Supreme Court Confirms Broad Reach of Lanham Act False Advertising Claims

03/28/2014

Confronted with three different standing tests applied by the Circuit courts to Lanham Act false advertising claims, the Supreme Court has answered the question of which test to apply: “None of the above.” In Lexmark International, Inc. v. Static Control Components, Inc., Slip op. March 25, 2014, Justice Scalia, writing for a unanimous Court, rejected each of the tests employed by the Circuits in favor of a “zone of interests” test. That test requires a court to determine, “using traditional tools of statutory interpretation, whether a legislatively conferred cause of action encompasses a particular plaintiff’s claim.” Slip op. at 8. Because § 45 of the Lanham Act explicitly lists “protect[ing] persons engaged in [interstate] commerce against unfair competition” as a purpose of the Act, the Court held that Static Control’s claims of false advertising under § 43(a) of the Act – which allege lost sales and damage to business reputation – “no doubt” fell within the statute’s zone of interests. Id. at 12, 19.

Lexmark makes and sells laser printers, which it designs to work only with its own toner cartridges. Lexmark took steps to ensure that customers return spent cartridges to Lexmark for refurbishment and resale, including a controversial “Prebate” program and the insertion of a microchip that would disable the cartridge once it ran out of toner. Static Control does not make or remanufacture toner cartridges, and thus is not a direct competitor to Lexmark. However, Static Control is “the market leader [in] making and selling the components necessary to remanufacture Lexmark cartridges,” including making and selling a microchip that could mimic the microchip in Lexmark cartridges. Slip op. at 2. By purchasing the Static Control microchip, remanufacturers were able to compete with Lexmark in the refurbishment and resale of Lexmark cartridges.

As the Court observes: “Lexmark did not take kindly to that development.” Slip op. at 2. A “sprawling litigation” ensued, including Static Control’s Lanham Act claims that (1) Lexmark “purposefully misleads end-users” to believe that they are legally bound by Prebate terms to return spent cartridges to Lexmark, and (2) Lexmark sent letters to most of the remanufacturers falsely stating that Static Control was engaging in illegal conduct and that it was illegal for remanufacturers “to use Static Control products to refurbish” Lexmark cartridges. Ibid at 6, n1 and 3. Static Control further alleged that it lost sales and suffered injury to its reputation as a result of the allegedly false statements. The District Court dismissed those claims, holding that Static Control lacked standing under the five factor “antitrust” standing test applied by the Third, Fifth, Eighth and Eleventh Circuits to false advertising claims. The Sixth Circuit reversed based on its application of the “reasonable interest” test established by the Second Circuit.

The Supreme Court found both of those tests lacking, noting that the “antitrust” test “can yield unpredictable and at times arbitrary results” and the “reasonable interest” test wrongly focuses on whether the plaintiff’s interest is reasonable rather than “whether it is one the Lanham Act protects.” Slip op. at 17, 18. The Court also rejected the direct competitor test employed by the Seventh, Ninth and Tenth Circuits as “distorting the statutory language” of the Act, which prohibits unfair competition even where there is no direct competition. Ibid at 17.

To be sure, the Court said, there are limitations on the reach of the Lanham Act. “[A] plaintiff must allege an injury to a commercial interest in reputation or sales” to come within the zone of interests of § 43(a). Slip op. at 13. Consumers “hoodwinked into purchasing a disappointing product” and even businesses “misled by a supplier into purchasing an inferior product” cannot invoke the protection of the Lanham Act. Ibid. Turning to the precise statement of the standing rule the Court created, the Court held that a plaintiff alleging false advertising under the Lanham Act must show that its injuries were proximately caused by violations of the Lanham Act by alleging and (eventually) proving the existence of “economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising.” Ibid at 15. That injury must occur “when deception of consumers causes them to withhold trade from the plaintiff.” Ibid at 15 (emphasis added).

The Court then held that Static Control’s claims met the proximate cause requirement because Static Control alleged that its reputation was damaged by Lexmark’s allegations of illegal business activities. The Court stated that Static Control’s alleged injury “flows directly from the audience’s belief in the disparaging statements.” Ibid at 19. Also, while the Court suggested that remanufacturers were the “direct victim[s]” of the allegedly false statements, it held that Static Control’s lost sales claim satisfied the proximate cause requirement because Static Control’s loss of microchip sales was likely to be commensurate with any cartridge sales lost by the remanufacturers to Lexmark. Ibid. at 20-21.

Of course, Static Control still has to prove its case; “it cannot obtain relief without evidence of injury proximately caused by Lexmark’s alleged misrepresentations.” Slip op. at 22. No doubt Static Control will seek to develop, among other proof, testimony from remanufacturers that Lexmark’s letters caused them to stop buying microchips and other components from Static Control, as well as evidence of decreased sales after Lexmark’s communications to those buyers.

Thus, the Court provided a roadmap for plaintiffs pleading a Lanham Act false advertising claim, even where they are not direct competitors. Such a plaintiff “must plead (and ultimately prove) an injury to a commercial interest in sales or business reputation proximately caused by the defendant’s misrepresentations.” Slip op. at 22. This straightforward and “not especially demanding” (Slip op. at 11) pleading standard will likely lead to more claims, even when the claimant will face challenges developing evidence of lost sales and reputation flowing directly from the alleged misrepresentations. A false advertising claim can be a powerful weapon, particularly in promoting who is the “good guy” in an intellectual property or other commercial dispute. As the Lexmark case demonstrates, the heat of litigation, or an incipient battle, often provokes companies to issue ill-advised statements or customer letters with disparaging comments about another business. Now more than ever, such missives are a bad idea.

Jeff Becker
214.651.5066
jeff.becker@haynesboone.com

 

 

David Harper
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david.harper@haynesboone.com

Kenneth Parker
949.202.3014
kenneth.parker@haynesboone.com

 

 

Richard Rochford
212.659.4984
richard.rochford@haynesboone.com

 

 

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