On November 14, the FTC Commissioners, in an opinion authored by Chairman Simons, issued an opinion in an antitrust case involving the online advertising industry that has important implications for online advertisers. Last November, we discussed the initial decision by FTC ALJ Chappell that 1-800 Contacts had violated Section 5 of the FTC Act by coming to agreements with its competitors limiting their abilities—as well as 1-800 Contacts’ ability—to bid on each other’s trademarks and URLs in auctions for placement in search results. In his decision, termed an “Initial Decision” in FTC parlance, Judge Chappell found that those agreements directly harmed competition and consumers in the market for contact lenses sold over the internet, and he rejected the efficiency justifications proposed by 1-800 Contacts.
The full Commission went even further, affirming the ALJ’s decision, albeit on different grounds, and also holding that the agreements also violated the antitrust laws by harming competition in the bidding market for search engine keywords, reducing the prices that search engines like Google received for presenting ads in search results, and reducing the quality of the results delivered to consumers. As a result of the Commission’s decision, 1-800 Contacts is barred from either enforcing the agreements it already has with other online contact lens marketers, or from entering into similar agreements in the future.
The Commission’s Final Decision
The Commission confirmed the ruling by the ALJ that the agreements restrained competition in the market for online contact lens sales. In doing so, it found that the agreements, as agreements that restrained advertising, were “inherently suspect.” As a result, the Commission required 1-800 Contacts to show procompetitive rationales for the agreements. The rationales proposed by 1-800 Contacts—the avoidance of litigation costs through settlement and the policies supporting trademark protection, while “cognizable” (i.e., legitimate under the antitrust laws)—were not supported by the record before the Commission. In particular, the Commission found that, while settlements in trademark cases are in the public interest in general, the actual agreements at issue were not narrowly tailored to that end, and in fact restricted advertising regardless of whether the ads in question were likely to be confusing. With respect to 1-800 Contacts’ argument that the agreements were settlements of lawsuits and saved resources, the Commission required proof that the cost savings would be passed on to consumers. In the absence of that proof, the Commission rejected that proposed justification as well.
The Commission turned to an alternate way of coming to the same conclusion using the same analysis that the ALJ had used: that an antitrust plaintiff can satisfy its prima facie case of a violation by showing that the agreements at issue had actual anticompetitive effects. FTC staff were able to show that the agreements had a direct anticompetitive effect on the online contact lens market by showing first that the agreements restricted truthful advertising, and second that the reduction in advertising had led to an increase in contact lens prices sold online. 1-800 Contacts was unable to successfully challenge those findings, and its procompetitive rationales for the reduction in advertising and the higher prices for online sales of contact lenses were the same rationales that the Commission had already rejected.
Of particular interest to advertisers, the Commission also found that, in addition to the illegal impact the agreements had in the market for online sales of contact lenses, the agreements also had an illegal impact in the market for the sale of advertising space in search result listings. As most know, companies like Google auction off the space that exists in search result listings. Those auctions are tied to a number of factors, including the search terms used. The agreements between 1-800 Contacts restricted the ability of online contact lens sellers to compete in those auctions for keywords corresponding to the brand names of their competitors. The Commission found that those agreements reduced the number of search advertising auction participants competing for relevant ads and reduced the price of ads paid by the auction winners, reducing the revenue for the search engines holding the auctions. For example, because of the agreements, 1‑800 Contacts was able to pay less for advertising relating to its brand in the auctions than it otherwise would have had to pay because the agreements reduced how hard it had to compete for those keywords in the auctions. And the agreements reduced the number of such ads shown to consumers, reducing the value of the platform to them (to the extent that consumers value such advertising—in this case, to find lower prices for contact lenses online).
Other Commission Statements
Because the entire Commission is relatively new, it is interesting to look at the additional statements issued by Commissioners. Commissioner Slaughter issued a concurring statement “strongly” in support of the Commission’s order and decision. She wrote separately to note that the case itself justified the expense incurred by the Commission in bringing the case, both because of the harm to consumers from the conduct and because of the precedential value of the decision. Commissioner Slaughter emphasized that she would not have brought the case based on the harm to search engines from the conspiracy alone. What this portends for other actions involving the online advertising space remains to be seen.
Commissioner Phillips dissented from the decision in its entirety, arguing that the agreements should not have been found to have been inherently suspect because they were settlements of trademark litigation. In a 40-plus page opinion, Commissioner Phillips disagreed with nearly every factual determination made by the Commission and many of its legal determinations. It will be interesting to see how Commissioner Phillips brings the concerns raised in this statement to future actions by the Commission. It will also be interesting to observe the dynamic between Commissioner Philips and Chairman Simons going forward.
The Commission’s decision makes clear that there is a majority at the Commission that is willing to find agreements that restrict advertising to be inherently suspect, putting anyone who makes that sort of agreement in the enforcers’ crosshairs. That appears to be true even if one of the “victims” of the conduct is a company the size of Google. Agreements between competitors are dangerous things under the antitrust laws, and even in the settlement of litigation participants should ensure that the agreements that they enter into are closely examined by antitrust counsel in order to ensure that the agreements do not come under the same microscope that the agreements in this case did.