Commentary

FTC Sues Contact Lens Seller For Restricting Rivals' Online Ads

In the last 12 years, contact lens seller 1-800Contacts has become infamous for aggressively policing the use of its trademarks online. Now, the Federal Trade Commission says 1-800Contacts went too far in its efforts to control how its name is used by competitors.

The FTC alleged in a complaint unveiled today that 1-800Contacts violated antitrust laws and engaged in an unfair business practice by preventing other companies from using the term 1-800Contacts in ads.

The complaint deals with business practices that allegedly began in 2004, when 1-800Contacts first sued or threatened to sue a competitor for allegedly infringing trademark by purchasing the term 1-800Contacts as a trigger for pay-per-click search ads. From 2004 through 2013, the company allegedly sued or threatened to sue at least 15 competitors over trademark infringement on search engines. Of those rivals, only Lens.com fought the lawsuit, which ended in a ruling largely in Lens.com's favor.

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Fourteen other retailers targeted by 1-800Contacts entered into agreements to restrict the use of the company's trademarks in search ads. Those agreements "unreasonably restrain both price competition in search advertising auctions and the availability of truthful, non-misleading advertising," the FTC alleges in its complaint.

The agency says that the company's contracts with competitors have distorted prices in search-ad auctions, and in some cases, resulted in higher prices for consumers.

The complaint specifically notes that 1-800Contacts' contract with competitors require them to use "negative" keywords -- which direct search engines not to display ads in response to queries with the term 1-800Contacts. "Even if a user enters a query for “1-800 Contacts cheaper competitors,” the user will see advertisements only for 1-800 Contacts," the FTC alleges.

This case isn't the first time the FTC has targeted companies that agree to restrict advertising, but does appear to be the first time the agency has moved against a company for allegedly restricting a competitor's search ads.

Santa Clara University law professor Eric Goldman, who has frequently criticized 1-800Contacts' position regarding search ads, notes that the FTC's complaint presumes that companies don't infringe trademark by using a brand name to trigger search ads. What's more, the FTC's complaint suggests that efforts to stop a competitor from using a trademarked term to trigger an ad may violate antitrust principles.

"If the FTC's position is that keyword advertising is legitimate, both in terms of the consumer benefit and in terms of trademark law, then efforts to suppress trademark advertising could be anticompetitive," Goldman says.

Despite the tone of the FTC's complaint, judges have struggled with questions involving the use of trademarks in search advertising. Google and Yahoo have prevailed in several lawsuits alleging that they wrongly allowed a trademarked term to trigger pay-per-click ads, as have several advertisers. But judges have allowed several other lawsuits between advertisers to proceed to jury trials. A federal judge in Connecticut just ruled two weeks ago that the gift-basket company Edible Arrangements could move forward with a lawsuit against rival Provide Commerce for allegedly infringing trademark by using variations of "edible arrangements" to trigger search ads.

The FTC is seeking an order prohibiting 1-800Contacts from engaging in a host of activity, including attempting to restrain competition in search ad auctions. The matter is slated to go to trial before an administrative law judge on April 11, 2017.

1 comment about "FTC Sues Contact Lens Seller For Restricting Rivals' Online Ads".
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  1. Kevin Lee from Didit, August 8, 2016 at 6:06 p.m.

    I've been involved in many conversations about "trademark bidding" including helping out as an expert witness twice.   The one piece of the argument above that I don't understand as it relates to the FTC attempting to protect consumer interest is the "company's contracts with competitors have distorted prices in search-ad auctions, and in some cases, resulted in higher prices for consumers."  The primary loser from reduced competition in keyword bidding is Google, and perhaps some competitors would have preferred not to have agreed to keyword bidding restrictions.  Yet, an economist might make the case that higher prices for marketing and advertising for all parties’ results in a cost to companies that ultimately is borne by the consumer. 

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