08.31.2016

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Updates

The Federal Trade Commission recently sued 1-800 Contacts, Inc., the largest contact lens retailer in the United States, charging it with restraining competition in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45.  The administrative complaint charges that 1-800 Contacts violated Section 5 by orchestrating agreements with competitors in which the companies agreed not to bid against each other in auctions for ads on search engine results pages.  The end result, the FTC alleges, is that some consumers paid higher retail prices for contact lenses.

Search engines like Google and Bing make money by selling ads that are served in response to a search query.  They sell these advertisements in automated auctions that occur each time a user conducts a search.  One way for advertisers to participate in these auctions is to identify keywords in search queries that they want to target.  They then identify what they are willing to pay to place ads on the results pages of search queries containing those keywords.  So when a user enters a search query, algorithms assess the various bids and then display the winning ads on the search results page.

Allegations of Trademark Infringement, Use of Negative Keywords

In the early 2000s, 1-800 Contacts found that when users were searching for 1-800 Contacts (or variations thereof) users were seeing ads placed by their competitors.  1-800 Contacts—wrongly, according to the FTC—considered the ads to infringe on 1-800 Contacts’ trademarks and sent cease-and-desist letters to a number of its competitors.  The letters stated that 1-800 Contacts would sue unless the competitor stopped buying ads that would accompany a search query containing a 1-800 Contacts’ trademark.

According to the FTC’s complaint, at least 14 of 1-800 Contacts’ competitors buckled to the demands and entered into bilateral agreements with 1-800 Contacts that restricted participation in search advertising auctions.  The FTC alleges that in each of these agreements, the competitor agreed not to bid in auctions for any of 1-800 Contacts’ trademark terms and 1-800 Contacts reciprocally agreed not to bid in auctions for competitors’ trademarked terms.

Moreover, in 13 of these agreements, the competitor agreed to use “negative keywords” that would prevent search engines from displaying the competitor’s ads in any search query that included a 1-800 Contacts trademark.  Thus, according to the complaint, even if the user searched for “1-800 Contacts cheaper competitors,” the user would only see ads for 1-800 Contacts.  The “negative keyword” portions of the agreements were reciprocal, as well: 1-800 Contacts would screen itself out of search queries that contained its competitors’ names or trademarks.

FTC Says Agreements Restrain Competition and Truthful Advertising

1-800 Contacts characterizes these agreements as “settlement agreements” necessary to protect its trademarks.  But the FTC disagrees, claiming these agreements “exceed the scope of any property right 1-800 Contacts may have in its trademarks, and they are not reasonably necessary to achieve any procompetitive benefit.”  Rather, the FTC alleges that these agreements unlawfully restrain competition and truthful, non-misleading advertising in violation of Section 5 of the Federal Trade Commission Act.  The FTC further alleges that because 1-800 Contacts controls 50 percent of the online market for contact lenses, and charges more than its rivals, these agreements mean that consumers did not see ads from 1-800 Contacts’ competitors telling consumers that contact lenses were available elsewhere for less.  According to the FTC, the end result is that in some cases consumers paid more for contact lenses than they otherwise would have without 1-800 Contacts’ restrictive advertising agreements.

1-800 Contacts has yet to file an answer to the complaint, but it did issue a press release in which it stated that it “strongly disagrees with [the FTC’s] contention that settlement agreements designed to protect its trademarks hinder competition.”  1-800 Contacts promised that it would respond to the FTC’s complaint by “vigorously defend[ing] its intellectual property rights.”

Settlement Agreements With Competitors Require Caution

The FTC action in 1-800 Contacts is another reminder that settlement agreements with competitors that limit the way in which the competitors may compete could implicate antitrust concerns, that settlements of intellectual property claims are also subject to antitrust scrutiny, that such scrutiny may not materially differ from the scrutiny applicable to settlements involving non-IP related claims and that those risks should be carefully analyzed before entering into the proposed settlement.

© 2016 Perkins Coie LLP


 

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