Antitrust Law Daily Commission finds that 1-800 Contacts harmed competition with restrictive Internet advertising settlements
Wednesday, November 14, 2018

Commission finds that 1-800 Contacts harmed competition with restrictive Internet advertising settlements

By Peter Reap, J.D., LL.M.

In an Opinion of the Commission that largely affirms an earlier ruling by FTC Chief Administrative Law Judge (ALJ) D. Michael Chappell, a divided Commission has determined that restrictive advertising litigation settlement agreements that 1-800 Contacts entered into with competitors to limit Internet search advertising and restrict bidding in Internet search auctions harmed competition and violated Section 5 of the FTC act. Specifically, the Commission majority held that Complaint Counsel showed competitive harm by (1) demonstrating the inherently suspect nature of the agreements; (2) providing direct evidence that the agreements resulted in actual anticompetitive effects; and (3) by showing harm to search engines—a third type of harm to competition not reached by the ALJ. Although some of the procompetitive justifications raised in defense by 1-800 Contacts were plausible, none of them was valid when measured against the less anticompetitive alternatives. As a remedy, the FTC required 1-800 Contacts to cease and desist from enforcing the unlawful provisions in its existing agreements and from entering into similar agreements in the future, modifying the order issued by the ALJ only slightly by adding a notification requirement (In the Matter of 1-800-Contacts, Inc., FTC Dkt. No. 9372, File No. 141 0200).

The FTC filed an administrative complaint against 1-800 Contacts, the largest online seller of contact lenses in the United States, in August 2016. The FTC’s complaint challenged a number of bilateral agreements between 1-800 Contacts and at least 14 competing online sellers of contact lenses that allegedly prevented the parties from competing against one another in certain online search advertising auctions. In particular, the FTC alleged that online search engine companies like Google and Bing sell advertising space on their search engines results pages through computerized auctions. Although the language of the agreements varies, each included provisions that prohibit the parties from using the other party’s trademarks, URLs, and variations of marks as search advertising keywords. The settlement agreements also required the parties to employ "negative" keywords to prevent their ads from displaying whenever a search included (or, as stated in some of the agreements, "contains") the other party’s trademarks.

In February 2017, the Commission concluded that 1-800 Contact’s conduct was not immune under the Noerr-Pennington doctrine and the reasonableness of 1-800 Contacts’ trademark litigation was not an affirmative defense. Complaint Counsel’s motion for partial summary judgment regarding 1-800 Contacts’ affirmative defenses was granted. The ALJ’s Initial Decision held that the advertising restraints at issue harm consumers and competition in the market for the sale of contact lenses online. 1-800 Contacts appealed.

Immunity from antitrust scrutiny. 1-800 Contacts argued that the Supreme Court’s 2013 Actavis decision stands for the proposition that there can be no antitrust challenge to a settlement agreement that is commonplace in form. It claimed that Actavis exempted commonplace forms of settlement from antitrust scrutiny and held that "a party challenging a settlement must show that the settlement’s form is unusual." The FTC disagreed. The Court in Actavis did not state a general rule that removes settlement agreements from antitrust scrutiny, but rather characterized two specific types of settlements as commonplace, and made it clear that the form of the settlement alone is not what subjects an agreement to antitrust scrutiny.

Moreover, the challenged settlement agreements were unusual, according to the FTC. Trademark litigation typically seeks to bar the use on the infringer’s labels, ads, or other promotional materials of the plaintiff’s trademark or a similar mark in a way likely to confuse consumers. Here, the settlement agreements effectively shut off an entire channel of advertising triggered by an alleged use of the trademark in the generation of search advertising.

1-800 Contacts further argued that even if the Commission finds the challenged settlements were unusual, dismissal still would be appropriate because Complaint Counsel did not prove any of the five "Actavis considerations" that, taken together, could outweigh the desirability of settlements, to favor antitrust scrutiny. The FTC disagreed that Actavis requires this five-factor test to be applied to antitrust review of all settlements of intellectual property litigation. Moreover, even if the Court had created such a requirement, the litigation in this case would pass, it decided.

Antitrust analysis. The Supreme Court has defined three separate but not entirely distinct ways for a plaintiff to show that a challenged restraint resulted in anticompetitive effects under a rule of reason analysis. In this case, the FTC used two of these modes of analysis to assess whether 1-800 Contacts’s agreements resulted in anticompetitive effects: (1) whether the challenged agreements are inherently suspect; and (2) whether there is direct evidence of anticompetitive effects. The FTC also examined whether the Challenged Agreements have substantial anticompetitive effects on competition with respect to bidding on search terms, which again led to the finding of a violation of Section 5 of the FTC Act.

Inherently suspect. Here, the agreements prohibit each party from causing or allowing advertisements to appear in response to an internet search for the other party’s trademarks or URLs, or variations of the trademarks or URLs. Those agreement terms and 1-800 Contacts’s subsequent enforcement of them prevent the agreeing parties from offering advertising in response to an internet search for "1-800 Contacts" or similar queries. Thus, the challenged agreements are, in essence, agreements between horizontal competitors to restrict the information provided by advertising to consumers when they search for 1-800 Contacts’s trademark terms and URLs. The effect of the advertising restrictions is to make information enabling consumer comparisons more difficult and costly to obtain.

Economic theory indicates that restrictions on this type of advertising are likely to harm competition. Further, courts have long condemned advertising restrictions. Thus, these agreements are inherently suspect, the FTC determined.

1-800 Contacts articulated two legitimate justifications that were cognizable and, at least, facially plausible: avoidance of litigation costs through settlement and trademark protection. Thus, in order to satisfy their burden under the rule of reason, Complaint Counsel must make a further showing, the FTC noted. Here, Complaint Counsel showed both that, in the context of online sales of contact lenses, the proffered procompetitive effects of the advertising restraints in the challenged agreements could be achieved through means less restrictive of competition, and that restraints are likely to harm competition.

Complaint Counsel identified three alternatives to the restrictions in the challenged agreements. 1-800 Contacts could (1) bar the rival from using specific text alleged by 1-800 Contacts to cause confusion, including prohibiting the rival from using a name confusingly similar to its own; (2) require clear disclosure in each search advertisement of the identity of the rival seller; or (3) require the rival to refrain from using confusing or deceptive language in its search ads. Assuming, arguendo, and contrary to the FTC’s findings, that protection against such infringement has been established as a valid procompetitive benefit here, alternatives one and three would not adequately address it. But the second proposed alternative—requiring clear disclosure of the identity of the rival seller—is a workable option that would achieve both litigation cost savings and protection of trademark rights, including prevention of the consumer confusion associated with infringement, in a significantly less anticompetitive manner, the FTC explained. 1-800 Contacts’ arguments to the contrary were unpersuasive. Given the inherently suspect nature of 1-800 Contacts’ advertising restraints and the finding that the procompetitive benefits asserted to justify those restraints could be achieved by significantly less anticompetitive means, 1-800 Contacts engaged in unfair methods of competition in violation of Section 5 of the FTC ACT.

Finally, the FTC examined 1-800 Contacts’s asserted justifications and to see if it provided the required sufficiently detailed evidence to establish that the justifications are not merely plausible, but actually valid. 1-800 Contacts did not meet this burden, the FTC found. Although 1-800 Contacts identified litigation cost savings, it has not demonstrated that these cost savings would have procompetitive effects. Moreover, although trademark protection can be a legitimate justification, it did not justify the restraints challenged in this case. Although claims based on keyword bidding have sometimes withstood dispositive motions, apart from a single district court summary judgment decision from over ten years ago, no court has found bidding on trademark keywords to constitute trademark infringement, absent some additional factor. In addition, a leading trademark treatise agrees that displays of non-deceptive advertising links arising from competitors’ purchases of trademark keywords are not confusing.

Direct evidence of anticompetitive effects. Even if the agency did not rely on the inherently suspect nature of the restraints in the challenged agreements to conclude that there is liability, a second way independently to establish plaintiff’s initial burden to show that a particular horizontal restraint has anticompetitive effects was to consider direct evidence of those effects. Like Judge Chappell, the FTC concluded that Complaint Counsel successfully established their prima facie case through direct evidence of two anticompetitive effects: the restriction of truthful advertising and an increase in contact lens prices sold online.

Restricting the availability of truthful information that guides consumer decisions in the marketplace is a competitive harm. The record demonstrated that the settlement agreements were effective in restricting advertisements from 1-800 Contacts’s rivals. The negative keyword requirement forces 1-800 Contacts’s rivals to override the search engines’ determination that the rivals’ ads are relevant and valuable to consumers. This evidence directly showed that the challenged agreements were effective in restricting truthful advertising from being presented to consumers, the FTC concluded.

In addition to evidence of reduced advertising, Complaint Counsel presented direct evidence of a price effect, which provides a persuasive, independent basis for Complaint Counsel’s prima facie case. Evidence that the challenged agreements insulate 1-800 Contacts from normal competitive forces and divert sales from low-priced sellers to a high-priced seller was direct evidence of an increase in price, the FTC reasoned.

Effects on search engines. In addition to harm to consumers, the complaint alleged that the challenged agreements harm search engines by, inter alia, unreasonably restraining price competition in certain search advertising auctions, preventing search engine companies from displaying to users the array of advertisements that are most responsive to a user’s search, and impairing the quality of searches. Contrary to Commission rules, Judge Chappell determined that the Initial Decision did not need to reach this issue, the FTC noted. However, the FTC’s review showed that Complaint Counsel presented a prima facie case of anticompetitive harm to search engines based on direct evidence of actual harm. Absent a valid procompetitive justification, this provided a third, independent basis to find liability in this case.

Witnesses from both Google and Bing explained that a reduction in the number of search-advertising auction participants offering relevant ads reduces the price paid by the auction winners and reduces the revenue for the search engine. The challenged agreements also harm both the search engines and consumers by removing advertisements that otherwise would have been displayed, thereby decreasing the quality of the search engines’ product. While avoiding litigation costs through settlement and trademark protection are cognizable and facially plausible justifications, reliance on those justifications faltered for the reasons articulated above. Consequently, without an offsetting, valid procompetitive justification, the anticompetitive harm to search engines caused by the challenged agreements was a further, independent basis for concluding that 1-800 Contacts engaged in unfair methods of competition in violation of Section 5 of the FTC Act.

Remedy. To remedy the violation of Section 5, the ALJ issued an order that bars 1-800 Contacts from agreeing with any seller of contact lens products to limit participation in online search advertising auctions (including restricting the use of keywords or requiring the use of negative keywords) or to limit online search advertising. The ALJ’s order contains a carve-out clause regarding future litigation. The ALJ’s order, in conjunction with an added notification provision, confers adequate protection, the FTC determined.

The FTC’s added notification provision required 1-800 Contacts to notify the Commission ten days before entering any stipulated order with a court and submitting a copy of the order at the time of notification. Such a notification provision would enable the Commission to intervene and apprise the court of any anticompetitive harm arising out of any stipulated order entered into by 1-800 Contacts.

Concurring and dissenting statements. Commissioner Rebecca Kelly Slaughter issued a concurring statement. Commissioner Phillips issued a dissenting statement.

Attorneys: Ryan A. Shores (Shearman & Sterling LLP) for 1-800 Contacts, Inc. Daniel Matheson, Barbara Blank, and Charles A. Loughlin, FTC.

Companies: 1-800 Contacts, Inc.

MainStory: TopStory Advertising Antitrust FederalTradeCommissionNews

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