With the holiday marketing season upon us, marketers launch the month-long, relentless scramble for consumer visibility and coveted advertising space on high-traffic inventory. One matter likely not on marketers’ radars? Antitrust violations. A recent ruling on a case brought by the Federal Trade Commission (“FTC”) against 1-800 Contacts scrutinizes the brand’s ad tech playbook through an antitrust lens, calling into question the legality of certain private agreements.
The crux of the FTC’s unfair competition case against 1-800 Contacts lays in the brand’s online search engine optimization (“SEO”) bidding agreements with its competitors. By way of context, in 2004, Google modified its proprietary online advertising service, AdWords, to allow advertisers to link their ads to other brands’ trademarks. In the online lens market, this means 1 800 Contacts’ competitors could bid on search terms like “1-800 Contacts” for the chance that their advertisement could show up alongside the retail giant’s search results.
Google’s policy shift set the stage for 1-800 Contacts’ bidding scheme. In or about 2004, the lens retailer began securing bidding agreements with rival online retailers to settle cases initiated by 1-800 Contacts, alleging that competitors’ online keyword advertising resulted in trademark infringement. Nearly a decade later, 1-800 Contacts secured at least 14 agreements to prohibit competitors from placing advertisements using certain 1-800 Contacts’ keywords on search engines like Google and Bing, the effect of which limited competitor advertising in consumers’ search results. While the FTC conceded that 1-800 Contacts is an enforceable trademark, it insisted that this is a limited right—allowing a brand to only bar confusing uses of the trademark. (See generally 1-800 Contacts, Inc. v. Lens.com, Inc., 722 F.3d 1229, 1245-49 (10th Cir. 2013).) 1-800 Contacts’ bidding agreements, comprising nearly 80 percent of the online retail market for lenses, reached far beyond the brand’s property rights, restraining trade and harming consumers.
Chief Administrative Law Judge (“ALJ”) D. Michael Chappell agreed with the FTC. In his Initial Decision on October 30, 2017, Judge Chappell upheld the FTC’s complaint against 1-800 Contacts, ruling that the company violated section 5 of the FTC Act (“FTCA”) by making a series of anticompetitive agreements with rival online lens retailers. In reaching this decision, Judge Chappell likened FTCA’s section 5 to section 1 of the Sherman Act, on the grounds that the FTCA encompasses violations of the Sherman Act. The ALJ proceeded by analyzing 1-800 Contacts’ behavior under section 1 of the Sherman Act, determining—1) “whether there was a contract, combination, or conspiracy—or more simply, an agreement; and if so, 2) whether the [agreement]… ‘unreasonably restrained trade in the relevant market.’” In the Matter of 1-800 Contacts, Inc., Docket No. 9372, 124 F.T.C. 194 (2017) (quoting Realcomp II, Ltd. v. FTC, 635 F.3d 815, 824 (6th Cir. 2011)). Judge Chappell gave significant weight to the element of unreasonable restraint of trade, delineating the ways in which 1-800 Contacts’ agreements harmed consumers and resulted in limited search results and higher lens prices.
The ALJ’s holding has significant implications for the burgeoning ad tech landscape. As the rise of new tools drives an increasingly saturated market, advertisers will continue to compete for—and need to protect—market share. In leveraging the might of an antitrust analysis for seemingly legitimate trademark infringement claims, this ruling endangers the legality of other ad tech agreements, such as top-dollar native advertising arrangements; exclusive ad feature beta-testing offers on popular platforms like Facebook, Twitter, and YouTube; and even major influencer marketing programs.
Takeaway: ’Tis the season for ramping up online advertising, but marketers should heed the warning from FTC v. 1-800 Contacts: Agreements between competitors—including on non-price terms (e.g., bidding on search terms), raise the risk of potential antitrust implications and should be reviewed by antitrust counsel.
¹Andrew C. Bernasconi is an attorney in the Antitrust & Competition Group, John P. Feldman is an attorney in the Advertising and Marketing Group, and Ali Peters was a Summer Associate who is currently clerking with Reed Smith while she completes law school.
² On November 16, 2017, the FTC granted the parties’ joint motion for an extension of time, until December 6, 2017, for 1-800 Contacts to file an appeal with the Commission. As of December 14, 2017, the FTC website listing docketing events for this case (https://www.ftc.gov/enforcement/cases-proceedings/141-0200/1-800-contacts-inc-matter) has not been updated since November 16, 2017, and therefore does not indicate whether 1-800 Contacts filed a timely appeal to the Commission.