FTC Alleges 1-800-Contacts Bullied Rivals Out of Competing in Search Ads

Comeptitors Agreed Not to Buy Ads Against Each Others' Brand Names

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FTC headquarters in Washington, D.C.
FTC headquarters in Washington, D.C. Credit: Andrew Harrer/Bloomberg

The Federal Trade Commission and 1-800-Contacts aren't seeing eye to eye, as the FTC filed an administrative complaint Monday alleging that the online retailer pressured other marketers out of competing with it in search ads.

1-800-Contacts has earned massive profits as a pioneer of selling contact lenses online, making it the largest online seller of contacts, the FTC said. But during the early 2000s, 1-800-Contacts began to see its profits fall as competitors successfully jumped into the fray and competed through search advertising, according to the compliant. Rivals sometimes bought ads on Google or Bing, for example, that displayed along with organic results when consumers typed in a search for "1-800-Contacts."

1-800-Contacts threatened to sue the smaller competitors if they used "1-800-Contacts" as a search term to trigger the delivery of their ads, the FTC said. "1-800-Contacts claimed -- inaccurately -- that the mere fact that a rival's advertisement appeared on the results page in response to a query containing 1-800-Contacts trademark constituted infringement," it said. "1-800-Contacts threatened to sue its rivals that did not agree to cease participating in these search advertising auctions."

Through 2004 to 2013, 1-800-Contacts entered at least 14 agreements with rival online sellers of contact lenses settling its purported trademark claims by restricting bidding in search advertising auctions, the FTC said. According to the complaint, rivals quickly caved in to 1-800-Contacts' demands "in order to avoid prolonged and costly litigation."

"1-800 Contacts strongly disagrees with the Federal Trade Commission's contention that agreements designed to protect its trademark hinder competition," Cindy Williams, general counsel at 1-800-Contacts, told Ad Age in an emailed statement. "1-800 Contacts is confident in its legal position and will vigorously defend its intellectual property rights in response to the administrative complaint filed today by the FTC."

The FTC also suggested that the agreements cleared the field in some bidding and surpressed prices in the process. "As 1-800-Contacts engineered this bid allocation scheme, certain auctions were reserved to 1-800-Contacts alone," it said in its complaint.

Kevin Lee, executive chariman of Didit, a full service agency that specializes in search, said competitors sometimes strike agreements not to bid on each other's trademarks. "In this case, the FTC alleges that the agreements were designed to suppress bidding by colluding on bid prices," he said.

The language in the agreements was so far-reaching that even if a user searched for "1-800-Contacts cheaper competitors" the user would only see advertisements for 1-800-Contacts, according to the complaint.

The FTC said in a statement that the alleged agreements "restrict truthful and non-misleading advertising to consumers, constituting an unfair method of competition in violation of federal law." The government agency claims 1-800-Contacts is in violation of the FTC Act.

One competitor, however, did not agree to 1-800-Contacts' demands to modify its search advertising strategy. Lens.com fought 1-800-Contacts in court until the Court of Appeals for the Tenth Circuit rejected 1-800-Contacts' trademark infringment claims, arguing that "consumers were not confused when an advertisment for Lens.com appeared on the search results page in response to a user query for 1-800-Contacts."

Search advertising is a big business, as marketers spent $20.5 billion in search advertising in 2015, an 8% increase from the previous year, according to the Interactive Advertising Bureau.

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