Last week, mega-online retailer 1-800 Contacts settled claims brought by a class action suit in the Central District of Utah alleging that the company was the mastermind of a scheme to prevent competition in the online contact lens market. The plaintiffs, consumer purchasers of contact lenses, alleged that 1-800 Contacts coerced some of its competitors to implement negative keyword lists so that when a potential consumer typed “1-800 Contacts,” no links to other retailers would appear in the search results.
According to the complaint, 1-800 Contacts sent various cease-and-desist letters to any competitor that appeared in a search of “1-800 Contacts,” claiming trademark infringement (when there was alleged to be no basis for this accusation). The plaintiffs, who had already settled with the other defendants in the action – including Walgreens, Vision Direct and international conglomerate Luxottica – settled with 1-800 Contacts for $15.1 million.
This settlement marks the end of this private consumer litigation after a nearly four-year-long saga, which originated from a separate Federal Trade Commission (FTC) enforcement action against 1-800 Contacts and rival online contact lens sellers for entering into agreements that prevented online contact lens retailers from bidding for search engine keywords in advertising auctions conducted by internet search engines, such as Google and Yahoo. The FTC ultimately ruled that agreements between 1-800 Contacts and 14 online sellers of contacts lenses violated Section 5 of the FTC Act and harmed competition in bidding for search engine keywords and by artificially reducing the prices that 1-800 Contacts pays as well as the quality of search engine results delivered to consumers. The FTC found that the agreements suppressed price competition and harmed consumer choice since they prevented other online contact lens retailers from bidding for search terms that would inform consumers that identical products were available at lower prices. The FTC case is currently on appeal to the Second Circuit.
Both the consumer and FTC cases against 1-800 Contacts and other online contact lens retailers explore the interesting area of prohibited agreements between companies to restrict search term advertising in order to prevent consumers from comparing price information. There are exceptions to these prohibitions, such as when related to trademark enforcement; but when companies limit which ads appear after a search, it may be difficult to show what pro-competitive effects that has for a consumer. The Second Circuit’s ruling in the pending FTC case will be closely watched for broader implications for internet search advertising restrictions and trademark protection.