On November 7, 2018, the Federal Trade Commission issued an opinion that agreements between 1-800 Contacts and various online sellers of contact lenses constitute unfair methods of competition, in violation of Section 5 of the FTC Act.
The matter arises from 1-800 Contacts lawsuits against rival contact lens sellers for trademark infringement when sellers’ online advertising appeared in response to consumers’ internet searches for “1-800 Contacts.” The settlements allegedly anticompetitively limited internet search advertising and restrict bidding in internet search auctions to the detriment of consumers.
The resulting settlement agreements require the parties, when bidding at search engine advertising auctions, to take steps to ensure their ads do not appear in response to searches for the other party’s trademark terms.
Internet search engines utilize algorithms to match the text of the query with relevant content. Links to webpages deemed potentially responsive to the user’s search are ranked and presented to the user on a search engine results page. Search results can be “organic” or “sponsored.” The latter are considered advertisements. Advertisers bid on “keywords” that trigger the display of ads and search engines evaluate various factors when determining the ad’s location.
The FTC’s decision affects not only the price that consumers pay for some contact lenses but also the very manner in which substantial parts of price competition will occur throughout consumer markets. Agency policy dictates accurate and intelligible price competition among those who compete for consumers’ dollars.
According the Commissioner Simons, when information is withheld from consumers, it frustrates their ability to compare the prices and offerings of competitors. Consequently,
according to the FTC, the agreements affect the quality of search engine results delivered to consumers, artificially reduce the prices that 1-800 Contacts pays, and prevent online contact lens retailers from bidding for search engine result ads that would inform consumers that identical products are available at lower prices.
The opinion signals a clear message about agreements that unreasonably restrain trade in violation of the Federal Trade Commission Act and otherwise hinder robust competition via online advertising.
FTC Attorney Simons also commented that there was no valid offsetting procompetitive justifications for the advertising restraints. Therefore, 1-800 Contacts has entered into a cease and desist agreement with the FTC that prohibits the company from enforcing the provisions in the settlement agreements.The Commission believes that restrictions on this type of advertising are likely to harm competition because the flow of information between buyers and sellers is an essential part of the market system. Restrictions on advertising interfere with that flow of information and raise the cost to consumers of finding the most suitable offering of a product or service.
Online search is one of the key methods by which consumers compare products and services. This is how lower-priced rivals compete. Smaller online sellers generally offer lower prices and much of the advertising for those retailers emphasizes those lower prices. Restrictions on advertising may reduce a seller’s incentives to lower prices is that, absent an ability to advertise, lower per-unit prices may not be sufficiently offset by higher volume
As stated by the U.S. Supreme Court, advertising serves to inform the public of the availability, nature and prices of products and services. It performs a vital role in the allocation of resources in a free enterprise system.
The FTC also rejected the argument that price competition concerns were overridden by the effort to protect intellectual property capital. The FTC held that the agreements prohibit a wide range of truthful advertising and that less anticompetitive alternative exist.