The Supreme Court Redefines Standing Requirements for False Advertising Claims

by Orrick, Herrington & Sutcliffe LLP
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On March 25, 2014, Justice Antonin Scalia authored an opinion for a unanimous United States Supreme Court in Lexmark International, Inc. v. Static Control Components, Inc., case number 12-873, setting forth a bright-line test for the right to sue for false advertising under section 43(a) of the Lanham Act, 15 U.S.C. §1125(a). Justice Scalia’s two-step inquiry test swept away three different approaches which had divided the various federal courts of appeals. The new Lexmark standard requires the plaintiff to demonstrate (1) that its injury falls within the "zone of interests" protected by the Lanham Act, and (2) proximate causation of that injury by the defendant’s misrepresentations. The "zone of interests," according to the Court, refers to a commercial interest in sales or business reputation. Any injury to such a "zone of interest" must "flow[] directly from the deception wrought by the defendant’s advertising." The Lexmark standard does not require that the plaintiff making the false advertising Lanham Act claim be a direct competitor of the defendant.

Facts in Lexmark

Lexmark manufactures and sells laser printers, as well as toner cartridges for printers that are designed to be used with Lexmark printers. Lexmark outfits its toner cartridges with microchips that prevent other entities from refurbishing and refilling Lexmark cartridges once the toner runs dry. Lexmark also instituted a "Prebate" program that entitles consumers to a discount on toner cartridges if they agree to return the used cartridges to Lexmark, which the consumers purportedly agree to merely by opening the toner cartridges’ packaging thanks to Lexmark’s "shrinkwrap licensing."
Static Control makes and sells parts and supplies for the laser toner remanufacturing industry, including chips for Lexmark cartridges, but is not itself a direct competitor of Lexmark.
Lexmark sued Static Control for copyright infringement and violation of the Digital Millennium Copyright Act. As one of its counterclaims, Static Control alleged that Lexmark was violating the "false advertising" provisions Section 43(a) of the Lanham Act by sending letters to companies in the toner cartridge manufacturing business that it was illegal to sell refurbished Prebate cartridges and in particular illegal to use Static Control’s products to refurbish such cartridges. The District Court granted Lexmark’s motion to dismiss the Lanham Act claim, utilizing a lack of "prudential standing" analysis, borrowed from federal antitrust laws. The Court of Appeals for the Sixth Circuit reversed that dismissal, applying a "reasonable interests" approach. In the Lexmark opinion, the Supreme Court affirmed the Sixth Circuit’s decision in favor of Static Control, but adopted its own "zone of interest" and "proximate cause" approach. The Supreme Court explained that it was applying traditional principles of statutory interpretation to come up with the two-step "zone of interest" and "proximate cause" test that now applies to false advertising claims under the Lanham Act.
Lexmark Test
Though Lexmark and Static Control are not direct competitors, the Supreme Court held that Lexmark’s misstatements proximately caused Static Control’s injuries. Static Control’s injury to its sales and business reputation flowed directly from Lexmark’s statements that Static Control’s microchips were illegal. Moreover, Static Control alleged that its microchips were necessary for refurbishing Lexmark toner cartridges, and therefore any reduction in sales in remanufactured cartridges as a result of Lexmark’s false advertising necessarily injured Static Control. Justice Scalia also confirmed the unanimous Circuit Court view that consumers do not have standing under the Lanham Act because they typically do not have "commercial" interests at stake when they rely on advertising statements that are false or misleading. Indeed, even a business misled by a supplier into purchasing an inferior product is not protected under the Lanham Act.
In applying this two-step test, the Supreme Court concluded that Static Control’s interests were within the zone Congress set out to protect in section 43(a) of the Lanham Act. Static Control therefore met its burden by alleging lost sales and damage to its business reputation from Lexmark’s claims of illegality.
Conclusion
The Lexmark decision provides clear guidance as to how false advertising claims under Section 43(a) of the Lanham Act must be pled. However, it is yet to be seen whether this apparently simple two-step test will in practice be as easy to apply in other fact situations. ?

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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