FTC Sues 1-800 Contacts For Restricting Competitors From Using Competitive Keyword Advertising

from the contact-lens-fight dept

This is a crosspost from Professor Eric Goldman's website.

For over a decade, I've blogged about 1-800 Contacts' campaign to suppress competitive keyword advertising, including its legislative games (e.g., those times when 1-800 Contacts asked the Utah legislature to ban competitive keyword advertising) and at least 15 lawsuits against competitors costing millions of dollars in legal fees. I've also marveled at its duplicity; 1-800 Contacts historically employed the same competitive keyword advertising practices it subsequently sought to suppress.

Things have been quiet on the 1-800 Contacts front for the past several years, after it suffered a major blow in the 10th Circuit's Lens.com ruling, but sometimes the machinery of justice keeps turning quietly in the background. This week, the FTC sued 1-800 Contacts for antitrust violations. I believe this is the FTC's first foray into keyword advertising issues, and it's left some folks scratching their heads.

The FTC's Allegations

Let's take a closer look at the FTC's allegations. (As you know, pleadings by government entities are usually a mixture of truth, half-truth and fiction). The complaint says 1-800 Contacts has 50% share of the online retail market for contact lenses. Facing emerging competition from lower-priced entrants, starting in 2004, 1-800 Contacts pursued trademark enforcement against advertisers engaged in competitive keyword advertising. 14 advertisers agreed to settlement terms; only Lens.com didn't give in. (The complaint redacts the names of the settling advertisers, but in a supplement to this blog post, I identify many of them). The settlement agreements barred the competitors from bidding on "1-800 Contacts" or variants; and 1-800 Contacts reciprocally agreed not to bid on the competitors' trademarks.

13 agreements also required the competitors to put "1-800 Contacts" on the negative keyword list. Thus, a search for "1-800 Contacts Cheaper Competitors" -- which strongly implies that the consumer sought competitive alternatives to 1-800 Contacts -- would not display these competitors' ads. The FTC provides a screenshot of that search, shown at the right. As you can see, 1-800 Contacts is the only keyword advertiser. However, the top organic result is a link to AllAboutVision.com, which claims to be "an unbiased source of trustworthy information on eye health and vision correction options" and possibly would be a helpful aggregator for consumers. The organic search results also link to some deep pages on 1-800 Contacts' site, none of which consumers would find responsive to the query. While these search results seem a little funky, the search term "1-800 Contacts Cheaper Competitors" is a VERY long-tail query that few, if any, consumers actually tried. The settlement agreements had reciprocal negative keyword obligations for 1-800 Contacts.

The complaint alleges that "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."

1-800 Contacts' campaign to restrict competitive keyword advertising could potentially hurt three different marketplace players: (1) the competitors who are hamstrung in their efforts to reach interested consumers, (2) consumers who suffer from a less competitive market, and (3) search engines whose ad auctions are rendered less efficient (and less profitable) when interested bidders choose not to participate. The complaint recaps some of the harms allegedly caused by 1-800 Contacts' conduct, including:

• distorting the price-setting mechanisms of search engine ad auctions
• degrading the quality of search results pages by keeping them from displaying the most relevant ads to consumers
• preventing truthful non-misleading information from reaching consumers
• suppressing price and service competition among online contact lenses retailers, which causes "at least some consumers to pay higher prices for contact lenses than they would pay absent the agreements, acts, and practices of 1-800 Contacts"
• increasing consumer search costs to purchase contact lenses online

In other words, the FTC sees competitive keyword advertising as contributing to efficient search advertising auctions and, more importantly, improving consumers' choices and fostering vendor competition on price and quality. Viewing competitive keyword advertising as pro-competitive isn't novel, but it's satisfying to see the FTC embrace the view so enthusiastically.

Finally, the complaint enumerates the FTC's wish list of remedies, including:

• banning 1-800 Contacts from entering into contracts with competitors that restrict participation in search engine ad auctions or suppress the dissemination of truthful non-misleading information
• banning 1-800 Contacts from "filing or threatening to file a lawsuit against any contact lens retailer alleging trademark infringement, deceptive advertising, or unfair competition that is based on the use of 1-800 Contacts' trademarks in a search advertising auction. Provided, however, that Respondent shall not be barred from filing or threatening to file a lawsuit challenging any advertising copy where Respondent has a good faith belief that such advertising copy gives rise to a claim of trademark infringement, deceptive advertising, or unfair competition."

While the FTC's focus on keyword advertising is new, its interest in advertising restrictions is not. For example, our Advertising and Marketing Law casebook covers the FTC v. Polygram case from 2003, in which the FTC successfully pursued two competitors' agreements to restrict advertising of old stock in order to prop up a new product release.

Questions Raised

Why Is the FTC Acting Now? The FTC says 1-800 Contacts started its enforcement-and-settlement campaign in 2004. Why is the FTC acting now, a dozen years later?

Normally a complaint like this is instigated by a competitor's complaint, and it would make sense if Lens.com tipped off the FTC about its situation. (In addition to the trademark battle, Lens.com had a parallel antitrust lawsuit against 1-800 Contacts going back years). However, I assume Lens.com would have raised this issue with the FTC a long time ago. After all, Lens.com filed its antitrust lawsuit in 2011. Perhaps the FTC waited to see how that lawsuit would play out before deciding whether or not to intervene. The district court dismissed Lens.com's antitrust complaint in 2014; I then see a notice of appeal to the 10th Circuit but it's murky what happened after that.

Perhaps the FTC is acting now because competitive keyword advertising law has cleared up a lot over the years. As I've mentioned many times, lawsuits over buying competitors' trademarks haven't succeeded in court for about a half-decade; and even lawsuits over the inclusion of a competitor's trademark in the ad copy rarely make much progress in court any more. While I doubt the FTC could have confidently taken a strong stand on the legality of competitive keyword advertising in the aftermath of the Second Circuit's 2009 Rescuecom opinion, the jurisprudential dust has settled a lot since then.

It's also possible that the FTC finally appreciated how restrictions on competitive keyword advertising distort ad auctions. Auctions work really well to set market prices when all of the relevant bidders participate. I could see how the FTC Bureau of Competition folks, steeped in economics doctrine, had their interest piqued when they first learned about agreements among potential auctions bidders not to participate in the ad auction. Perhaps it took a while for the issue to find its way to the right folks.

Will 1-800 Contacts Accept a Big Fight Against the FTC? When the FTC conducts an investigation into a complaint like this and thinks there's a problem, inevitably it discusses settlement options with the investigated company before suing. Therefore, it seems very likely that 1-800 Contacts already refused a settlement offer from the FTC. I can understand why 1-800 Contacts might do so. Presumably, 1-800 Contacts believes that its actions over the past dozen years are justified, and it's willing to throw more money to defend that proposition (and, as discussed below, to try to maintain its above-market prices).

Still, fighting the FTC is a daunting challenge for any company. The FTC always says it's a small agency, but it's still the freaking U.S. government and has more resources than any company it targets. Further, it has an exceptionally strong batting average in litigation, and judges view the FTC as the voice of the consumer -- making it a more sympathetic litigant than a competitor trying to defend its profitable investments in competitive keyword advertising. Furthermore, the FTC has picked a friendly litigation venue. The FTC steered this case into its in-house adjudication process, so the case will be heard before an FTC administrative law judge with appeals going to the FTC Commissioners before this case can be heard in federal court. By keeping this litigation within the FTC, it will take years and lots of money before 1-800 Contacts can tell its story to an adjudicator not employed by the FTC.

I respect companies that have the fortitude and wealth to stand up to the FTC, but I often question their wisdom and logic.

Is Competitive Keyword Advertising Legitimate? The FTC's complaint assumes, but doesn't prove, that competitive keyword advertising is a legally legitimate practice. For example, the FTC alleges (para. 18) that "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." I'm sure 1-800 Contacts (and all trademark owners) would love to see the FTC's citations for the "inaccurately" comment. Later (para. 32), the FTC says—again, without any citations—that agreements not to engage in competitive keyword advertising "exceed the scope of any property right that 1-800 Contacts may have in its trademarks, and they are not reasonably necessary to achieve any procompetitive benefit."

Now, as you know, I emphatically agree with this proposition. I've argued for over a decade that competitive keyword advertising is pro-competitive and should be legal; and I've chronicled the systematic failure of trademark owners' anti-keyword advertising lawsuits over the past half-decade. However, I acknowledge that this issue is still being hotly contested in the courts. Indeed, just last week I blogged about a ruling sending a competitive keyword advertising lawsuit (with the trademark used in the ad copy) to a jury because the defendant couldn't convince the judge that it was entitled to summary judgment. So while I wish the state of competitive keyword advertising law was definitively resolved, the FTC's implied factual claim is aggressive.

For those of us a little tired of the decade-long competitive keyword advertising battles, the FTC's move offers some tantalizing prospects. Because the FTC stacked the litigation deck in its favor, we could get some clean and powerful judicial pronouncements about the legitimacy and pro-competitive nature of competitive keyword advertising. Combined with developments like the Texas ethics opinion greenlighting competitive keyword advertising by lawyers, this case could help push the pendulum so decisively in favor of competitive keyword advertising that it permanently ends the debates.

What About Vertical Restrictions on Competitive Keyword Advertising? This case deals with horizontal restrictions between competitors. While those are relatively rare, it's quite common (at least in certain industries) for trademark owners to restrict keyword ad bidding by vertical channel partners such as affiliates and distributors. What implications does this lawsuit have for those vertical restrictions?

Usually, distributors can use manufacturers' trademarks for the goods or services they resell without a trademark license. In contrast, affiliates usually need a trademark license, in which case the trademark owner should be able to put conditions on its trademark license to affiliates. However, trying to impose those same conditions on distributors could be a legal overreach because they didn't need trademark permission at all.

The FTC might be signaling that it's a problem to restrict keyword ads by channel partners who don't need trademark permission in the first place. However, manufacturers have substantial power to control intra-channel conflicts (see, e.g., the modern deference to resale price maintenance), and restrictions on keyword advertising help the trademark owner manage the trademark and prevent channel partners from driving up the owner's cost of doing so. So vertical restrictions on keyword advertising bidding may have better competitive justifications than horizontal restrictions. My guess is that the FTC didn't intend to implicate vertical restrictions; but it probably wouldn't categorically greenlight them either because some vertical restrictions could indeed have anti-competitive effects.

What Does This Mean For Trademark Owners? Trademark owners, PAY ATTENTION. Effectively, the FTC is saying that 1-800 Contacts committed antitrust violations by making overreaching trademark demands. I can't recall when the FTC last implied that trademark overclaiming could create antitrust problems (nothing comes to mind immediately). Among academics, we've frequently discussed how trademark overclaims can hurt competition, so many academics probably think it's about time the FTC moved in that direction. However, if this lawsuit signals that the FTC plans to pay more attention to trademark owner overreaching, that would be a seismic event for the trademark owner community.

Two related notes. First, as I've said before, I think 1-800 Contacts is an exceptionally weak trademark because it's more a phone number than a source identifier. Just like trademark law won't protect [noun].[tld] domain names (when the domain name relates to the noun), "800 [noun]" also should be generic. It creates a lot of friction when we weaponize such highly descriptive terms, and it makes sense for the FTC to pay particular attention to those weapons deployments.

Second, I've observed before that owners of weak descriptive marks tend to be the most litigious and make the most aggressive interpretations of trademark law. They often use litigation to try to overcome the intrinsic shortcomings of the mark; and they are often paranoid about the so-called "policing duty" that makes trademark owners think they will lose the mark if they don't shut down other users of the term. However, the trademark policing "obligation" is often overstated; and the TTAB has expressly said there's no policing obligation against competitive keyword advertising.

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About Past Coverage of 1-800 Contacts. I have been critical of 1-800 Contacts for over a dozen years, starting with the 1-800 Contacts v. WhenU district court ruling. That ruling spurred me to file a Second Circuit amicus brief with the EFF and ultimately motivated my Deregulating Relevancy article. After some jaw-dropping shenanigans in the Utah legislature (e.g., that time when 1-800 Contacts' government lobbyist also was a Utah legislator and voted in favor of the bill backed by 1-800 Contacts), I vowed I would never buy from them. I don't wear contacts, but if I did, I'd still not deal with 1-800 Contacts to protest against their overreaching IP positions. Indeed, the FTC complaint alleges: "To this day, 1-800 Contacts' prices for contact lenses remain consistently higher than the prices of its online rivals." If true, this provides some evidence that they are still getting supra-competitive rents. 1-800 Contacts customers might consider that when voting in the marketplace with their wallets.

Some blog posts about 1-800 Contacts:

• Tenth Circuit Kills the Initial Interest Confusion Doctrine–1-800 Contacts v. Lens.com
• Just How Egregiously Must a Trademark Plaintiff Act Before a Court Awards Attorneys' Fees to the Defendant?–1-800 Contacts v. Lens.com
• How Much Does 1-800 Contacts Hate Competitive Keyword Advertising? $1.1M Worth!?
• Utah HB 450 Dies in Utah Senate Without a Vote
• Utah House Barely Passes HB 450 (Maybe)–UPDATED
• Utah Trying to Regulate Keyword Advertising….Again!? Utah HB 450
• Utah Amends Trademark Protection Act (But Only After Some Drama)
• 1-800 Contacts Sues LensWorld for Keyword Advertising
• Utah Legislators Realizing They Screwed Up By Banning Keyword Advertising
• Utah Bans Keyword Advertising [Updated]
• Supreme Court Denies 1-800 Contacts Cert Petition
• 1-800 Contacts Appeals 2nd Circuit WhenU Decision to the Supreme Court
• Important 2d Circuit Adware Case–1-800 Contacts v. WhenU
• LA Times on Adware Advertisers–Including 1800 Contacts?

Supplement: 1-800 Contact's Trademark Enforcement Cases

I searched PACER's records for all of the trademark enforcement actions brought by 1-800 Contacts. I excluded the ones that clearly didn't involve keyword advertising, but I didn't carefully verify that the remaining cases involved keyword advertising. Still, it's likely that some or all of following defendants were among the 14 blacked-out competitors listed in the FTC complaint (most or all of these were filed in District of Utah):

• 1-800 Contacts v. Harner, 2:10-cv-00927 (filed Sept. 20, 2010, closed March 21, 2011)
• 1-800 Contacts v. Web Eye Care, 2:10-cv-00770 (filed Aug. 10, 2010, closed Sept. 13, 2010)
• 1-800 Contacts v. Standard Optical, 2:10-cv-00643 (filed July 13, 2010, closed Feb. 7, 2011)
• 1-800 Contacts v. Walgreen, 2:10-cv-00536 (filed June 8, 2010, closed July 20, 2010)
• 1-800 Contacts v. Tram Data, 2:10-cv-00420 (filed May 6, 2010, closed July 28, 2010)
• 1-800 Contacts v. Contact Lens King, 2:10-cv-00205 (filed Mar. 8, 2010, closed April 8, 2010)
• 1-800 Contacts v. Empire Vision Center, 2:10-cv-00173 (filed Feb. 25, 2010, closed May 18, 2010)
• 1-800 Contacts v. Arlington Contact Lens Service, 2:10-cv-00131 (filed Feb. 18, 2010, closed March 10, 2010)
• 1-800 Contacts v. Memorial Eye, 2:2008cv00983 (filed Dec. 23, 2008, closed August 17, 2011)
• 1-800 Contacts v. Lensfast, 2:2008cv00984 (filed Dec. 23, 2008, closed Feb. 3, 2010)
• 1-800 Contacts v. Drugstore.com, 2:2008cv00157 (filed Feb. 26, 2008, closed August 12, 2008)
• 1-800 Contacts v. Lensworld.com, 2:2008cv00015 (filed January 8, 2008, closed September 9, 2008)
• 1-800 Contacts v. Premier Holdings, 2:2007cv00946 (filed December 6, 2007, closed May 16, 2008)
• 1-800 Contacts v. Lens.com Inc., 2:2007cv00591 (filed August 13, 2007)
• 1-800 Contacts Inc v. Manila Industries Inc, 8:2007cv00102 (filed January 26, 2007, closed April 7, 2008)

(And, of course, the WhenU litigation).

In reviewing the PACER dockets, two things stood out. First, many of the complaints were virtually identical and filed by the same lawyers. Economies of scale, I guess. Second, many lawsuits settled within weeks or months of 1-800 Contacts' complaint. Apparently, many defendants found it cheaper to settle than fight, and 1-800 Contacts was amenable to that option.

Filed Under: antitrust, competition, competitive keyword advertising, consumer protection, ftc, keyword advertising, trademark
Companies: 1-800 contacts