The Federal Trade Commission is asking the Second Circuit federal appeals court to uphold a finding that 1-800 Contacts violated antitrust law by preventing rivals from using its trademarked name in search ads. Meanwhile, 1-800 Contacts is also defending against a class-action lawsuit brought on behalf of consumers centering on the same conduct, but also naming additional retailers as defendants, including National Vision, Vision Direct, Luxxotica and Walgreens. Luxxotica recently agreed to pay $5.9 million to settle the claims against it in the lawsuit and National Vision settled for $7 million in 2017.
The dispute centers on 1-800 Contacts’s business practices dating back to 2004, when it brought or threatened legal action against numerous rivals accusing them of infringing its trademarks by purchasing search ads using the phrase “1-800 Contacts” to trigger a pay-per-click search ad. From 2004 through 2013, the company sued or threatened to sue at least 13 competitors over alleged trademark infringement on various search engines. 1-800 Contacts asserted that the act of purchasing ad words using its registered mark violated its trademark. In most cases, the rival companies responded to these threats or lawsuits by agreeing to enter agreements requiring them to cease bidding on search engine ad words using the 1-800 Contacts mark. Only Lens.com fought back and largely prevailed in the suit.
When the FTC caught wind of these agreements, it responded by filing an administrative complaint against 1-800 Contacts alleging that the bidding agreements are overly broad and not necessary to safeguard any legitimate trademark interest.
1-800 Contacts vehemently denied the allegations in the FTC’s complaint and ultimately fought the charges in a 19-day administrative hearing which involved the testimony of 43 witnesses and more than 1250 exhibits. The administrative law judge overseeing the hearing issued a 214-page Initial Decision holding that the advertising restraints harm consumers and competition in the market for the sale of contact lenses online.
1-800 Contacts appealed the ALJ’s Initial Decision to the full FTC. The FTC ruled 3-1-1 to uphold the ALJ’s decision and held that 1-800 Contacts violated antitrust law by forging agreements to restrict truthful ads. Chairman Joseph J. Simons said in a written opinion that the agreements may have deprived consumers of the ability to compare brands.
The majority opinion ruled that the agreements between 1-800 Contacts and 14 online sellers of contact lenses constituted unfair methods of competition, in violation of Section 5 of the FTC Act. The agreements prevent online contact lens retailers from bidding for search engine result ads that would inform consumers that identical products are available at lower prices. The Commission Opinion held that the agreements harm competition in bidding for search engine key words, artificially reducing the prices that 1-800 Contacts pays, as well as the quality of search engine results delivered to consumers. Although the Opinion directly addresses restraints to search engine advertising for contact lenses, it carries broader implications for preserving competition through online advertising. The Commission’s opinion was not without detractors, however, and Commissioner Noah J. Phillips penned a 46-page dissenting statement.
The Commission’s Order requires 1-800 Contacts to stop enforcing the unlawful provisions in its existing agreements and from entering into similar agreements in the future. It further prohibits the company from agreeing with other contact lens retailers to restrict search advertising or to limit participation in search advertising auctions. 1-800 Contacts appealed the finding in the Commission’s Order to the 2nd Circuit, where the company has argued that its trademark settlements were valid efforts to police and protect its trademark rights. The contact lens company also argues that, if upheld, the FTC’s decision will undermine trademark policy and jeopardize companies’ investments in their brand names.
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