A Uniform Approach to Standing for False Advertising Claims under the Lanham Act

INTRODUCTION

On March 25, 2014, the Supreme Court, in Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. ___ (2014), resolved a circuit split regarding the test for standing to assert a claim for false advertising under the Lanham Act, 15 U.S.C. § 1125(a) (“Section 1125(a)”). Rejecting all tests previously applied in the circuits, the Court, in a unanimous opinion written by Justice Antonin Scalia, held that a Lanham Act plaintiff will have standing if its claim is within the “zone of interests” protected by the Lanham Act and the defendant’s alleged false advertising proximately caused the plaintiff’s injuries. Under this approach, a plaintiff alleging it suffered an injury to its commercial interests in its reputation or sales directly flowing from the alleged false advertising will have standing to assert a claim for damages or injunctive relief under Section 1125(a).

The Supreme Court’s decision provides clarity and a uniform approach to determining standing to assert Lanham Act false advertising claims. By this decision, the Court made clear that the right to sue under the Lanham Act’s false advertising provisions is not limited to direct competitors of the false advertiser, but extends to others whose commercial interests in reputation or sales have been directly harmed by the false advertising alleged.

BACKGROUND

The facts of the Lexmark case are straightforward. Lexmark sells laser printers and toner cartridges for those printers. Lexmark’s toner cartridges are the only type of cartridges that will work with its printers. However, certain “remanufacturers” have made a business of acquiring empty Lexmark cartridges and selling refurbished cartridges in competition with Lexmark’s new or replacement cartridges. In response to this competition, Lexmark established a “Prebate” program that provides customers who agree to return its empty cartridges to the company—instead of letting them fall into the hands of a remanufacturer—a discount on new cartridges. Lexmark also added a microchip to each Prebate cartridge which disables the empty cartridge unless Lexmark specifically replaces the chip. Static Control, a supplier of components for the remanufacture of Lexmark cartridges, responded to the technical obstacle presented by the Lexmark chip by developing a microchip that replicates the functionality of Lexmark’s chip. Static Control then sells its chip to its customers, i.e., remanufacturers, who use it to create replacement cartridges that work in Lexmark’s printers.

Lexmark reacted by communicating to consumers via notices printed on the toner cartridge boxes which stated to consumers that opening the boxes would indicate assent to the terms of the agreement. Static Control claims that these notices misled consumers into believing they were legally bound to return the cartridges to Lexmark after a single use.

Lexmark sued Static Control for copyright infringement, and Static Control countersued for, among other things, false or misleading advertising under Section 1125(a). Static Control alleged that Lexmark engaged in misrepresentations which caused it to lose sales and damaged its business reputation. The dispute is part of an expansive litigation also involving patent infringement and antitrust claims. In Lexmark, though, the Supreme Court was exclusively concerned with whether Static Control had standing to assert its Lanham Act claim.

In its complaint, Static Control made two principal allegations in support of its Lanham Act claim:

1. Lexmark “purposefully misleads end-users” to believe that they are legally bound to return its empty cartridges; and
2. Lexmark “sent letters to most of the companies in the toner cartridge remanufacturing business” falsely stating that selling refurbished Lexmark cartridges and/or using Static Control’s microchips to do so is illegal.

The Kentucky District Court granted Lexmark’s motion to dismiss Static Control’s Lanham Act claim based on a multifactor balancing test, emphasizing that the remanufacturers were the parties suffering a direct injury from Lexmark’s false advertising activities, while Static Control’s harm, as a mere supplier to the remanufacturers, was too attenuated. The Sixth Circuit reversed, applying the reasonable interest test typically applied by the Second Circuit, and concluding that Static Control had standing because it “alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that th[o]se interests were harmed by Lexmark’s statements to the remanufacturers that Static Control was engaging in illegal conduct.”

THE SUPREME COURT’S DECISION

The Supreme Court granted certiorari and affirmed the Sixth Circuit, holding that Static Control had alleged an adequate basis for standing. However, the Court declined to apply the reasonable interest test or any of the other tests applied by the circuit courts (i.e., the “antitrust standing” factors and the “actual competitor” test) to determine standing under Section 1125(a). Instead, the Court held that a plaintiff suing for false advertising will have standing if (1) its claim comes within the zone of interests of the Lanham Act and (2) the defendant’s conduct is a proximate cause of plaintiff’s injury. Justice Scalia explained that standing for false advertising claims is not a discretionary issue of “prudential standing,” as it was referred to by the parties and by prior judicial precedent. Rather, it is purely an issue of statutory interpretation.

Under the Lanham Act, the zone of interests is clear from the plain language of the statute, which states that a purpose of the Lanham Act is to “protect persons engaged in [commerce] against unfair competition.” Observing that “unfair competition” was a “plastic concept at common law… understood to be concerned with injuries to business reputation and present and future sales,” the Court held that “to come within the zone of interests in a suit for false advertising under [Section] 1125(a), a plaintiff must allege an injury to a commercial interest in reputation or sales.”

With respect to the proximate cause element, the Court stated that analysis of this requirement is controlled by the nature of the statutory cause of action, the big question being whether the harm alleged has a sufficiently close connection to the conduct prohibited by the statute. In this case, the Court held that a “plaintiff suing under Section 1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that occurs when deception of consumers causes them to withhold trade from the plaintiff.”

Accepting Static Control’s allegations as true at the motion to dismiss phase, the Court stated that Static Control’s “alleged injuries—lost sales and damage to its business reputation—are injuries to precisely the sorts of commercial interests the Act protects.” Therefore, there was no doubt that such injuries were within the zone of interests protected by the Lanham Act.

The Court further held that Static Control’s injuries were proximately caused by Lexmark’s misrepresentations. It explained that Lexmark’s disparagement of Static Control’s business and products (i.e., asserting that the use of Static Control’s products is illegal) directly injured Static Control. While Lexmark and Static Control are not direct competitors, the Court noted that direct competition is not required for proximate cause when a party claims reputational injury from disparagement, and stated that this would be true even if the defendant’s aim was “to harm its immediate competitors, and the plaintiff merely suffered collateral damage.” According to the Court, this requirement was met because Static Control “designed, manufactured, and sold microchips that both (1) were necessary for, and (2) had no other use than, refurbishing Lexmark toner cartridges.” Moreover, the Court recognized that there was “something very close to a 1:1 relationship between the number of refurbished Prebate cartridges sold (or not sold) by the remanufacturers and the number of Prebate microchips sold (or not sold) by Static Control.”

The Court acknowledged that the causal chain linking Static Control’s injuries to consumer confusion is not typical of a Lanham Act case because Static Control does not directly sell to end users, but rather supplies remanufacturers, who in turn sell to end users. However, it found no discontinuity between the alleged false and disparaging statements and Static Control’s injuries largely because of the 1:1 ratio in sales. As such, Static Control’s injury was “surely attributable” to Lexmark’s false advertising.

CONCLUSION

The Lexmark decision provides clarity and uniformity for litigants in the context of standing for false advertising claims under the Lanham Act.

First, the decision overturns all of the circuit tests and creates a new framework that is binding on every federal court. The Court makes clear that standing for false advertising is now driven by a straightforward inquiry of statutory interpretation. Under this approach, a plaintiff will have standing to sue for false advertising provided that two requirements are met: first, its claim must come within the “zone of interests” protected by the Lanham Act, i.e., a plaintiff must show economic injury to its reputation or sales; second, to satisfy the proximate cause requirement, plaintiff’s economic injury to its reputation or sales must “flow directly” from defendant’s false advertising.

Second, the Supreme Court’s statutory interpretation-based approach makes clear that a plaintiff does not need to be in direct competition with a false advertiser to sue under the Lanham Act. Indeed, Justice Scalia explained that while diversion of sales to a direct competitor represents the paradigm of direct injury in false advertising cases, it is not the only type of injury which Section 1125(a) is designed to protect against. Under the facts of Lexmark, a supplier was found to have alleged a direct harm to its sales despite an intervening link of injury to the remanufacturers. Thus, a plaintiff will have standing under Section 1125(a) provided that its alleged injury to its sales or business reputation is directly attributable to the false advertising—even if the parties are not in direct competition with each other.

Finally, although Justice Scalia’s opinion provides a clear framework for standing claims under Section 1125(a), the approach the Court adopted is not a bright-line rule. In cases involving false advertising claims between non-direct competitors, plaintiffs and defendants have ample room to craft arguments for and against standing under Lexmark.