1-800 Contacts and Vision Direct, Inc named in class action alleging conspiracy to restrain trade

1 800 Contacts

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1-800 Contacts and Vision Direct, Inc named in class action lawsuit alleging a conspiracy to restrain competition in the  direct-to-consumer and online markets for contact lenses

Plaintiffs bring this action on behalf of all direct-to-consumer purchasers of contact lenses, including those who purchased contact lenses online, in the United States and a subclass of all California residents against defendant 1-800 Contacts as the ringleader behind a scheme to prevent competition in the online market for contact lenses.

This action arises out of defendants’ overarching scheme to restrain competition in the direct-to-consumer and online markets for contact lenses.

As recently revealed in a complaint by the Federal Trade Commission (“FTC”), 1-800 Contacts is the instigator and enforcer of an unlawful series of agreements between 1-800 Contacts and at least 14 of its “competitors” to divide up the direct-to-consumer and online markets for sales of contact lenses. These 15 “competitors” combine to control over 50% of the direct-to-consumer and online markets for contact lenses. 1-800 Contacts accounts for over 50% of the online market by itself. In particular, 1-800 Contacts abused its monopoly power and entered into bilateral agreements with each of its competitors/co-conspirators to not bid against each other in advertising auctions conducted by internet search engines.

Due to the massive amount of information available on the internet, internet search engines have become indispensable to anyone seeking to use the internet. Internet search engines are generally simple to use – a user need only enter keywords, such as “contact lenses,” into a field and the search engine will use an algorithm to find and list the webpages that are responsive to the query, usually ranked in order of relevance. Search engines, such as Google or Bing, are usually free to users. The main source of revenue for these search engines is the advertising they sell, which appears in response to a user’s search and is displayed adjacent to the respective search engine’s organic results. This form of advertising has a proven track record of being successful, as it allows the advertisers to market directly to consumers at the very moment they are looking to make a purchase or have expressed an interest in a specific subject. Online search engine advertising is critical to nearly every company’s ability to compete in the digital age. Google and Bing sell this advertising through automated auctions.

A successful way for competitors to raise awareness of their products and compete for sales is to purchase search advertising that mentions their competitors, especially as a comparison. For example, if a consumer is looking to buy a  television for the cheapest price and knows a big retailer like Best Buy sells televisions, the consumer might search for “cheaper than best buy for tvs.” Such a search will likely  yield sponsored ads by Best Buy, but also ads by competitors, such as Walmart.

This is not the case in the contact lenses industry. A search of “cheaper than 1-800 contacts for contact lenses” yields sponsored advertising by only one company, 1-800 Contacts. The reason for this disparity is that anti-competitive bilateral agreements between 1-800 Contacts and its co-conspirators prevent each other from bidding on any search keywords or phrases with the other company’s brand names, websites or trademarks in them. In addition, the agreements require that 1-800 Contacts and its co-conspirators use “negative keywords.” This is an instruction to the search provider that a company’s advertisement should not appear in response to a search query that contains a particular term or terms.

Normally negative keywords are used to prevent advertising appearing from irrelevant queries that may contain similar words. For example, a company that sells billiards accessories would bid for the term “pool” in order to advertise for pool sticks, but use a negative keyword of “swimming” to prevent its ads from appearing when someone is looking for water-related accessories. While many companies use negative keywords to properly tailor advertisements to interested consumers, defendants use negative keywords to allocate the market for contact lenses. 1-800 Contacts and its co-conspirator agreed to instruct search advertisers that their advertising should not appear when a search includes a competitor’s trademark through the use of negative keywords.

As alleged, the 1-800 Contacts-led scheme has been ongoing for more than a decade. In 2003, there was an estimated $200 million worth of online contact lens sales. Though 1-800 Contacts accounted for $187 million worth of those sales, the company realized that it was beginning to have real competition for direct sales. 1-

800 Contacts thereafter devised a plan to unlawfully stifle online competitors so that it could continue to sell contact lenses at higher prices than its rivals without losing market share. Specifically, in order to restrict competition and maintain its market share and pricing, 1-800 Contacts began accusing its then competitors of trademark infringement if a rival’s advertisement appeared on the search results page in response to internet search queries that involved 1-800 Contacts’ brand name, websites or trademarks. 1-800 Contacts’ position was legally baseless and a transparent threat to inundate its competitors with prolonged and costly litigation.

 

Between 2004 and 2013, fourteen of 1-800 Contacts’ competitors agreed with 1-800 Contacts not to bid against 1-800 Contacts in certain auctions in order to settle the sham lawsuits or threat thereof. Most of the competitors agreed to 1-800 Contacts’ terms before even asserting counter claims. The agreements – which are reciprocal – prevented 1-800 Contacts and its competitors from bidding in search advertising auctions for any of the others’ trademarked terms and common variations, including common misspellings, of any of those terms. Each competitor knew that by entering into this agreement, its market share and profits would be protected. Of course, to ensure this was the case, all a competitor needed to do was a Google search. In addition, 13 of the agreements called for the adoption of negative keywords. Only one competitor, Lens.com, refused to enter into an agreement. 1-800 Contacts and Lens.com proceeded to litigate 1-800 Contacts’ bogus trademark claim, and after years of litigation, Lens.com prevailed. The district court in that action specifically called the practice of seeking agreements that preclude a competitor’s advertisements from appearing on a search results page any time its mark is entered as a search term “an anti-competitive, monopolistic protection to which [1-800 Contacts] is not entitled.” Notably, in its answer to the FTC action, 1-800 Contacts admitted that it entered into these agreements with competitors in all but one case to allegedly resolve threatened or actual trademark litigation.

Members of the Class were injured by defendants’ actions by paying supra-competitive prices for contact lenses. In addition, defendants’ actions prevented the Class from receiving the benefits of a fair and competitive marketplace for both information and pricing of contact lenses sold directly to consumers, including online.

 

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