[PDF] Initial Decision by Chief Administrative Law Judge D. Michael

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PUBLIC

UNITED STATES OF AMERICA

FEDERAL TRADE COMMISSION

OFFICE OF ADMINISTRATIVE LAW JUDGES

DOCKET NO. 9372

In the Matter of

1-800 CONTACTS, INC.,

a corporation

Respondent.

INITIAL DECISION

D.

Michael Chappell

Chief Administrative Law Judge

Date: October 27, 2017

TABLE OF CONTENTS

I. INTRODUCTION........................................................................�..................................... 1

A. Summary of Complaint and Answer.......................................................................

1

1. The Complaint ........................................................................

.................... 1

2. Respondent™s Answer and Defenses........................................................... 2

B. Procedural History ........................................................................ .......................... 3 C. Evidence........................................................................ .......................................... 4

D. Summary of Initial Decision........................................................................

........... 7

II. FINDINGS OF FACTS ........................................................................�............................ 8

A. Jurisdiction........................................................................ ...................................... 8

B. Contact Lenses OE Industry Background .................................................................. 8

1. Contact Lens Manufacturers .......................................................................

8

2. Contact Lenses are Prescription-Only Medical Devices ............................ 8

3. Prescription Verification........................................................................

..... 9

4. Contact Lenses are a Commodity Product................................................ 10

C. 1-800 Contacts ........................................................................ .............................. 11

1. Company Background ........................................................................

...... 11

2. Marketing Strategy........................................................................

............ 13

3. 1-800 Contacts™ Sales ........................................................................

....... 14

D. Categories of Contact Lens Retailers.................................................................... 15

1. ECPs........................................................................

.................................. 15 a. Independent ECPs........................................................................ . 15 b. Optical retail chains ...................................................................... 16 c. Mass merchants and club stores.................................................... 16

2. Online Retailers ........................................................................

................ 17 a. AC Lens ........................................................................ ................ 17 b. Coastal Contacts........................................................................ .... 18 c. Contact Lens King ........................................................................ 18 d. EZ Contacts USA........................................................................ .. 18 e. Lens.com........................................................................ ............... 18 f. LensDirect........................................................................ ............. 18 g. Lens Discounters........................................................................ ... 18 h. Lensfast ........................................................................ ................. 18 j. Lenses for Less ........................................................................ ..... 19 k. Memorial Eye........................................................................ ........ 19 l. ReplaceMyContacts ...................................................................... 19 m. Web Eye Care ........................................................................ ....... 19 n. Walgreens and Vision Direct ........................................................ 19

3. New Contact Lens Retail Companies ....................................................... 20

a. Simple Contacts ........................................................................ .... 20 b. Sightbox ........................................................................ ................ 20 c. Hubble Contacts........................................................................ .... 20 d. Daysoft........................................................................ .................. 21 i

E. Internet Search Methods and Mechanics .............................................................. 21

1. Organic or Natural Search Results............................................................ 22

2. Paid Search Advertising........................................................................

.... 22

3. How Paid Search Results are Generated by Google................................. 23

a. Keywords and match types ........................................................... 23 i. Broad match........................................................................ . 24 ii. Modified broad match.......................................................... 24 iii. Phrase match ........................................................................ 24
iv. Exact match........................................................................ .. 25 v. Negative keywords............................................................... 25 b. Ad Rank and its components ........................................................ 25 i. Bids ........................................................................ .............. 26 ii. Expected CTR...................................................................... 26 iii. Ad relevance ........................................................................ 27
iv. Landing page experience ..................................................... 27 v. Ad extensions and format .................................................... 27 c. The Auction Outcome: Ad Rank, Ad Position, and Actual ....................... 28 i. Minimum bids...................................................................... 28 ii. Ad position........................................................................ ... 29 iii. Actual cost-per-click............................................................ 29 iv. User information .................................................................. 30 v. Whether an ad is shown may change over time................... 30 d. Advertiser budgets ........................................................................ 30
e. AdWords keyword planner........................................................... 31

4. How Paid Search Results are Generated by Bing..................................... 31

5. Other Marketing Channels on the Internet................................................ 32

a. Display advertising ....................................................................... 33
b. Retargeting and remarketing advertising...................................... 33 c. Social media advertising............................................................... 33 d. Affiliate marketing........................................................................ 34
e. Email marketing........................................................................ .... 34 f. Mobile applications....................................................................... 34
g. Comparison shopping engines ...................................................... 35 h. Product listing advertisements ...................................................... 35 i. Knowledge graphs ........................................................................ 36
F.

Search Engine Trademark Policies .......................................................................

38

1. Google Trademark Policies.......................................................................

38

2. Bing Trademark Policies........................................................................

... 39 G. The Challenged Agreements........................................................................ ......... 40

1. Trademark Litigation Settlements............................................................. 40

a. Early history: Vision Direct and Coastal Contacts ....................... 40 i. Vision Direct........................................................................ 40
ii. Coastal Contacts................................................................... 42 b. Trademark monitoring and cease and desist letters ...................... 42 ii c. Litigation........................................................................ ............... 44 d. ............ 47 e. Relevant provisions of the Settlement Agreements...................... 48 f. Post-settlement enforcement of the Settlement Agreements ........ 50 i. AC Lens ........................................................................ ....... 50 ii. Coastal Contacts................................................................... 51 iii. Vision Direct........................................................................ 52
iv. Walgreens ........................................................................ .... 52 v. EZ Contacts........................................................................ .. 53 vi. Lensfast ........................................................................ ........ 53 vii. Contact Lens King ............................................................... 53 viii. Empire Vision ...................................................................... 54 ix. Lenses for Less .................................................................... 54

2. Luxottica Sourcing and Services Agreement............................................ 54

H. Relevant Product Market ........................................................................ .............. 54 1. ...................... 55 2. Industry Recognition........................................................................ ......... 56 3. Specialized Facilities ........................................................................ ........ 57 4. Distinct Prices ........................................................................ ................... 59 5. Critical Loss Analysis........................................................................ ....... 62 6. Unilateral Pricing Policies ........................................................................ 65
I. Relevant Geographic Market ........................................................................ ........ 66 J. Market Shares ........................................................................ ............................... 67 K. Anticompetitive Effects ........................................................................ ................ 67 1. Commercial Importance of Advertising in Response to Searches for

1-800 Contacts' Trademarks ............................................................... 67

a. Importance of paid search advertising in marketing contacts ..................... 67 i. AC Lens ........................................................................ ....... 68 ii. Empire Vision ...................................................................... 70 iii. LensDirect........................................................................ .... 70 iv. Lens Discounters.................................................................. 71 v. Lenses for Less .................................................................... 71 vi. Memorial Eye....................................................................... 72
vii. Vision Direct........................................................................ 72
viii. Walgreens ........................................................................ .... 73 ix. Walmart........................................................................ ........ 73 x. Web Eye Care ...................................................................... 74 b. Expert opinion........................................................................ ....... 75 c. Importance of trademark paid search advertising in marketing contacts online ............................................................. 75 i. 1-800 Contacts ..................................................................... 75 ii. AC Lens ........................................................................ ....... 77 iii. Coastal Contacts................................................................... 79 iv. Empire Vision ...................................................................... 79 v. LensDirect........................................................................ .... 79 iii vi. Lens Discounters.................................................................. 81 vii. Lenses for Less .................................................................... 81 viii. Memorial Eye....................................................................... 82
ix. Vision Direct........................................................................ 83
x. Walgreens ........................................................................ .... 84 xi. Walmart........................................................................ ........ 84 xii. Web Eye Care ...................................................................... 85 d. Expert opinion........................................................................ ....... 86 e. AdWords data ........................................................................ ....... 87 i. Memorial Eye....................................................................... 87
ii. LensDirect........................................................................ .... 89 2. Economic Theory as to Anticompetitive Effects of Advertising ........................... 91 3. Restricted Advertising ........................................................................ ...... 91 4. Price Information ........................................................................ .............. 92 5. Relationship Between Restricting Advertising in Response to Searches for 1-800 Contacts' Trademark Terms and Sales ...................... 95 6. Expert Opinion........................................................................ .................. 98 7. Economic Modeling Facts ...................................................................... 100 a. Dr. Athey's model....................................................................... 100
b. Dr. Evans' model ........................................................................ 101

L. Asserted Procompetitive Justifications............................................................... 102

1. Dr. Van Liere's Survey........................................................................ ... 102 2. Dr. Goodstein's Opinion........................................................................ . 105 3. Increased Search Costs ........................................................................ ... 107 4. Increased Sales........................................................................ ................ 107 III.

ANALYSIS ........................................................................�............................................ 109

A. Summary of Facts ........................................................................ ....................... 109 1. Contact Lenses Generally ....................................................................... 109
2. The Start of the Company 1-800 Contacts.............................................. 110 3. Sources for Purchasing Contact Lenses.................................................. 111 a. Eye care practitioners.................................................................. 111 b. Online retailers of contact lenses ................................................ 112 4. Paid Search Advertising on the Internet ................................................. 113 5. Summary of the Challenged Agreements ............................................... 115
a. The Settlement Agreements........................................................ 115 b. Luxottica Sourcing and Services Agreement.............................. 116

B. Overview of Applicable Law........................................................................

...... 117 C.

Immunity Under Actavis ........................................................................�............. 120

D. Relevant Market........................................................................ .......................... 123 1. Relevant Geographic Market .................................................................. 123 2. Relevant Product Market ........................................................................ 124
a. Interchangeability and cross-elasticity........................................ 125 iv b. Brown Shoe factors ..................................................................... 127 i. Industry recognition........................................................... 127 ii. Peculiar characteristics and distinct customers.................. 128 iii. Distinct prices .................................................................... 129 iv. Specialized vendors ........................................................... 130 c. Ordinary course of business documents ..................................... 132 d. Economic expert testimony......................................................... 133 i. Critical loss analysis .......................................................... 133 ii. Unilateral pricing policies.................................................. 136 e. ............. 138 E. Anticompetitive Effects ........................................................................ .............. 138 1.quotesdbs_dbs31.pdfusesText_37

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