On March 25, 2014, the U.S. Supreme Court ruled that Static Control Components, Inc. had the right to sue Lexmark International Inc. under the Lanham Act’s false advertising prong. In doing so, the Court established a new Lanham Act standing test, rejecting several different tests circuit courts have used to evaluate standing under the Lanham act’s false advertising provisions.
In a long-running litigation, Static sued Lexmark for telling customers that Static’s chips – which are used by third-party companies to enable empty Lexmark printer cartridges to be refilled and resold – were illegal. Static challenged Lexmark’s practices under the Lanham Act, arguing that it constituted false advertising. The Sixth Circuit had ruled that Static had standing to sue under the Lanham Act, relying on the “reasonable interest” standing test enunciated by the Second Circuit. See Famous Horse, Inc. v. Fifth Avenue Photo, Inc., 624 F.3d 106, 113 (2d Cir. 2010).
The Supreme Court reversed and rejected the three distinct approaches different circuit courts have taken for weighing whether a company can sue for false advertising: the broad “reasonable interest” test relied upon by the Sixth Circuit; the bright-line “direct competitor” test; and a five-part balancing test originally derived from antitrust law.
In an opinion authored by Justice Scalia, the Court used a “straightforward . . . statutory interpretation” based on the basic rules of the road for evaluating standing under a statutory cause of action, namely, whether the plaintiff falls “within the zone of interests protected by the law invoked” and suffered an injury “proximately caused” by the alleged wrongdoing.
Addressing the existing Lanham Act standing tests, Justice Scalia explained “While none of those tests is wholly without merit, we decline to adopt any of them. We hold instead that a direct application of the zone-of-interests test and the proximate-cause requirement supplies the relevant limits on who may sue.”
Applying these tests to the “extraordinarily helpful” language of the Lanham Act, the Court announced a standing test that required a plaintiff to “show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising.” It explained that this occurs when deception of consumers causes them to withhold trade from the plaintiff.
The ruling resolved a wide rift among the circuits in the standards adopted to determine standing to sue for federal false advertising.
The Seventh, Ninth and Tenth circuits established a “director competitor” test, whereby the parties needed to be direct competitors for there to be Lanham Act standing. See, e.g., L.S. Heath & Sons, Inc. v. AT&T Information Systems, Inc., 9 F.3d 561, 575 (7th Cir. 1993). The Third, Fifth, Eighth and Eleventh circuits, meanwhile, had used a series of five factors borrowed from the Court’s antitrust standing test enunciated in Associated Gen. Contractors of Cal, Inc. v. Carpenters, 459 U.S. 519 (1983). See Conte Bros. Automotive, Inc. v. Quaker State – Slick 50, Inc., 165 F.3d 221, 223-34 (3d Cir. 1998). The Second Circuit required plaintiffs to show a “reasonable interest to be protected” against the alleged false advertising and “a reasonable basis for believing” that the false advertising would harm that interest. See Famous Horse, 624 F.3d at 113.
In rejecting each of these tests, Scalia said the “direct competitor” test provided a simple rule “at the expense of distorting the statutory language.” The Associated Gen’l Contractors test was “a commendable effort” to fix a “nebulous inquiry,” but was tossed aside as “slightly off the mark.” The “reasonable interest” test was rejected because its “vague language can be understood as requiring only the bare minimum of Article III standing” and lent itself to widely divergent application.
Under the simplified “zone of interest and proximate cause” approach, the Court explained that Lexmark’s alleged statements about Static Control’s chips were sufficiently harmful to confer standing, even though the companies weren’t competitors.
“When a party claims reputational injury from disparagement, competition is not required for proximate cause,” the Court wrote. “And that is true even if the defendant’s aim was to harm its immediate competitors, and the plaintiff merely suffered collateral damage.”
The Court explained: “to come within the zone of interests in a suit for false advertising under §1125(a), a plaintiff must allege an injury to a commercial reputation or sales.” This test affirmed the numerous decisions holding that consumers lacked standing to sue under the Lanham Act and also closed the Lanham Act door to “a business misled by a supplier into purchasing an inferior product.”
The case is Lexmark International Inc. v. Static Control Components Inc., case number 12-873, in the U.S. Supreme Court.