The Supreme Court Redefines Standing Test for Lanham Act False Advertising Claims

20 April 2014 IP Litigation Current Blog

On March 25, 2014, the Supreme Court clarified the standing requirements for false advertising claims brought under the Lanham Act. In Lexmark Intl., Inc. v. Static Control Components Inc., 572 U.S. ___ (2014), the Court, in a unanimous decision, invalidated various tests used by the courts of appeals when deciding whether a party has standing to bring a false advertising claim under the Lanham Act, 15 U.S.C. § 1125(a). Instead, the Supreme Court established a new test requiring a plaintiff suing for false advertising under 15 U.S.C. § 1125(a) to (1) allege an injury to a commercial interest in reputation or sales; and (2) show that such injury was proximately caused by defendant’s misrepresentations.

In contrast to many false advertising cases, the parties in Lexmark are not direct competitors. Lexmark manufactures and sells laser printers as well as new and refurbished toner cartridges. In the cartridges market, Lexmark competes with “remanufacturers”, companies who buy Lexmark’s used cartridges, refurbish them, and sell them at a lower price. Trying to limit competition from remanufacturers, Lexmark started installing a microchip in its cartridges that would disable the cartridges once they were out of toner. Static Control is a manufacturer of parts used by remanufacturers to refurbish used cartridges. Static Control replicated the Lexmark microchip and sold it to remanufacturers, which allowed the remanufacturers to continue with the refurbishing of Lexmark’s empty cartridges. Frustrated with this development, Lexmark sued Static Control for copyright infringement and violation of the DMCA. Static Control countersued for false advertising under 15 U.S.C. § 1125(a), alleging that Lexmark made false representations about Static Control’s products, causing Static Control to lose sales and suffer damage to its reputation.

The district court dismissed Static Control’s counterclaim on the basis that Static Control did not directly compete with Lexmark and thus lacked “prudential standing” to sue under 15 U.S.C. § 1125(a). On appeal, the Court of Appeals for the Sixth Circuit, noting that the Circuits are split on the proper test for determining standing under the Lanham Act, applied the Second Circuit’s “reasonable-interest” test and reversed the district court’s decision.

The Supreme Court affirmed the Sixth Circuit’s decision but discarded all the various tests used by the Circuit Courts for standing under the Lanham Act. Writing for a unanimous court, Justice Scalia noted that the question should be whether Static Control had a “cause of action under the statute.”  To this end, the Supreme Court employed a two-prong test requiring that (1) plaintiff’s interest fall within the “zone of interests” protected by the law invoked; and (2) plaintiff ’s “injuries are proximately caused by violations of the statute.”

With regard to the first prong, the Court noted that the Lanham Act itself provides a detailed statement of the statute’s purposes in 15 U.S.C. § 1127, including the Act’s goal to protect persons engaged in commerce against unfair competition. Explaining that under common law unfair competition was associated with injuries to business reputation as well as to present and future sales, the Court concluded that “a plaintiff must allege an injury to a commercial interest in reputation or sales” to “come within the zone of interests” in a suit for false advertising under 15 U.S.C. § 1125(a).

As to the second prong, the Supreme Court held that a plaintiff suing under 15 U.S.C. § 1125(a) “must show economic or reputational injury flowing directly from the deception” triggered by the defendant’s advertising, which “occurs when deception of consumers causes them to withhold trade from the plaintiff.”

Applying this test, the Supreme Court held that Static Control came within the “zone of interest” of the Lanham Act because Static Control’s alleged injuries (lost sales and damages to business reputation) were precisely the types of commercial interests protected by the Lanham Act. The Court also found that Static Control sufficiently alleged that its injuries were proximately caused by Lexmark’s false statements for two reasons: (1) Lexmark’s disparaging comments expressly targeted Static Control’s products; and (2) Lexmark’s allegedly false statement directed at remanufactures necessarily injured Static Control because Static Control’s microchips were necessary for, and had no other use than, being installed in refurbished Lexmark cartridges.

This decision is important for plaintiffs seeking redress for false advertising under the Lanham Act. First, it clarifies and unifies the standing requirements for Lanham Act false advertising plaintiffs and will likely reduce forum shopping related to standing issues. Second, the decision expands the scope of potential plaintiffs to non-direct competitors as long as they satisfy the requirements of the new test. The application of this test by the district courts in the future will help show what type of evidence will be required from plaintiffs to prove that a defendant’s false advertising proximately caused damage to a plaintiff’s commercial interests.

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