Contact Lens Seller Harmed Search Engines And Consumers, Government Argues

Contact lens seller 1-800 Contacts' efforts to control the use of its trademarks in search ads harmed consumers as well as Google and Bing, according to the Federal Trade Commission.

The agency makes that assertion in new legal papers outlining the ways in which the retailer allegedly violated antitrust laws by prohibiting rivals from using its name in search ads.

The FTC's complaint against 1-800 Contacts, filed last August, deals with business practices that allegedly began in 2004 -- when the company first 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. 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 1-800 Contacts 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 alleged in its original complaint.

After the FTC filed suit, several consumers brought separate antitrust class-actions against the contact lens seller. The retailer is fighting the FTC allegations as well as the class-actions.

The FTC spells out some of its theories this week in papers filed with an administrative law judge.

"1-800 Contacts’ bidding agreements have resulted in actual harm to search engines by distorting the search engines’ advertising auctions, diminishing their revenues, and, perhaps most importantly, diminishing the quality of the search engines’ product," the FTC argues in its 90-page pre-trial brief. "Specifically, 1-800 Contacts’ bidding agreements distorted the search engine auctions by removing many relevant (and willing) advertisers from the pool, even in instances where the search engine itself determined that an advertiser’s offering was directly relevant to the user’s query."

The FTC also contends that restricting search ads led to higher prices for consumers, arguing that 1-800 Contacts charges more than other online contact lens retailers, but that consumers "are generally unaware of this, and believe that 1-800 Contacts’ prices are comparable to that of other pure-play online retailers."

The agency adds that evidence developed for trial shows that some consumers will stop searching and "settle for whatever price is offered by 1-800 Contacts" if that company is the only advertiser in the search results.

The FTC also says the agreements between 1-800 Contacts and other retailers reduce competition and likely result in "higher average prices than what would otherwise prevail."

Santa Clara University professor Eric Goldman -- who has frequently criticized 1-800 Contacts' position regarding search ads -- describes the FTC's position as "radical."

"The FTC is taking the position that it was anticompetitive to prevent competitors from bidding on trademarks," Goldman tells MediaPost. "Taking that position is radical. Now, the FTC is executing on that audacious assertion."

Goldman blogged last August that he believes "competitive keyword advertising is pro-competitive and should be legal." But he added that the issue "is still being hotly contested in the courts."

"While I wish the state of competitive keyword advertising law was definitively resolved, the FTC’s implied factual claim is aggressive," he wrote.

In the past, judges have struggled over 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 lawsuits between advertisers to proceed to jury trials.

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