Earlier this month, the Federal Trade Commission initiated an administrative proceeding against contact lens distributor 1-800 Contacts, Inc. The FTC claimed that certain IP settlement agreements between the company and several of its competitors violate FTC Act Section 5’s prohibition on “unfair methods of competition.” The company has vowed to “vigorously defend” itself. Separately, the huge class action alleging anti-competitive price agreements among contact lens manufacturers and distributors that we previously reported on here survived a motion to dismiss this summer. The cases serve as good reminders of the antitrust risks inherent in all agreements, explicit or allegedly implicit, with competitors.
According to the FTC’s administrative complaint, 1-800 Contacts was a pioneer in the online sale of contact lenses and maintains about a 50 percent share of such sales. Allegedly to help maintain that share, 1-800 Contacts has for years entered agreements with many of its competitors regarding the use of keywords in online advertising.
Search engines like Google or Bing generate two types of results in response to a search query. “Organic” or “natural” results are those that the engine’s algorithm deems most useful based on past queries. Displayed near those organic results are “search advertising”: links to sites of advertisers that paid the search engine to display their material in response to those keywords. Advertisers can also specify “negative keywords.” For instance, a seller of eyeglasses might bid on “glasses” but list “wine” as a negative keyword to prevent its ad from displaying in response to a query for “wine glasses.”
The FTC alleges that beginning in 2004, 1-800 Contacts began sending cease and desist letters alleging trademark infringement to competitors whose search advertising displayed in response to queries involving “1-800 Contacts” and variations. To settle such claims, 1-800 Contacts entered into at least 14 agreements that prevented the competitor from bidding on search advertising involving “1-800 Contacts” and similar terms. In nearly all the agreements, the competitor also agreed to list those same “1-800 Contacts” terms as negative keywords. The settlement agreements were reciprocal: 1-800 Contracts agreed to the same bidding prohibitions and negative keyword requirements for the competitor’s trademarks.
One competitor, Lens.com, did not settle and prevailed against the claims of trademark infringement in a 2013 opinion from the 10th Circuit. According to the FTC’s complaint, that court:
found that consumers were not confused when an advertisement for Lens.com appeared on the search results page in response to a user query for “1-800 Contacts.” … And, in the absence of the likelihood of consumer confusion, there can be no infringement of 1-800 Contacts’ trademarks.
The FTC alleges that the agreements restrain price competition and truthful advertising and so are inherently suspect. Further, it alleges negative effects on competition in the markets for both the sale of search advertising and the retail sale of contact lenses. The proposed relief includes prohibition on these types of agreements, although 1-800 Contacts would still be free to challenge competitor ads where it has “a good faith belief” that trademark infringement has taken place. The company responded with a press release stating that the settlement agreements merely “protect its trademark” and that it “will vigorously defend its intellectual property rights.” A hearing in front of an FTC administrative law judge is now scheduled to begin in April 2017.
Elsewhere in the industry, contact lens manufacturers will need to continue to defend against allegations that each of their similar retail pricing schemes was the result of an agreement among the manufacturers and some distributors and eye care professionals. See In re Disposable Contact Lens Antitrust Litig., MDL No. 3:15-md-2626-J-20JRK (M.D. Fla.). That series of cases has been going on for nearly two years and involves consolidated class actions in Florida on behalf of contact lens purchasers. The plaintiffs allege that the lens manufacturers agreed with each other and eye care professionals to implement similar retail pricing schemes to blunt the impact of online and mass market discounters.
The defendants’ motion to dismiss was denied earlier this summer by Senior Judge Harvey Schlesinger. The district court found it plausible that each manufacturer implemented its retail pricing scheme not merely to protect its brand’s reputation but as part of an agreement with the other manufacturers and higher-priced eye care professionals. One of the “plus” factors the court found important was the discussion of retail prices among the manufacturers, the doctors, and an industry association. The case will now proceed to discovery.
Not all agreements with competitors are “inherently suspect”; in fact, agreements that settle legal differences among competitors without the costs of litigation are usually seen as good for competition. But just as with some so-called “pay for delay” agreements in the pharmaceutical industry, the details of those settlements between competitors might raise antitrust risks. Not all strategies designed to raise the retail price of a manufacturer’s product violate the antitrust laws; however, when one group of retailers publicly advocates for a strategy and then every manufacturer in the industry adopts it, the antitrust risk increases.