Utah District Court Denies Defendants’ Motion To Dismiss Complaint Alleging Restraint Of Trade In Online Lens Retail Market
06/05/2018On May 17, 2018, Judge Tena Campbell of the United States District Court for the District of Utah denied three leading contact lens retailer defendants’ motion to dismiss a putative class action complaint alleging violations of Section 1 of the Sherman Act. J. Thompson, et al. v. 1-800 Contacts, et al., Case No. 2:16-CV-1183-TC (D. Utah May 17, 2018). Plaintiffs, who purchased contact lenses online from defendants, alleged that they paid artificially-inflated prices for those contact lenses due to defendants’ anticompetitive trademark litigation settlement agreements. Defendants moved to dismiss the claims because the plaintiffs lacked antitrust standing, failed to properly plead a relevant product market, did not allege a single overarching conspiracy, and with respect to damages claims prior to 2012, failed to file a lawsuit within the Clayton Act’s four-year statute of limitations.
The class action originates from a Federal Trade Commission (FTC) investigation into a series of litigation settlements entered into by certain online contacts retailers. After an administrative complaint and evidentiary hearing, an FTC administrative law judge ruled that 1-800-Contacts had violated Section 5 of the FTC Act. Plaintiffs subsequently filed a class action lawsuit alleging that beginning in 2004, 1-800-Contacts began filing a series of trademark infringement cases against its competitors and quickly settling those suits. Under these settlement agreements, the parties allegedly agreed to limit or withhold the use of certain trademark terms and related key words in their bids for advertisement space on Internet search engines like Google and Yahoo. In particular, the agreements prohibited the retailers “from bidding on any search keywords or phrases with the other company’s names, websites or trademarks in them” and required them to use “negative keywords” to prevent that company’s advertisement from appearing in response to a search query that contains one or more of the specified words. Plaintiffs alleged that through these agreements, defendants illegally manipulated the number and types of ads seen by online shoppers, which restrained competition and resulted in artificially high prices.
Judge Campbell denied defendants’ motion to dismiss the complaint. Judge Campbell held that plaintiffs’ allegations that the settlement agreements restricted competition, increased search costs, and caused plaintiffs to pay higher prices for contact lenses were sufficient to plead an antitrust injury under Section 1 of the Sherman Act. Judge Campbell also held that plaintiffs sufficiently alleged the online market for retail sales of contact lenses as a distinct relevant market by alleging, among other things, that: online prices for contact lenses are lower than the offline retailer prices, that retailers of optical products recognize the online market as a separate economic entity, and that online retailers can maintain a much larger inventory than brick and mortar stores, which allows them to fulfill and ship orders faster than offline retailers. Thus, notwithstanding the functional interchangeability of contacts sold by online and offline sellers, the Court found that plaintiffs had adequately alleged a basis for concluding that offline sellers were not an adequate substitute for, and did not restrain the prices of, online contacts sellers. With respect to allegations of a conspiracy, Judge Campbell found that plaintiffs sufficiently alleged that each individual settlement agreement caused anticompetitive effects, which satisfied the concerted action requirement of Section 1. Finally, Judge Campbell rejected defendants’ statute of limitations argument and held that certain nondisclosure provisions (including provisions mandating that the parties keep the agreements private) in the settlement agreements, the dates of those agreements, and the fact that the parties successfully concealed the details of the agreements satisfied the Rule 9(b) heightened pleading standard to allege fraudulent concealment. In addition, the Court found that the FTC’s investigation and findings of illegality tolled the statute of limitations because, although the administrative action was filed under Section 5 of the FTC Act, the FTC’s action was instituted “to prevent, restrain, or punish violations of any of the antitrust laws,” specifically Section 1 of the Sherman Act. Thus, plaintiffs were permitted to pursue damages claims dating back to 2004.