and essentially repealed the next year.
At the same time, the contact lens giant which accounts for half the market began using the threat of litigation to discipline the market by sending cease-and-desist letters to its online competitors.
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 threatened to sue its rivals that did not agree to cease participating in these search advertising auctions.
All but one rival folded rather than fight 1-800 Contacts. The exception was Lens.com, who chose to fight 1-800 Contacts, successfully obtaining summary judgment against 1-800 Contacts trademark claims and prevailing on appeal. Lens.com later argued unsuccessfully that the trademark actions were sham lawsuits that violated the antitrust laws.
In a complaint filed today, however, the Federal Trade Commission charges 1-800 Contacts with restraining trade under the FTC Act stemming from fourteen agreements it entered with rivals over its purported trademark claims that restricting competitive keyword search advertisements and more.
21. The Bidding Agreements go well beyond prohibiting trademark infringing conduct. They restrain a broad range of truthful, non-misleading, and non-confusing advertising.
22. All fourteen Bidding Agreements bar 1-800 Contacts’ competitor from bidding in a search advertising auction for any of 1-800 Contacts’ trademarked terms (e.g., “1-800 Contacts”) or variations thereof (such as common misspellings).
23. All fourteen Bidding Agreements are reciprocal, barring 1-800 Contacts from bidding for the competitors’ trademarked terms or variations thereof. Notably, most of the competitors that entered into these Bidding Agreements had never raised trademark infringement claims or counterclaims against 1-800 Contacts.
24. Thirteen of the 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. Thus, even if a user enters a query for “1-800 Contacts cheaper competitors,” the user will see advertisements only for 1-800 Contacts. . . .
25. 1-800 Contacts has aggressively policed the Bidding Agreements, complaining to competitors when the company has suspected a violation, threatening further litigation, and demanding compliance.
The FTC contends that these horizontal agreements improperly “restrain price competition and restrain truthful and non-misleading advertising,” noting that the overly broad agreements are not reasonably necessary to achieve any procompetitive benefit. The agreements foreclosed competition with approximately 80 percent of the market and enabled 1-800 Contacts to avoid price competition, as the complaint notes that “[t]o this day, 1-800 Contacts’ prices for contact lenses remain consistently higher than the prices of its online rivals.”
Cindy Williams, 1-800 Contacts’ General Counsel, told Ad Age that
1-800 Contacts strongly disagrees with the Federal Trade Commission’s contention that 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.