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Feds Sue 1-800 Contacts for ‘Market Manipulation’ Amid Ad Search Brouhaha

The Federal Trade Commission (FTC) has accused the country's largest online contact lens retailer of manipulating the market and hurting consumers by illegally restricting internet advertising.

In a lawsuit filed earlier this month, the FTC claims 1-800 Contacts unlawfully orchestrated agreements with rival contact lens sellers that "unreasonably restrain both price competition in search engine advertising auctions [that determine which ads are displayed] and the availability of truthful and non-misleading advertising."

The lawsuit alleges that these signed marketing agreements with at least 14 companies were "an unfair method of competition" in violation of federal law that caused "at least some consumers to pay higher retail prices for contact lenses than they would pay absent the agreements, acts, and practices of 1-800 Contacts."

Those 14 other lens companies were not named in the lawsuit.

1-800-Contacts calls itself "the world's largest contact lens store" and promises customers an alternative way to shop "that is not only fast, but at the same time saves them money."

The company says it did nothing wrong and it vows to "vigorously defend" itself against the charges.

In a statement to NBC News, CEO Brian Bethers said the company "strongly disagrees" with the FTC's contention that it hindered competition and he looks forward to the opportunity to present his company's position fully in court.

"The company has been a pioneer for consumer rights, and we are proud to have opened up the contact lens market for increased competition," he wrote. "Our commitment to the consumer and to a fair and competitive marketplace is unwavering."

Bethers said the company has "actively fought price-fixing in the industry from contact lens manufacturers that would deprive consumers of lower prices."

Trademark Protection or Limiting Competition?

As outlined in the federal complaint, this all started back in 2003 when 1-800-Contacts started losing sales to lower-priced online competitors. The company did not want to lower its prices to compete, so it devised a plan to avoid doing so.

About a year later, 1-800 Contacts sent cease-and-desist letters to online rivals, accusing them of violating its trademark rights and threatening to sue. The company's assertion: The fact that a competitor's ad appeared on the results page when someone searched for "1-800 Contacts" was a trademark infringement. The FTC states in its complaint that this trademark claim was inaccurate.

Eventually, 14 companies signed reciprocal agreements with 1-800 Contacts to restrict which ads would be seen when a search engine requests included a company's trademarked name. These 14 firms and 1-800 Contacts represent about 80 percent of online contact lens sales.

Under the agreement: If someone searches for "1-800 Contacts," ads for any of the other 14 companies will not be displayed. Likewise, if a search is done for one of those other companies's trademarked name, ads for 1-800 Contacts will not appear.

The FTC's complaint states that most of these agreements required competitors to use what are called "negative keywords" to instruct search engines not to display their ads in response to any query containing the words "1-800 Contacts" — even if the search engine's algorithms determine that ad would be relevant and useful.

As a result, if you search for "1-800 Contacts cheaper competitors," you will only see ads for 1-800 Contacts.

The FTC position on this: These agreements "go well beyond anything necessary to protect against trademark infringement." Rather, they are "depriving consumers of the benefits of vigorous price and service competition among online sellers of contact lenses," the agency says in its lawsuit.

"To this day, 1-800-Contacts' prices for contact lenses remain consistently higher than the prices of its online competitors," according to the federal complaint.

The FTC points out that one online contact lens company, Lens.com, did not settle when 1-800 Contacts threatened to sue. Instead, it fought them in court and won — the U.S. Court of Appeals rejected 1-800 Contacts' trademark infringement claims.

In its complaint the FTC noted: "The court found that consumers were not confused when an advertisement for Lens.com appeared on the search results page in response to a user query for '1-800 Contacts.'"

An administrative law judge is scheduled to hear the FTC's case against 1-800 contacts in April of 2017.

The Company Responds

A company has the legal right to protect its trademarks, and 1-800 Contacts insists that's all it's doing. The marketing agreements with its competitors, it says, were designed to protect its intellectual property, not limit competition.

Bethers told NBC News, "1-800 Contacts strongly disagrees with the Federal Trade Commission (FTC) contention that its trademark settlement agreements are anti-competitive. The trademark settlement agreements were specifically designed to protect the trademark rights of all parties. We have invested significantly in advertising each year to build our brand, trademarks and business so that consumers are aware that they may choose where to buy their lenses. We believe that every business deserves to protect its intellectual property."

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.