PUBLIC UNITED STATES OF AMERICA BEFORE THE FEDERAL TRADE COMMISSION OFFICE OF ADMINISTRATIVE LAW JUDGES 06 22 2017 ___________________________________ 587197 ) In the Matter of ) ) 1-800 CONTACTS, INC., ) a corporation, ) DOCKET NO. 9372 ) Respondent ) __________________________________ ) COMPLAINT COUNSEL’S CORRECTED PROPOSED FINDINGS OF FACT Abbott Lipsky Daniel J. Matheson Acting Director Kathleen M. Clair Nathaniel M. Hopkin Markus Meier Charlotte S. Slaiman Acting Deputy Director Mika Ikeda Gustav P. Chiarello Geoffrey M. Green Joshua B. Gray Assistant Director Aaron Ross Thomas H. Brock Barbara Blank Attorneys Deputy Assistant Director Federal Trade Commission Charles A. Loughlin Bureau of Competition Chief Trial Counsel 600 Pennsylvania Ave., NW Washington, DC 20580 Telephone: (202) 326-2075 Facsimile: (202) 326-3496 Electronic Mail: [email protected] Counsel Supporting the Complaint Dated: June 22, 2017 PUBLIC SUMMARY TABLE OF CONTENTS I. Jurisdiction.............................................................................................................................. 1 II. Contact Lens Retail Industry Participants............................................................................... 1 III. Contact Lens Industry Background .................................................................................. 27 IV. Search Advertising Background ....................................................................................... 36 V. Advertising in Response to Searches Including 1-800 Contacts’ Branded Queries is a Successful, Commercially Significant Strategy for Online Contact Lens Retailers ..................... 59 VI. 1-800 Contacts Entered into the Challenged Agreements to Prevent Online Rivals from Presenting Competitive Search Advertising ................................................................................. 87 VII. Horizontal Restraints are Likely to Cause Competitive Harm ....................................... 145 VIII. Competitive Effects of the Restraints: Direct Evidence of Harm to Search Engines ..... 146 IX. Competitive Effects of the Restraints: Direct Evidence of Harm to Consumers ............ 150 X. Competitive Effects: Harm to Competition Within A Relevant Market ............................ 184 XI. No Procompetitive Effects Outweigh Anticompetitive Effects of Restraints ................ 199 *** DETAILED TABLE OF CONTENTS I. Jurisdiction.............................................................................................................................. 1 II. Contact Lens Retail Industry Participants............................................................................... 1 A. Online Retailers .................................................................................................................. 1 1. 1-800 Contacts.............................................................................................................. 1 2. AC Lens ........................................................................................................................ 8 3. Vision Direct............................................................................................................... 11 4. Coastal Contacts ......................................................................................................... 13 5. Lens.com..................................................................................................................... 14 6. Memorial Eye ............................................................................................................. 14 7. Luxottica..................................................................................................................... 15 8. EZ ContactsUSA ........................................................................................................ 16 9. Lensfast....................................................................................................................... 17 10. Lenses for Less ........................................................................................................... 18 11. Contact Lens King...................................................................................................... 19 12. Empire Vision / VisionWorks .................................................................................... 19 13. ReplaceMyContacts .................................................................................................... 20 14. Walgreens ................................................................................................................... 21 15. WebEyeCare............................................................................................................... 22 ii PUBLIC 16. Standard Optical ......................................................................................................... 23 17. Walmart ...................................................................................................................... 23 18. LensDirect .................................................................................................................. 24 19. Lens Discounters ........................................................................................................ 25 20. LensWorld .................................................................................................................. 25 B. Non-Online Retailers (Brick and Mortar)......................................................................... 25 C. Manufacturers ................................................................................................................... 26 III. Contact Lens Industry Background .................................................................................. 27 A. Contact Lens Consumers .................................................................................................. 27 B. Contact Lenses are Sold By Prescription, Which Doctors Must Provide to Patients ....... 27 C. Prescription Verification................................................................................................... 28 D. Contact Lenses are a Commodity Product........................................................................ 29 E. Contact Lens Retailers Compete on the Basis of Price and Service ................................. 30 1. Inventory..................................................................................................................... 30 2. Shipping...................................................................................................................... 31 3. Many of 1-800 Contacts’ Rivals Offer Excellent Customer Service. ........................ 32 IV. Search Advertising Background ....................................................................................... 36 A. Description of Search Advertising.................................................................................... 36 1. What are Search Engines? .......................................................................................... 36 2. What is Search Advertising? ...................................................................................... 36 3. Search Engines Have a Strong Incentive to Show Only Search Advertisements that are Relevant and Useful to Users.......................................................................................... 37 4. Search Engines Attempt to Display Advertisements Relevant to Users’ Interests .... 39 5. Search Advertising Auctions are Second-Price Auctions Based Advertisers’ Bids on Keywords .............................................................................................................................. 41 6. Contact Lens Retailers Set, and Adjust, Their Search Advertising Budgets and Expenditures Based on Return on Investment ...................................................................... 43 B. Search Advertising is a Uniquely Important Marketing Channel in the Online Sale of Contact Lenses.......................................................................................................................... 48 1. Search Advertising Accounts for a Significant Portion of Online Contact Lens Retailers’ Advertising Expenditures ..................................................................................... 48 2. Search Advertising Accounts for a Significant Portion of Online Contact Lens Retailers’ Orders ................................................................................................................... 50 3. Search Advertising is Essential for Online Contact Lens Retailers ........................... 51 4. Search Advertising is Particularly Effective Because it is Particularly Targeted, Reaching Consumers Very Near the Point of Purchase ........................................................ 52 iii PUBLIC 5. Search Advertising is Particularly Effective Because it is Cost-Effective and Allows Advertisers to Easily Monitor, Adjust, and Control Their Advertising ................................ 53 6. Online Contact Lens Retailers Find Other Types of Advertising Less Effective than Search Advertising................................................................................................................ 55 V. Advertising in Response to Searches Including 1-800 Contacts’ Branded Queries is a Successful, Commercially Significant Strategy for Online Contact Lens Retailers ..................... 59 A. Search Advertising Trademark Policies ...........................................................................