Restricting Competitive Keyword Ads Is Anti-Competitive–FTC v. 1-800 Contacts

Starting in 2002 and continuing for about a decade, 1-800 Contacts systematically locked up many of its online contact lenses retail competitors into settlement agreements that prohibited the parties from bidding on each other’s trademarks at the search engines. Perhaps not coincidentally (this was the subject of some back-and-forth among experts), 1-800 Contacts unapologetically and consistently charges higher prices than its online retailer competitors.

In 2016, the FTC filed an administrative complaint against 1-800 Contacts, alleging that its competitive advertising restrictions were illegal restraints on trade. The enforcement action implicates a number of complex topics, including: (1) when are settlement agreements pro- or anti-competitive; (2) when (if ever) can competitors agree to restrict advertising; and (3) when does competitive keyword advertising infringe trademarks? The case’s complexity virtually ensured long, fact-intensive, divisive, and very expensive proceedings. Both sides lawyered (10+ on each side) and experted up.

The FTC chose administrative review of this matter instead of federal court. A year ago, the FTC’s administrative law judge ruled in favor of the FTC, holding that 1-800 Contacts engaged in anti-competitive behavior. 1-800 Contacts appealed the case to the full Commission. All five FTC commissioners turned over during the case’s pendency, so the new commissioners inherited a case they had no role in bringing.

Earlier this month, the Commission affirmed the ALJ ruling in a 3-1 ruling (one commissioner was recused). The majority opinion completely vindicates the FTC’s decision to bring the case. The dissent’s opinion, in contrast, raises numerous substantive and procedural flaws with the majority decision. The split of opinion exposes some potentially significant ideological fault lines that might define this cohort of commissioners.

If the FTC’s ruling on the matter were the final stop in the litigation, it would be a watershed ruling on the topic of competitive keyword advertising. Instead, the case simply moves to its inevitable appeal at the DC Circuit. Personally, I think the majority opinion is well-constructed for an appeal. At the same time, the dissent raises some good points that might garner attention on appeal. So it’s anyone’s guess what will happen in the DC Circuit.

Commissioner Simons’ majority opinion

The majority praises the role of advertising in efficient markets: “robust, accurate, and intelligible price competition among those who compete for consumers’ dollars is one of the cornerstones of our vibrant market economy. When information is withheld from consumers, it frustrates their ability to compare the prices and offerings of competitors.” This might signal the FTC’s skepticism about advertising restrictions generally. Certainly the FTC finds plenty of good reasons to be skeptical of 1-800 Contacts’ advertising restrictions.

Aren’t Settlement Agreements Good?

Generally, everyone benefits when litigants settles their cases rather than fighting to the bitter end. However, settlement agreements are not categorically pro-competitive. Indeed, in this case, the settlement agreements restrict truthful competitor advertising, which is a problem:

the settlement agreements effectively shut off an entire—and very important—channel of advertising triggered by an alleged use of the trademark in the generation of search advertising. Stated differently, each settlement reaches farther than a cure based on rewording a label or an ad—effectively eliminating an entire channel of competitive advertising at the key moment when the consumer is considering a purchase. Furthermore, 1-800 Contacts systematically applied similar restrictions to rival after rival that sought to challenge its position. And, contrary to Clorox’s premise, the agreements did achieve a market division through their reciprocal prohibitions on bidding in specific search auctions. Thus, from the perspective of substance, the settlement agreements between 1-800 Contacts and its thirteen rivals were indeed unusual….

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’ trademark terms and URLs; consumers could have used that withheld information to compare and evaluate the prices and other features of competing online sellers. Ultimately, the effect of the advertising restrictions is to make information enabling consumer comparisons more difficult and costly to obtain.

Online search is one of the key methods by which consumers discover vendors and compare products and services. It is an important method by which lower-priced rivals compete with 1-800 Contacts. Rival online sellers generally offer lower prices than 1-800 Contacts, and much of the advertising for those retailers emphasizes those lower prices. This is particularly important because the advertising is presented to a consumer at a time when the consumer is more likely to be looking to buy….

the restrictions at issue here are not limitations on the content of an advertisement a consumer would otherwise see; they are restrictions on a consumer’s opportunity to see a competitor’s ad in the first place. Moreover, the record shows that the suppressed ads often emphasize lower prices. In this context, we find the advertising restrictions are inherently suspect.

Can’t 1-800 Contacts Enforce Its Trademark Rights?

The majority acknowledges that trademark enforcement is “a legitimate procompetitive justification.” However,

When an agreement limits truthful price advertising on the basis of trademark protection, it must be narrowly tailored to protecting the asserted trademark right. The agreements here are not—they restrict advertising regardless of whether the ads are likely to be confusing and, apparently, regardless of whether competitors actually use the trademark term (requiring negative keywords).

The Value of Bidding on Keywords Containing 1-8oo Contacts’ Marks

The dissent repeats several times that 1-800 Contacts’ settlement agreements restricted only one form of advertising, leaving open many other advertising channels. Even if that’s true, the majority explains in great detail why the suppressed advertising channel is especially valuable and important to both 1-800 Contacts and its online retailer rivals:

Trademark search is a significant source of 1-800 Contacts’ business. It accounts for the substantial majority of 1-800 Contacts’ new customer orders attributable to paid search advertising. In 2006, 2007, and 2008, trademark search generated far more orders than non-trademark searches. In 2015, between 20 and 31 percent of 1-800 Contacts’ initial web orders came from users searching for 1-800 Contacts’ trademark terms.  1-800 Contacts’ trademark terms have higher conversion rates than non-branded search terms.

Similarly, for 1-800 Contacts’ online rivals, advertising displayed for searches on 1-800 Contacts’ trademark terms is important. During the period from 2002 through 2016, Google displayed advertisements for nine of the 14 contact lens retailers that are parties to the Challenged Agreements, as a result of their direct bidding on 1-800 Contacts’ trademark terms prior to entering into the agreements. These nine firms found such keyword bidding to be worth the cost, and Google determined their advertisements were sufficiently relevant to warrant display. In addition, parties to the Challenged Agreements consistently testified that, absent the agreements, they would bid, or test bidding, on 1-800 Contacts’ trademark terms and/or remove negative keywords from their advertising accounts….

The volume of searches for 1-800 Contacts’ trademark terms is significant. Based on the comScore dataset of searches by users for the period July 2013, through July 2016 (the “comScore dataset”) analyzed by Complaint Counsel’s expert witness, Dr. Susan Athey, 17 percent of search queries for contact lenses were for 1-800 Contacts’ trademark terms. The volume of searches for 1-800 Contacts’ trademark terms in the comScore dataset was similar in size to the collective volume of searches for the top three generic terms (“contact,” “contact lenses,” and “contacts”). The 1-800 Contacts search term is the largest, single brand-name search term, according to the comScore data analyzed by Dr. Athey.

The reason that 1-800 Contacts’ rivals’ ads are so important at this key moment is that the rival online sellers offer lower prices, and advertising for those retailers often emphasizes those lower prices.  That information is valuable: online shoppers for contact lenses are primarily concerned with low prices. Yet, in a 2012 consumer survey of 1-800 Contacts’ customers, more than one-third of respondents explained that they initially purchased from 1-800 Contacts because “It Was the Only Online Contacts Site of Which I Was Aware,” and a 2015 AEA Investors Fund analysis based on another survey found that actual price variances were “much more” than consumers thought them to be.

Consumers respond to competitors’ ads displayed in response to searches for 1-800 Contacts’ trademark terms. Based on data analyzed by Complaint Counsel’s expert, Dr. Athey, firms that are currently bidding on “1-800 Contacts,” have a higher conversion rate for those searches than for other search terms. 1-800 Contacts observed that an increase in competitor ads appearing in response to a search for 1-800 Contacts’ trademark terms tends to decrease sales for 1-800 Contacts. For example, in a report covering the week ending September 22, 2007, 1-800 Contacts noted a 6 percent week-over-week drop in trademark paid search orders, in part because of competition from Vision Direct, which had been “advertising in the 2nd position on many of [the SERPs for searches for 1-800 Contacts’] branded terms in Google.” See also IDF 726 (report for the week ending March 12, 2010: 1-800 Contacts experienced a lower click-through-rate than in prior weeks, which is “likely the result of additional competitor’s ads . . . showing up on our best terms such as 1800contacts and 1800 contacts”), 727 (report for the week ending June 11, 2010: 1-800 Contacts’ trademark paid search orders through Google and click-through rates for trademark ads “were slightly softer than [the preceding week] because of increased competition on [1-800 Contacts’] best branded terms”).

Similarly, 1-800 Contacts found that reducing the competitor ads that appear in response to searches for 1-800 Contacts’ trademark terms increased sales. For example, in a report covering the week of June 20, 2008, 1-800 Contacts attributed an increase in orders as being helped in part by “LensWorld finally removing all their ads from all of [1-800 Contacts’] trademark keywords.” See also IDF 725 (report for the week ending January 8, 2010: 1-800 Contacts achieved “an all-time record high” for orders obtained through searches for its trademark keywords, due in part to fewer advertisers appearing on searches for 1-800 Contacts’ trademark terms that week, “which always helps improve performance”), 730 (reporting that in late August 2010, orders from new customers coming through search ads on searches for 1-800 Contacts’ trademarks “jumped to the highest level of the year,” due in part to the appearance of “fewer competitors on [1-800 Contacts’] best TM words such as 1800contacts 1 800 contacts and 1800 contacts.”), 723 (report for the week of March 6, 2009: “[t]here are substantially less competitors showing up on our list of monitored TM words . . . in Google[,] which is likely helping improve our TM [conversion rate] and TM order volume.”)….

While the Challenged Agreements do not prevent all advertising for the online sale of contact lenses, they affect a particularly significant type of advertising for online sales at the crucial moment when sales are about to be made. See IDF 661 (finding a higher conversion rate for bids on “1-800 Contacts” than for other search terms). The suppressed ads would have enabled consumers to learn about alternative, lower-priced sellers of contact lenses and to make price comparisons. Prohibiting this particular type of advertising is likely to have substantial anticompetitive effects.

Does Trademark Law Ban Competitive Keyword Advertising?

The majority says it doesn’t need to resolve the legality of competitive keyword advertising, but it nevertheless persuasively shows that courts don’t think that competitive keyword ads, in fact, infringe. The majority sketches out the issue (emphasis added):

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 [Eric’s note: the stupid Soilworks opinion], no court has found bidding on trademark keywords to constitute trademark infringement, absent some additional factor, such as a misleading use of the trademark in the ad text that confuses consumers as to the advertisement’s source, sponsorship, or affiliation. Rather, “[c]ourts have consistently rejected the notion that buying or creating internet search terms, alone, is enough to raise a claim of trademark infringement.” Tempur-Pedic N. Am., 2017 WL 2957912, at *7 (holding, on motion for preliminary injunction, that “[b]ecause the court has concluded that the purchase of AdWords alone, without directing consumers to a potentially confusing website, is unlikely to cause customer confusion, the AdWords will not be included in the injunction”); see Acad. of Motion Picture Arts & Sciences v. GoDaddy.com, Inc., 2015 WL 5311085, *50 (C.D. Cal. Sept. 10, 2015) (“There is a growing consensus in the case authorities that keyword advertising does not violate the Lanham Act.”). Indeed, Respondent lost the one infringement case that it pursued to judgment. See 1-800 Contacts, Inc. v. Lens.com, Inc., 722 F.3d 1229 (10th Cir. 2013) (affirming, in relevant part, summary judgment in favor of defendant)…..Despite the accumulating evidence regarding the weakness of trademark infringement claims, 1-800 Contacts continued to police and enforce the Challenged Agreements and, consequently, continued to extend their anticompetitive effects.

A leading trademark treatise agrees that displays of non-deceptive advertising links arising from competitors’ purchases of trademark keywords are not confusing. See 5 McCarthy on Trademarks and Unfair Competition § 25A:8 (5th ed. Supp. 2018 update).

FN 42 says (emphasis added): “See CX8014 at 021 (¶ 43) (Tushnet Rebuttal Report) (noting that the “preeminent expert on internet advertising law . . . has been unable to identify any case in which a defendant lost a trial on likely confusion based on purchases of a plaintiff’s trademark as a search engine keyword – despite the filing of over a hundred such cases”); Hogan, Tr. 3459-61 (1-800 Contacts’ trademark law expert acknowledging that he was not aware of any court that had found liability based on keyword bidding alone); USA Nutraceuticals Grp., Inc. v. BPI Sports, LLC, 165 F. Supp. 3d 1256, 1266 (S.D. Fla. 2016) (“[Plaintiff] points to no case indicating that the simple purchase of advertising keywords, without more, may constitute initial interest confusion. . . .”).”

[Navel-gazing sidebar: Rebecca generously called me the “preeminent expert on internet advertising law” in her rebuttal report…but the FTC didn’t reference me by name. Yes, I got the equivalent of subtweeted by the FTC. If my mom were around, she would praise me for the honorific, and then chide me that I obviously wasn’t important enough to be referenced by name by the FTC. Navel-gazing over.]

Back to the FTC’s take on the legitimacy of competitive keyword advertising (emphasis added):

In this case, the agreements restrict a type of competitive advertising that has never been found to violate the trademark laws, and the weight of authority overwhelmingly points to non-infringement. We are not convinced that trademark protection in this case is a valid procompetitive benefit that merits suppressing truthful advertising….

The justification for including negative keywords in the agreements is even weaker. Not only is there a lack of support for a finding of confusion, discussed above, but no court has ever found that bidding on a generic keyword (like “contacts”), which may be broad or phrase matched by the search engine to a trademark search, is even a “use.”…Because there is no support for a trademark infringement claim based on a failure to designate negative keywords, Respondent has failed to establish that protecting trademark rights justifies negative keyword agreements between competitors….the negative keyword requirement forces 1-800 Contacts’ rivals to override the search engines’ determination that the rivals’ ads are relevant and valuable to consumers

Putting It All Together

The majority provides this helpful recap:

the Challenged Agreements cut off advertising in a way that interfered with the operation of competitive forces in the online sale of contact lenses and disrupted consumers’ mechanisms for comparing and selecting between alternative online sources…

the Challenged Agreements reduced the number of competitor ads, and increased sales for 1-800 Contacts while reducing the sales for its rivals….

the Challenged Agreements insulate 1-800 Contacts from normal competitive forces and divert sales from low-priced sellers to a high-priced seller is direct evidence of an increase in price. The higher prices that consumers are paying do not reflect a producer selling a differentiated product, such as a product with new technology or additional features that offer more than the products of low-priced sellers. Instead, the higher prices are a consequence of 1-800 Contacts shielding itself from competitive pressure by preventing consumers from obtaining information that would enable comparison shopping…. Restricting the advertising presented to such consumers at the critical time when they are about to make a purchase impedes their ability to compare prices, which leaves them unaware of alternatives to 1-800 Contacts’ higher-priced products.

Thus, most consumers only knew about 1-800 Contacts and not the other online retailers (as FN50 echoes, “many 1-800 Contacts customers are unaware that other online contact lens sellers exist….Display of rivals’ search ads would tend to counter this ignorance”)–likely an artifact of the suppressed competitive keyword advertising that would have alerted consumers about the alternatives. It’s logical to connect this with the fact that 1-800 Contacts charges the highest price among online retailers, because consumers aren’t aware of the competitors. Thus, 1-800 Contacts’ long-term campaign to control competitive keyword ads apparently has been a contributing factor to its ability to charge more than its competitors, costing consumers substantial money due to their lack of knowledge. This confirms the validity of the FTC’s decision to bring the complaint in the first place. They are helping to monitor and improve the efficiency of the market, just as we want and expect them to do.

Search Engines as Victims

1-800 Contacts’ agreements distorted the search engines’ keyword auctions, and the FTC cites that concern too:

the Challenged Agreements resulted in actual harm to search engines. 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….1-800 Contacts’ internal documents acknowledge that one effect of the Challenged Agreements was reduced search advertising costs….1-800 Contacts paid less per click as a result of the Challenged Agreements….Preventing 1-800 Contacts’ online rivals from bidding on their first choices for keywords, leaving them to bid only for keywords that they value less, reduced those retailers’ demand for search advertising, reduced their purchases of search advertising, and reduced the search engines’ revenues.

Note that because Google runs a second-price auction, reduced competition for keywords benefits the remaining participating advertisers directly. In particular, 1-800 Contacts saved a lot of money by keeping other bidders from bidding in the auctions for its trademarks. Those savings came directly reduced search engines’ revenues.

Commissioner Slaughter’s Concurring Opinion

Commissioner Slaughter “strongly supports” the majority opinion. She sees 1-800 Contacts’ conduct as a “type of illegal bid rigging.” She adds: “Online search bidding restriction may be a new frontier in advertising restraints, but it is just as pernicious as traditional restraints in frustrating the role that advertising plays to benefit consumers in their search for the highest value products and services as recognized by the Supreme Court.” However, she would not have supported bringing the case if it had been based solely on 1-800 Contacts’ harm to search engines.

Commissioner Phillips’ Dissenting Opinion

Commissioner Phillips writes a spirited dissent. He sees this case quite differently than his peers. It makes me wonder if this presages ideological splits among the FTC commissioners. If so, we’ll have more popcorn moments for FTC watchers, but it could reduce the number of times the FTC commissioners act unanimously–historically, a high priority for FTC commissioners.

Much of Commissioner Phillips’ dissent focuses on antitrust “inside baseball” issues, such as the applicable standard of legal review. If you’re an antitrust geek, you’ll enjoy getting into the weeds. The dissent flags a wide range of topics for the appellate court to reach a different conclusion if they are so inclined.

Commissioner Phillips views keyword ads on 1-800 Contacts’ trademarks as a small corner of the advertising world, so restricting those ads is NBD:

The record reflects that competitors’ advertisements may be less effective without the use of 1-800 Contacts’ trademarks. But these restrictions do not significantly affect competition as a whole because the counterparties to the Trademark Settlements are still capable of competing against 1-800 Contacts—including by selling to whomever they wish, advertising aggressively, and even buying advertisements on search engines, just not all advertisements—as are numerous other sellers of contact lenses, including other online retailers (e.g., Lens.com), independent eye care professionals (“ECPs”), optical retail chains (e.g., Visionworks), mass merchants (e.g., JCPenny), and club stores (e.g., Costco).

Commissioner Phillips also thinks the legal questions around keyword ads aren’t as clear as the majority portrays: “the majority overstates the clarity of trademark law at the time of the Trademark Settlements. The record reflects that the parties entered the Trademark Settlements precisely because of the possibility that bidding on trademarked terms as keywords created liability for infringement, a reality exacerbated by the Rescuecom decision….At most, the majority have shown that the legal status of using trademarked terms as keywords in paid search advertising was uncertain.” I think this overstates the consequences of Rescuecom, which only resolved one element of the plaintiff’s prima facie case, didn’t cast any direct shadows on the other elements, and involved the TM owner v. search engine context as opposed to the TM owner v. advertiser suits.

Implications

1-800 Contacts has already indicated that it will appeal this ruling. We don’t know the case’s real implications until, at earliest, the DC Circuit has spoken. Still, I’ll offer some highly preliminary ruminations about the implications of this ruling.

Most likely, this ruling won’t change anyone’s conduct regarding keyword advertising. 1-800 Contacts’ campaign to suppress competitive keyword ads was relatively unique. I’m not aware of other companies who did something similar to 1-800 Contacts and thus would feel the need to change course after this ruling. Similarly, I don’t expect the FTC will find new enforcement targets.

Still, the ruling implicates several common practices that might now need elevated antitrust compliance review:

Suing Over Competitive Keyword Advertising: I don’t think this ruling restricts trademark enforcement actions. 1-800 Contacts’ problems arose from the settlement process, not the filing of the lawsuits. Indeed, so long as there’s some trademark merit to the lawsuit, I think all of the commissioners would endorse the pro-competitive aspects of trademark enforcement. Still, I can imagine some outer boundary, such as a trademark owner who deliberately pursues a campaign of clearly meritless trademark enforcements to raise its competitors’ costs and drive them off the branded keywords. Anything short of that should be untouched by this opinion.

Including Keyword Ad Restrictions in Settlement Agreements. The FTC’s order provides some details about when the FTC thinks settlement agreements can restrict competitive keyword ads. The order says:

nothing in this Paragraph II.B shall prohibit Respondent from entering into or complying with a written agreement providing that a:

1. Seller shall not include in the text of any Search Advertising (a) a false or deceptive claim, (b) a representation that Respondent is the source of the goods or services advertised therein, (c) a representation that the Seller is affiliated with or sponsored by Respondent, or (d) a name that is identical to or confusingly similar to any trademark owned by Respondent; or
2. Seller’s Search Advertising shall clearly identify the Seller (for the avoidance of doubt, including the name of the Seller in the URL, website address, or domain name shall constitute clear identification of the Seller);….

nothing in this Paragraph II shall prohibit Respondent from entering into or complying with a written agreement with a Seller to require that Search Advertising disclose the Seller’s identity and/or lack of affiliation with Respondent or disclose that the Search Advertising is not sponsored by Respondent.

So settlement agreements can ban competitive keyword ads containing false information or that don’t clearly identify the rival. I also think settlement agreements can prohibit further infringement, kicking over to contempt proceedings to determine if/when competitive keyword ads constitute infringement. Commissioner Phillips’ dissent raises concerns about these ambiguities, but trademark settlements routinely contain ambiguous restrictions.

Vertical Keyword Ad Restrictions. The hardest question left open by the FTC opinion is the continued legitimacy of vertical keyword ad restrictions, such as manufacturers restricting retailers’ competitive keyword ads or retailers restricting affiliates’ competitive keyword ads. Vertical restrictions are usually less problematic than  horizontal restrictions, but with respect to keyword ad restrictions, they have the same consequence that the trademark owner clears out other bidders from the keyword auctions. I think trademark owners routinely will have many reasonable pro-competitive justifications for their vertical restraints. Still, many trademark owners will want to consult with competition counsel to double-check the legitimacy of controlling downstream competitive keyword ads. For example, if the trademark owner’s only justification for the vertical restriction is that it reduces its bid costs in the keyword ad auction, I would give serious thought to the continued tenability of the practice.

Case citation: In the Matter of 1-800 Contacts, Inc., 2018 WL 6078349 (FTC Docket #9372, Nov. 7, 2018)

Case library: The FTC maintains a page with public filings in this case. Here’s a selected library of materials (including some not on the FTC page):

* FTC opinions: majority by Commissioner Simons, concurrence by Commissioner Slaughter, dissent by Commissioner Phillips. Final order.

* ALJ opinion. Blog post: Interesting Tidbits From FTC’s Antitrust Win Against 1-800 Contacts’ Keyword Ad Restrictions.

* Some expert reports and related material: Howard Hogan. Dr. William Landes. Rebecca Tushnet’s rebuttal report. Prof. Rebecca Tushnet Slides. Dr. Evans’ Slides. Dr. Susan Athey’s slides (see the exhibit).

* Respondent’s Second Corrected Pretrial Brief. Blog post: 1-800 Contacts Charges Higher Prices Than Its Online Competitors, But They Are OK With That–FTC v. 1-800 Contacts

* Complaint Counsel’s Corrected Pre-Trial Brief and Exhibits. Blog post: FTC Explains Why It Thinks 1-800 Contacts’ Keyword Ad Settlements Were Anti-Competitive–FTC v. 1-800 Contacts

* FTC Complaint from Aug. 2016. Blog post: FTC Sues 1-800 Contacts For Restricting Competitive Keyword Advertising