1-800 Contacts, Inc. v. Lens.com, Inc.

• Decision Date: 16 July 2013
• Docket Number: 12–4022.,11–4204,Nos. 11–4114,s. 11–4114
• Citation: 722 F.3d 1229
• Parties: 1–800 CONTACTS, INC., Plaintiff–Appellant/Cross–Appellee, v. LENS.COM, INC., d/b/a Lens.com, Defendant–Appellee/Cross–Appellant, and JustLens.Com; JustLenses.Com, a Nevada corporation, Defendants.
• Court: U.S. Court of Appeals — Tenth Circuit

722 F.3d 1229

1–800 CONTACTS, INC., Plaintiff–Appellant/Cross–Appellee,

v. LENS.COM, INC., d/b/a Lens.com, Defendant–Appellee/Cross–Appellant,andJustLens.Com; JustLenses.Com, a Nevada corporation, Defendants.

Nos. 11–4114, 11–4204, 12–4022.

United States Court of Appeals, Tenth Circuit.

July 16, 2013.

Mark A. Miller, Holland & Hart LLP, Salt Lake City, UT, (Bryan G. Pratt, Holland & Hart LLP, Salt Lake City, UT; Marcy G. Glenn, Holland & Hart LLP, Denver, CO; and Donald A. Degnan, Holland & Hart LLP, Boulder, CO, with him on the briefs), for Plaintiff–Appellant, Cross–Appellee.

Scott R. Ryther, Phillips Ryther & Winchester, Salt Lake City, UT, (Mark M. Bettilyon, Ray, Quinney & Nebeker, P.C., Salt Lake City, UT, with him on the briefs), for Defendant–Appellee, Cross–Appellant.

Before BRISCOE, Chief Judge, LUCERO, and HARTZ, Circuit Judges.

HARTZ, Circuit Judge.

The Lanham Act, 15 U.S.C. §§ 1051–1127, prohibits the infringement of trademarks (used to identify products) and service marks (used to identify services). It was enacted in 1946, but because it speaks in general terms it can be applied to technologies unimagined at the time of enactment. One such technology, the Internet, has created a number of challenging issues. The case before us concerns Internet search engines, which present advertisers with new means of targeting prospective customers and therefore new possibilities for claims under the Lanham Act. The dispute arises out of advertising through AdWords, a program offered by the Internet search engine Google. An advertiser using AdWords pays Google to feature one of its ads onscreen whenever a designated term, known as a keyword, is used in a Google search. We must resolve whether the Lanham Act was violated by an advertiser's use of keywords that resembled a competitor's service mark. For the most part, we hold that there was no violation.

Plaintiff 1–800 Contacts, Inc. (1–800) dominates the retail market for replacement contact lenses. It owns the federally registered service mark 1800CONTACTS. Defendant Lens.com, Inc. is one of 1–800's competitors. To police the use of its mark, 1–800 enters different variations of the mark into Google searches and monitors what search results are displayed. When 1–800 found that several searches generated paid ads for Lens.com's websites, it concluded that Lens.com had reserved the mark as a keyword. After attempting to resolve the situation informally, 1–800 sued Lens.com for service-mark infringement. Its primary claim was that Lens.com itself had infringed the 1800CONTACTS mark by purchasing keywords resembling the mark. According to 1–800, this conduct had directed potential customers for 1–800 to Lens.com by creating what is known as “initial-interest confusion,” which can be actionable under the Lanham Act. As the case progressed, 1–800 supplemented its claim of direct infringement by alleging that certain third-party marketers hired by Lens.com, known as affiliates, had also purchased keywords resembling the mark and that at least one affiliate was using the mark in the text of its online ads. 1–800 sought to hold Lens.com secondarily liable for its affiliates' conduct. The theories of secondary liability, which will be discussed more fully below, were common-law agency and contributory infringement.

The district court awarded summary judgment to Lens.com on all claims. On the direct-liability claim and most of the secondary-liability claims, the court ruled that 1–800 had raised no genuine issue of fact regarding the likelihood of initial-interest confusion. On the remaining secondary-liability claims—which concerned the use of 1–800's mark in the content of ads displayed on Google's site—the court ruled that 1–800's evidence was insufficient to hold Lens.com liable for any misconduct of its affiliates.

1–800 appeals the summary judgment. To the extent that the court based summary judgment on the ground that no likelihood of confusion existed, we affirm. Traditional analysis and actual marketplacedata reveal that the keyword use by Lens.com and its affiliates was highly unlikely to divert consumers. As for the remaining secondary-liability claims, we affirm the denial of liability under agency law because the affiliates, even if agents (or more precisely, subagents) of Lens.com, lacked authority to include 1–800's mark in ads for Lens.com. But we reverse the denial of liability for contributory infringement because the evidence could support a reasonable finding that Lens.com did not take reasonable steps to halt the display of 1–800's marks in affiliate ads once it learned of such display.

Also, we affirm the discovery sanction challenged by Lens.com on cross-appeal (but decline to award 1–800 its attorney fees for defending the sanction in this court), and we affirm the denial of Lens.com's district-court motion for attorney fees.

I. BACKGROUNDA. The Dispute

1–800 is the world's leading retailer of replacement contact lenses. It sells lenses via telephone, by mail order, and over the Internet. In 2003 it registered with the federal trademark register the nonstylized word mark “1800CONTACTS” as one of its service marks. Aplt.App., Vol. 6 at 1001. The mark achieved incontestable status under 15 U.S.C. § 1065 in 2008. Lens.com is one of 1–800's competitors in the replacement-lens retail market. Unlike 1–800, which advertises through several different media and which derived approximately 40% of its gross sales from sources other than Internet orders in 2007, Lens.com advertises and does business almost exclusively online.

This dispute arose in the summer of 2005, when 1–800 discovered that paid advertisements for Lens.com appeared when one searched for the phrase “1800 CONTACTS” on Google. Id., Vol. 11 at 2654. 1–800 concluded that Lens.com was using the 1800CONTACTS mark in its online marketing. To explain this concern properly, we must first review some mechanics of Internet advertising through search engines. Because 1–800's arguments on appeal focus solely on Lens.com's use of AdWords, a program offered by Google, we describe only AdWords and no other search engines or advertising services.

At the time of the proceedings below, a typical Google search simultaneously yielded two different kinds of results: organic results and sponsored links. Organic results were the links generated by Google's search algorithms, which sorted web pages according to their relevance to the user's search as well as their quality. An advertiser could not pay Google to have its web page displayed among the organic results. Through AdWords, however, an advertiser could pay to be displayed as a sponsored link. A sponsored link would include advertising copy and the advertiser's website address. A user who clicked on the ad would be connected to the website. Sponsored links usually appeared either above or to the right of the organic results. The notice “Sponsored Links” was displayed next to each cluster of ads. Google placed background shading behind several of the sponsored links to set them apart visually from the organic results, which appeared on a plain white background.

For its ad to appear as a sponsored link when a user initiated a Google search, an advertiser had to bid to reserve a particular word or phrase—known as a keyword—that would trigger the display of its ad. The advertiser specified whether its ad should appear as the result of (1) a broad match—that is, whenever a Google search contained a phrase that was either similar to or a relevant variation of the keyword; (2) a phrase match—whenever the search contained the exact keyword; or (3) an exact match—whenever the search contained the exact keyword and nothing more. The advertiser could also use negative matching, which instructed Google not to display the ad when a certain search term was used. Negative matching allowed the advertiser to filter out irrelevant searches. For example, if a seller of contact lenses had purchased the keyword contacts, it might have wanted to exclude searches for marketing contacts.

The display of a sponsored link in response to a user's search was known as an impression. An advertiser paid Google only if the user actually clicked on its impression; its bid for the keyword represented the amount per click that it was willing to pay. Advertisers who bid higher amounts generally received superior placement among the sponsored links. A click that led to a sale through the advertiser's web page was called a conversion, which did not incur an additional charge to the advertiser from Google.

1–800 apparently reasoned that a Google search for “1800 CONTACTS” could generate an ad for Lens.com only if Lens.com—or someone working on its behalf—had bid on that exact term or on some phrase containing that exact term. In September 2005 it sent Lens.com two letters reporting that online searches for that term were resulting in ads for Lens.com. One of the letters was accompanied by screenshots that showed Google search results for the phrases “1–800 contacts,” “1–800–contacts,” and “1800contacts.” Id. at 2657–59. In each screenshot an ad for Lens.com appeared among the sponsored links, along with ads for 1–800 and other retailers. Lens.com responded that it had looked into the matter, had determined who appeared to be responsible, and would advise them not to bid on “1–800–CONTACTS” as a keyword in the future. Id. at 2663.

The parties who appeared to be responsible, Lens.com told 1–800, were affiliates. Advertisers like Lens.com might pay third-party affiliates to publish ads for them through AdWords and other search-engine programs. An Internet user who clicked on an ad published by a Lens.com affiliate would be routed directly to one of Lens.com's four websites—www. Lens. com, www. Just Lenses. com, www. 1– 800 Get Lens. com, and www. Contacts America. com—or instead would be taken to the affiliate's own website, where links to Lens.com's websites were displayed....