The Federal Trade Commission has sued online retailer 1-800 Contacts, saying the company illegally restrained competitors from buying search advertisements. It's a dramatic move that could mold the shape of online trademark law for years to come.

In the administrative complaint (PDF) filed Monday, FTC lawyers say that 1-800 Contacts reached deals with at least 14 competing contact lens sellers, in which they agreed to limit their advertising on search engines like Google and Bing. In the FTC's view, those agreements constituted unfair competition, because they limited truthful advertising and restrained price competition.

The 14 competitors aren't named in the FTC's lawsuit, but some of them are likely to be companies that Utah-based 1-800 Contacts sued in court. In 2008, 1-800 Contacts filed a lawsuit (PDF) against LensFast.com, saying their keyword advertising violated trademark law; in 2010, ContactLensKing.com got sued (PDF) on similar grounds.

The FTC complaint is scheduled to be heard by an FTC administrative law judge in April 2017.

In a statement, 1-800 Contacts General Counsel Cindy Williams said her company "strongly disagrees" that its settlement agreements are anticompetitive. "Our settlement agreements were specifically designed to protect our intellectual property rights," she said. "1-800 Contacts strongly believes in a competitive contact lens marketplace and will continue to be a leading advocate for providing consumers with more choice, greater convenience, and lower prices."

Contentious Marks

The role of trademark law in online search advertising has been contentious since the very inception of online search, although the matter has settled out somewhat in recent years. To understand the importance of the FTC's claims, it's worth reviewing a very brief history of the issue.

Search engines like Google and Bing make money from selling ads that are keyed to search terms. Some trademark owners have long disliked the fact that when a potential customer types in their trademark company name into Google—say, "American Airlines" or "Rosetta Stone"—the user will see ads from competitors.

Some companies, including both companies cited above, chose to sue search engines, saying that selling such ads without their permission constitutes trademark infringement. Google fought those cases hard, and no trademark owner has ever convinced a court that selling trademarked keywords violates the law. Not only did Google not back down, it expanded the practice to Europe after winning a court case against luxury brand owners including France's Louis Vuitton.

While lawsuits against search engines wound down to nothing, some trademark owners were persistent about suing competitors who purchased ads keyed to their trademarks. However, those types of cases also mostly went in the advertiser's favor. In the past several years, US court cases in which an advertiser buys a trademarked keyword but does not use the trademark in the text of the ad have universally been resolved in favor of the advertiser, according to Prof. Eric Goldman of Santa Clara University, who has tracked and blogged about such cases for years.

A third type of keyword-ad litigation involves advertisers that buy a competitor's trademark and also use that trademark in the ad copy. Those can't be easily generalized about, because the outcome is dependent on factors beyond just buying online ads. However, even in those more aggressive examples, many of the cases are resolving in favor of the advertiser, Goldman notes.

Back in 2004, 1-800 Contacts began sending cease and desist letters to competing online stores, telling them that the mere appearance of their ad in response to a search query that contained "1-800 Contacts" constituted trademark infringement. "1-800 Contacts threatened to sue its rivals that did not agree to cease participating in these search advertising auctions," write FTC lawyers in the complaint. "Most often, rivals quickly acceded to 1-800 Contacts' demands in order to avoid prolonged and costly litigation."

Only one competitor, Lens.com, litigated against 1-800 Contacts for the long haul. That case ultimately went up to the US Court of Appeals for the 10th Circuit, which rejected 1-800 Contacts' trademark claims.

Between 2004 and 2013, at least 14 competing stores stopped bidding for ads. That left 1-800 Contacts, already the titan of the industry with more than 50 percent market share, free to bid on its own trademark with little or no competition.

Long battle ahead

For those who believe, as Goldman does, that competitive keyword advertising is beneficial and pro-consumer, the FTC case is potentially a big win that could create lasting change by getting a crystal-clear endorsement of keyword advertising. A legal opinion from a judge who favors the government's view will hold more weight going forward than one favoring an embittered competitor.

But, Goldman warns, don't start the party quite yet. First of all, a complaint is just a complaint. "It hasn't been battle-tested," said Goldman. "No court has agreed with it, and it's possible no court will ever agree."

The FTC's complaint goes ahead and assumes that competitive keyword advertising is not only okay, but indisputably legal. They're saying that the "no bidding" agreements distorted the marketplace. But if buying such ads is actually trademark infringement and can confuse consumers—as some large trademark owners continue to believe—then all 1-800 Contacts was doing was making sure the market worked correctly.

"It's not really being distorted if the people bidding are infringing trademarks," said Goldman in an interview with Ars. "You have to not only believe that competitive keyword advertising is legitimate, but believe it's not even in doubt."

And of course, the FTC case could utterly backfire and make the landscape more murky than it is now. But the way FTC cases work, that's not likely, at least in the near term. The administrative law judge who will hear the complaint is essentially an FTC employee; a party who loses a case to the Federal Trade Commission can appeal, but the appeal then gets heard by the full Federal Trade Commission. Only after that can a party appeal to a "regular" federal appeals court with a non-FTC judge.

That's right—for two long rounds of legal battles, the FTC will get to be both prosecutor and judge. That's why some private practice lawyers have ridiculed the FTC as a kind of "kangaroo court." For 19 years, from 1995 to 2014, the agency did not lose a single administrative lawsuit with unfair competition claims.

That's why one of the big questions going forward is how hard 1-800 Contacts is going to fight this case. The company is years away, millions of dollars away, from having its fate heard by an independent judge. For those looking for a deep dive into the subject, Goldman, a longtime critic of 1-800 Contacts, ponders some other questions in a lengthy blog post published yesterday. That includes the complex issue of what kind of "vertical" restrictions on keyword ads can be legally put in place for affiliates and franchisees.