FTC Says 1-800 Contacts' Court Victory Threatens Online Competition

Online competition will suffer as a result of a recent court decision clearing 1-800 Contacts of antitrust charges involving agreements to restrict search advertising, the Federal Trade Commission says.

“The decision was wrong and will likely have nationwide repercussions,” the FTC writes in papers filed Friday with the 2nd Circuit Court of Appeals. “Restricting search-based advertising can harm competition by leaving consumers in the dark.”

The agency is asking the 2nd Circuit to reconsider its decision and rehear the case.

The dispute between the FTC and contact lens retailer dates to 2016, when the agency alleged in an administrative compliant that 1-800 Contacts violated antitrust law by accusing at least 14 competitors of infringing trademark by using its brand name to trigger paid search ads, and then settling the matter by entering into agreements that restricted the use of its name in paid search advertising. (Lens.com -- which was the only competitor targeted by 1-800 Contacts that fought the trademark allegations in court -- largely prevailed in the case)

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An administrative judge found in the FTC's favor. The contact lens retailer appealed that ruling to the FTC, which concluded 4-1 that 1-800 Contacts acted anticompetitively.

The retailer then appealed to the 2nd Circuit, which sided against the FTC in June.

A two-judge panel of that court said in its ruling that courts “owe significant deference” to trademark settlement agreements -- even though they “limit competitors from competing as effectively as they otherwise might.”

The judges also said the FTC didn't prove the search agreements resulted in increases prices for consumers, writing that the agency's evidence was “theoretical and anecdotal.”

The FTC now argues the decision was incorrect for several reasons, including that the ruling marks an “elevation of trademark policy over antitrust enforcement.”

The result, according to the agency, is that online competitors now have “a free pass” to agree that they won't advertise against each other.

“Effective competition in internet-based commerce requires that consumers who search for brand names also learn about rival sellers that may offer lower prices or superior products,” the agency writes. “Blocking that information enables companies to charge excessive prices to under-informed consumers. That was 1-800 Contacts’ approach here: ensuring that low-priced rivals would withhold their advertisements when consumers search for the term '1-800 Contacts.'”

The FTC also adds that the 2nd Circuit's ruling “provides a roadmap for competitors to cloak an agreement not to compete in the garb of trademark dispute resolution and will lead to anticompetitive outcomes across the e-commerce sector.

In addition to the FTC's lawsuit, 1-800 Contacts and the companies it entered into agreements with were sued by consumers in federal court in Utah. All of those companies settled that matter for $40 million, with 1-800 Contacts agreeing to pay $15 million of that figure.

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