Data & Privacy Law

December 2016

For well over a century, US trademark law has afforded brand owners certain rights, remedies and obligations.  As the Department of Commerce has noted, owners of trademarks have both a legal right and an affirmative obligation to protect their trademarks from unauthorized third-party use.  Diligent enforcement practices not only protect trademark assets, but also protect the public from mistaking businesses’ affiliations with their competitors.¹

With increasing regularity, lawmakers, courts, and regulators have revisited the Lanham Act to address novel instances of unauthorized online trademark use.  In August 2016, following a decade of trademark litigation in connection with its competitors’ Internet search advertising practices, one brand owner has been targeted by the Federal Trade Commission (FTC or Commission) for entering into allegedly anti-competitive trademark settlement agreements.  This article outlines the basic mechanics of Internet search advertising, explores the trademark litigation of an online contact lens seller, details the FTC’s recent enforcement action against the e-retailer, and considers some of the effects that these legal developments may have on trademark owners, advertisers, and affiliate marketers.

Internet Search Advertising

Internet search engines, such as Google, Bing, and Yahoo, use complex algorithms to display search results that correspond to particular words or phrases (keywords).  While most search results are organically generated and sorted according to relevance, an advertiser can pay to have its advertising copy and a hyperlink to its Web site appear above or to the right of the organic results.

Using platforms such as Google AdWords, Bing Ads, and Yahoo Gemini, advertisers can bid against one another to reserve specified keywords that trigger the display of search ads. To filter out irrelevant searches, advertisers also can designate “negative keywords,” which instruct the search engine not to display ads in response to certain search terms. Consumers who click on a search ad are directed to the applicable advertiser’s Web site.

The appearance of a search ad in response to a consumer’s search is known as an “impression.”  Search advertising is primarily a pay-per-click (PPC) regime, which only requires a search advertiser to pay if a consumer actually clicks on its impression.  Advertisers often will use a search ad’s click-through rate (CTR)—the percentage of impressions that result in clicks—to gauge the performance of a given advertisement and its corresponding keywords.

1-800 Contacts Saga

As the following decade-long narrative of 1-800 Contacts, Inc. (1-800) illustrates, a regulatory risk has emerged for brand owners endeavoring to enforce certain trademark rights in the Internet search advertising space.

1-800 Contacts, Inc.

1-800, which describes itself as “the world’s largest contact lens store,” delivers more than 200,000 contact lenses daily.²  Although 1-800 also sells contacts via telephone and mail order, it derives the majority of its gross sales online and engages in extensive Internet search advertising.³  Between 2003 and 2008, 1-800 reportedly spent $11 million on Google advertising alone.⁴

As part of its business practices, 1-800 conducted Internet searches using its federally registered 1800 CONTACTS mark and common variations thereof as search terms. When a competitor’s paid search advertisement was generated in its search results, 1-800 presumed that the competitor had purchased the subject ad by using the 1800 CONTACTS mark as a keyword. In 2004, 1-800 began delivering cease-and-desist correspondence to such competitors, alleging that their conduct amounted to trademark infringement and demanding that they prevent their respective search ads from appearing in response to the search term “1800 Contacts.”

Lens.com, Inc. Complaint

Lens.com, Inc. (Lens.com), an online contact lens store and competitor of 1-800, conducted Internet search advertising directly, as well as indirectly through the affiliate network Commission Junction.

Court records indicate that Lens.com purchased search advertisements directly using nine keywords consisting of variations and misspellings of 1-800’s mark (resulting in 1,626 impressions and 25 clicks). In addition, two of 1-800’s more than 10,000 affiliate marketers from the Commission Junction network purchased search ads using the 1800 CONTACTS mark as a keyword (collectively generating 790,000 impressions and 4,960 clicks).  While 1-800’s direct search advertisements did not include the 1800 CONTACTS mark, one affiliate referred to “1800 Contacts” in visible advertising copy (resulting in 65,183 impressions and 352 clicks).⁵

In-house and outside counsel for 1-800 delivered separate cease-and-desist correspondence to Lens.com on numerous occasions for purportedly using the 1800 CONTACTS mark as a “triggering keyword” for Google and Yahoo search advertisements. Dissatisfied with the results, 1-800 filed suit against Lens.com in 2007 in the Federal District of Utah for alleged trademark infringement, secondary infringement, unfair competition, misappropriation, breach of contract, and unjust enrichment.⁶

In its amended complaint, 1-800 alleged that Lens.com used the 1800 CONTACTS mark in commerce within the meaning of the Lanham Act when it purchased search ads using its trademark as a keyword. In addition, 1-800 claimed that Lens.com’s use of search ad keywords was likely to create initial interest confusion among the consuming public concerning the origin of Lens.com’s goods and services, luring consumers to Lens.com who were seeking 1-800’s products and services.

District Court Ruling

In 2010, the District Court granted Lens.com’s motion for summary judgment, dismissing all of 1-800’s causes of action.

The court agreed that Lens.com and its respective affiliates satisfied the Lanham Act’s “use in commerce” requirement by purchasing search ads for the 1800 CONTACTS mark and/or related variations and misspellings.  Notwithstanding Lens.com’s use of 1-800’s mark in commerce, however, the court determined that “the mere purchase of a trademark as a keyword cannot alone result in consumer confusion,” holding that “use alone of another’s mark as a keyword is insufficient to support a claim of infringement, unfair competition, or misappropriation of good will.”⁷

With respect to the affiliate search advertisements that visibly featured the 1800 CONTACTS mark, the District Court concluded that a strong likelihood of confusion existed. However, 1-800 did not name the marketing affiliate as a party to the lawsuit, instead raising a number of secondary infringement theories against Lens.com. After considering 1-800’s claims of contributory and vicarious/agent infringement, the court ruled that 1-800’s evidence was insufficient to hold Lens.com liable for its affiliates’ misconduct.

Tenth Circuit Ruling

In 2011, 1-800 appealed the District Court’s summary judgment ruling. In 2013, the Tenth Circuit affirmed on all issues but one (contributory infringement).  Although it conceded that the District Court’s anti-infringement stance for search ad keywords “has some attraction,” the Circuit Court affirmed the dismissal of 1-800’s direct infringement claims only “[t]o the extent

that the court based summary judgment on the ground that no likelihood of confusion existed.”⁸ Conducting its own likelihood of confusion analysis, the court focused primarily on Lens.com’s Google AdWords data, specifically, its CTR of 1.5 percent (i.e., 25 clicks per 1,626 impressions). Referencing unpersuasive confusion rates from other cases that were as high as 7.6 percent, the Tenth Circuit found that Lens.com’s 1.5 percent CTR “cannot support an inference that Lens.com’s keyword activity was likely to lure consumers away from 1-800.  It is thus insufficient to justify relief.”⁹

However, the Tenth Circuit reversed and remanded with respect to 1-800’s contributory infringement claim, finding that Lens.com may have known that one of its affiliates was using the 1800 CONTACTS mark in its advertising copy without making reasonable efforts to halt the subject conduct. In October 2014, after remand and shortly before trial in the District of Utah, the parties settled their dispute, and 1-800 dismissed its remaining claims.

FTC Complaint

As described above, over the years 1-800 has delivered cease-and-desist correspondence to a number of competitors that apparently purchased Internet search advertisements using the 1800 CONTACTS mark as a keyword. 1-800 ultimately sued a number of these competitors (including Lens.com) for alleged trademark infringement in federal district courts throughout the country.

In fact, between 2004 and 2013, 1-800 entered into at least 13 written settlement agreements, and one sourcing and fulfillment agreement, with other online contact lens sellers. All 14 of the subject agreements “prevent each party from engaging in the unauthorized use of the other’s specified trademark terms as keywords for Internet search advertising.”¹⁰  Thirteen of the agreements require each party to employ the other party’s trademarks, and certain variations thereof, as negative keywords to prevent the party’s search ads from appearing in response to those search terms.  1-800 purportedly has continued to police the agreements to ensure that the subject competitors remain in compliance therewith.

In August 2016, the FTC filed an administrative complaint against 1-800 alleging, among other things, that 1-800’s trademark enforcement practices have unreasonably restrained competition in violation of the FTC Act.¹¹  The Commission contends that 1-800 “unlawfully orchestrated and now maintains a web of anticompetitive agreements”¹² which, it claims, are likely to restrain price competition for Internet search ads, impair search engines, deprive consumers of information and cause consumers to pay more for contact lenses.

The FTC has contemplated ordering 1-800 to cease and desist from: (1) entering into agreements with competitors concerning Internet search advertising; (2) enforcing the non-use and negative keyword provisions of its preexisting settlement agreements; and (3) enforcing its trademark rights in connection with search ad keywords.  1-800 has denied all wrongdoing, arguing that “[t]he agreements alleged in the Complaint are legitimate, reasonable, and commonplace settlements.”¹³  1-800 is scheduled to appear before an FTC Administrative Law Judge (ALJ) in April 2017.

Key Takeaways

As noted above, trademark owners have an affirmative duty to diligently enforce their trademark rights, whether through cease-and-desist correspondence, litigation, or otherwise.  However, public policy has long favored compromise and the settlement of disputes before trial.

The Commission’s administrative complaint against 1-800 harkens back to aggressive FTC enforcement actions taken during the 1970s that portrayed trademark protection as inherently anti-competitive.  While the Commission claims that “[l]ess restrictive alternatives are available” to trademark owners involved in disputes concerning Internet search advertising keywords, the FTC provided no examples of such alternatives.  In the case of a trademark dispute, settlement agreements allow the parties to protect their respective trademark assets and negotiate appropriate terms and conditions, including non-use provisions, to avoid subsequent confusion.¹⁴  The FTC’s decision to pursue 1-800 for entering into trademark settlement agreements that were negotiated in good faith undoubtedly will have a chilling effect on other brand owners that attempt to resolve legitimate Internet-related trademark disputes in the future.¹⁵

Further, although the Tenth Circuit’s ruling in 1-800 Contacts comes short of adopting the District of Utah’s complete eradication of trademark liability for use of third-party trademarks as search ad keywords, the Circuit Court has suggested that search ad campaigns with a CTR of 7.6 percent or less create no likelihood of confusion, an essential element of trademark infringement. With CTRs in Google AdWords averaging 1.91 percent, and 4 percent to 5 percent being considered a high-quality CTR,16 the 1-800 Contacts ruling would all but immunize advertisers’ unauthorized use of protected trademarks as search advertising keywords.

While both the Commission and Tenth Circuit questioned advertisers’ unfettered use of competitors’ trademarks in the visible text of search ads, brand owners attempting to limit third-party use of trademarks for search advertising purposes should now proceed with extreme caution. On the other hand, advertisers and affiliate marketers that have been served with legal process in connection with their search advertising practices may find support in this developing area of the law. Against this backdrop, brand owners and advertisers alike are advised to speak with experienced intellectual property counsel about minimizing their unique legal risks before attempting to resolve any Internet search advertising dispute.

The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney.

David O. Klein is the managing partner of Klein Moynihan Turco in New York, where he practices Internet marketing law and intellectual property law.  He can be reached at dklein@ kleinmoynihan.com.  Joshua R. Wueller is an associate at Klein Moynihan Turco and can be reached at jwueller@ kleinmoynihan.com.

1. Dep’t of Commerce, Trademark Litigation Tactics and Federal Government Services to Protect Trademarks and Prevent Counterfeiting 6 (2011) (“[D]iligent enforcement of trademark rights is necessary to help prevent others from unfairly trading off the mark owner’s goodwill and reputation and to protect the public from mistakenly believing that the mark owner authorizes, endorses, sponsors, or is somehow affiliated with another business.”).
   2. The Company, 1800 CONTACTS, https://www.1800contacts.com/the-company.html (last visited Nov. 28, 2016).
   3. 1-800 Contacts, Inc. v. Lens.com, Inc., 722 F.3d 1229, 1235 (10th Cir. 2013).
   4. 1-800 Contacts, Inc. v. Lens.com, Inc., 755 F. Supp. 2d 1151, 1158 (D. Utah 2010).
   5. Id. at 1160-63.
   6. Id. at 1164.
   7. Id. at 1174, 1190.
   8. 1-800 Contacts, Inc., 722 F.3d at 1234, 1243.
   9. Id. at 1244 (citation and internal quotation marks omitted).
   10. Answer and Defenses to Administrative Complaint ¶ 22, In re 1-800 Contacts, Inc., No. 9372 (F.T.C. Aug. 29, 2016).
   11. Complaint, In re 1-800 Contacts, Inc., No. 9372, 2016 FTC LEXIS 146 (F.T.C. Aug. 8, 2016).
   12. Press Release, Fed. Trade Comm’n, FTC Sues 1-800 Contacts (Aug. 8, 2016).
   13. Answer and Defenses to Administrative Complaint at 1.
   14. See Dep’t of Commerce, supra n.1, at 10-11 (“If the trademark dispute can be resolved amicably, the parties may enter into a settlement agreement. If the parties believe their marks can co-exist, the agreement terms may include provisions governing use and/or registration of the marks . . . . Settlement and license agreements usually enable the mark owner to exercise some control over how and by whom its marks are used, thereby protecting the owner’s trademark rights.”).
   15. See Daniel M. McClure, “Trademarks and Competition: The Recent History,” 59 L. & Contemp. Probs. 13 (1996) (exploring the FTC’s “high-water mark” for aggressive anti-competition action against trademark owners in the 1970s and recalling that “[t]he antitrust laws are designed to promote and protect competition, and the use of the antitrust laws to directly challenge the validity of trademarks sent shivers through the community of trademark owners”).
   16. See “Click-Through Rate (CTR): Understanding Click-Through Rate for PPC,” WordStream, http://www.wordstream.com/click-through-rate (last visited Nov. 28, 2016).