FTC Urged To Uphold Finding Against 1-800 Contacts In Battle Over Search Ads

An administrative law judge correctly ruled that 1-800 Contacts violated antitrust law by entering into agreements with rivals that restricted their ability to advertise on search engines, lawyers with the Federal Trade Commission's Competition Bureau argue in new legal papers.

The bureau attorneys are asking the agency to reject the contact lens retailer's appeal of a finding issued last year by Chief Administrative Law Judge D. Michael Chappell, who ruled that 1-800 Contacts' efforts to restrict search advertising by competitors likely resulted in higher prices for consumers.

"For over a decade, Respondent 1-800 Contacts, Inc. ... has sold a commodity product (pre-packaged boxes of contact lenses) at an excessive price, alongside a range of equally capable but lower-price online sellers -- and all the while has maintained a predominant share of the market," counsel for the FTC write in a brief made public late last week. "1-800 has been able to accomplish this impressive feat because its customers commonly do not know that they are paying a significant premium. Consumers are in the dark because 1-800 methodically secured from all of its major competitors commitments to suppress competitive advertising."

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The battle dates to 2016, when the FTC sued 1-800 Contacts over business practices regarding search ads. From 2004 through 2013, the company allegedly sued or threatened to sue at least 15 competitors for allegedly infringing trademark by purchasing the term 1-800 Contacts as a trigger for pay-per-click search ads. Fourteen of those companies entered into agreements to restrict their use of search ads. Only Lens.com fought the lawsuit, which resulted in a decision largely in Lens.com's favor.

Chappell ruled that the agreements to restrain search ads resulted in higher prices for some consumers. He also rejected 1-800 Contacts' argument that the agreements prevented ads that probably would have confused consumers.

1-800 Contacts appealed the ruling last month. Among other arguments, the company says it was entitled to police the use of its name in search ads. The contact lens retailer said that the "the scope of trademark infringement liability for paid search advertising was highly unsettled" when it filed the lawsuits.

Counsel for the FTC counters that the agreements between 1-800 Contacts and the other sellers were too broad. Those agreements didn't just prevent companies from engaging in activity that 1-800 Contacts claimed infringed trademark -- that is, using the phrase 1-800 Contacts to trigger search ads -- but also prohibited a host of other ad practices, the agency lawyers argue.

"For antitrust purposes, the Commission need not determine whether 1-800’s infringement claims had merit, or who would have won any lawsuit," the Competition Bureau writes. "The critical point is that 1-800 and its rivals agreed to resolve these trademark disputes with contract terms that indiscriminately bar both potentially infringing advertising and a broad range of legitimate, procompetitive, non-infringing advertising.

Counsel adds: "The agreements prohibit advertising where the competitor uses 1-800’s trademark in a manner that is not confusing. The agreements prohibit advertising even where the competitor does not use 1-800’s trademark. And the agreements are reciprocal, prohibiting non-confusing advertising by 1-800, the nominal plaintiff in these trademark disputes."

The Competition Bureau's lawyers also argue that the restrictive agreements enabled 1-800 Contacts to charge higher prices. "The best explanation for 1-800’s ability to charge a price premium for a commodity product is that consumers lack sufficient information about the presence of lower-price competitors," the brief states. "Unleashing millions of advertisements on behalf of numerous discount sellers would reduce this information deficit."

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