Last month in In the Matter of 1-800 Contacts, Inc., the Federal Trade Commission (“FTC”) provided insight into the circumstances under which retail price competition may take place in the 21st century internet economy. In the Opinion authored by Chairman Joseph J. Simons (“Commission’s Opinion”) the Commission decided that 1-800 Contacts, the country’s largest online retailer of contact lenses, unlawfully entered into anticompetitive agreements with 14 rival online sellers (“Agreements”). The Agreements, which, in most cases were trademark litigation settlements, required the parties, when bidding as part of search engine advertising auctions, to take measures ensuring their advertisements do not appear in response to searches for the other party’s trademark terms. According to the Commission’s Opinion, approved 3-1-1, the “decision will affect not only the price that consumers pay for some contact lenses but also the very manner in which substantial parts of price competition will occur throughout consumer markets today and tomorrow.” This week, 1-800 Contacts filed an application with the FTC for a partial stay pending review by the U.S. Court of Appeals.
The Agreements between 1-800 Contacts and Rival Retailers
By way of background, more than a decade ago, 1-800 Contacts began bringing trademark infringement actions against rival contact retailers, who were selling lenses at lower prices. The infringement claims were based on the retailers’ online advertisements appearing in response to consumers’ searches for “1-800 Contacts.” The Agreements, which resulted from the litigation, restricted the parties’ ability to bid on certain “keywords” in search engine auctions. “Keywords” are words or phrases that trigger the display of a party’s advertisements as “sponsored links” on a search engine when the words or phrases “match” a user’s search. As relevant here, the Agreements specifically prohibited each party from bidding on keywords that allegedly infringe upon the other party’s trademarks and additionally required the parties to employ “negative” keywords to prevent their advertisements from displaying whenever a search included the other party’s trademarks. Continue Reading