Supreme Court Rules on Standing In False Advertising Cases

Lexmark is a provider of printing and imaging products and software solutions worldwide. Specifically, Lexmark manufactures and sells laser printers and accompanying toner cartridges for its laser printers. Lexmark's laser printers and cartridges are designed to be used together and are not compatible with other comparable products on the market. As a result, only Lexmark cartridges can be used in Lexmark laser printers, and Lexmark dominates the market for cartridges for use with its printers. Remanufacturers do, however, compete with Lexmark in this area by acquiring and refurbishing used Lexmark cartridges and reselling them to customers, competing with Lexmark's market for both new and refurbished cartridges. To increase its market share for refurbished cartridges, Lexmark introduced its Lexmark Return Program cartridges. These cartridges are sold at a discount when compared to the prices of regular Lexmark cartridges, in exchange for the customer's agreement to use the cartridge only once and return it only to Lexmark for remanufacturing or recycling. The terms of the program were communicated to customers through “shrink wrap contracts.” To prevent competitors' refurbishing products and services from being used with its Lexmark Return Program cartridges, and to enforce the terms of the Return Program upon its customers, Lexmark placed a special microchip in each of its Return Program cartridges that disabled each cartridge once it was empty, unless and until the chip was replaced by Lexmark through its refurbishment program.

Static Control is the world's largest manufacturer and global distributor of parts and supplies supporting the laser toner remanufacturing industry. Static Control developed a microchip that mimicked the chip used in Lexmark's Return Program cartridges, allowing customers to use third party remanufacturers to refill Lexmark cartridges, even those containing Lexmark's preventative microchip. Static Control is not a direct competitor of Lexmark because the companies do not offer directly competing goods or services; however, Static Control is the market leader in making and selling the components necessary to remanufacture Lexmark cartridges, and creates a product that allows third party remanufacturers (who are direct competitors of Lexmark) to compete at a more efficient level by reselling Lexmark's Return Program cartridges.

Static Control alleged that in connection with its Return Program, Lexmark intentionally misled customers into believing that they are legally bound to return the Lexmark Program Return cartridges after a single use. Further, Static Control alleged that, in response to its microchip development, Lexmark “sent letters to most of the companies in the toner cartridge remanufacturing business” falsely informing those competitors that it was illegal to offer for sale refurbished Lexmark Return Program cartridges, and in particular to use Static Control products to refurbish the Return Program cartridges.

The Lower Court Proceedings

As a result of the microchip development, Lexmark sued Static Control in 2002 for copyright infringement, alleging, among other things, that Static Control's microchips violated both the Copyright Act of 1976 and the Digital Millennium Copyright Act (DMCA). Static Control filed counterclaims, alleging, among other things, false advertising under '1125(a) based on Lexmark's actions and statements toward end-user consumers and competitors regarding its Return Program, thereby damaging Static Control's business and reputation. Lexmark then filed a motion to dismiss Static Control's false advertising Lanham Act claim for lack of standing.

The district court granted Lexmark's motion, accepting Lexmark's argument for use of the multi-factor standing test applied by the Supreme Court in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 535-546 (1983), to determine standing under 15 U.S.C. '1125(a). The district court pointed to the lack of direct competition between the parties as a basis for deciding in favor of Lexmark on the issue. The district court concluded that Lexmark's alleged intent was to prevent the supply of its cartridges to third-party remanufacturers, and therefore these remanufacturers were the intended target, rather than Static Control. As a result, the court found that there were “more direct plaintiffs in the form of remanufacturers of Lexmark's cartridges,” and deemed Static Control's injuries to be too remote, because there were merely a byproduct of Lexmark's supposed use of false advertising to manipulate the relationship between customers and remanufacturers.

The Sixth Circuit reversed the district court, finding that Static Control had standing to bring a false advertising claim under 15 U.S.C. '1125(a) because it “alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that these interests were harmed by Lexmark's statements to the remanufacturers that Static Control was engaging in illegal conduct.” In its analysis, the Sixth Circuit noted that three varied approaches have been applied among other circuit courts in false advertising cases, the first being the multi-factor test adopted from Associated General, applied by the Third, Fifth, Eighth, and Eleventh Circuits. The second and most restrictive test was the narrow categorical test applied by the Seventh, Ninth, and Tenth Circuits, which allowed only an actual competitor to bring a false advertising claim. The third approach, followed by the Second and Sixth Circuits, was the reasonable interest test under which a plaintiff had standing if it could demonstrate: “1) a reasonable interest to be protected against the alleged false advertising; and 2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.”

The Supreme Court's Decision

In a unanimous opinion written by Justice Scalia, the Supreme Court articulated a new standard for determining whether a party has standing to bring a false advertising claim under the Lanham Act. After analyzing whether the standing issue was one of statutory or prudential standing, the Court framed the issue as a straightforward question of statutory interpretation. The Court ultimately held that the proper test for determining standing to bring a false advertising claim is the “zone of interests” test, and that to come within the zone of interests, “a plaintiff must allege an injury to a commercial interest in reputation or sales” and must show that this reputation-related or economic injury flows “directly from the deception wrought by the defendant's advertising” which “occurs when deception of consumers causes them to withhold trade from the plaintiff.”

The Supreme Court went on to explain why each prior test advocated by the parties was improper. Lexmark first urged the Court to adopt the multi-factor test derived from the Court's decision in Associated General. There, the Court identified five relevant considerations for determining whether a party has standing: 1) the nature of the plaintiff's alleged injury (whether it is a type of injury for which Congress intended to provide a private remedy); 2) the directness of the asserted injury; 3) the proximity of the party to alleged injurious conduct; 4) the speculative nature of the damages claim; and 5) the risk of duplicative damages or complexity in apportioning damages. The Court rejected this test because it treats both the requirement that the plaintiff's harm be within the relevant zone of interests and the requirement of proximate causation, as mere factors weighed in a balance, instead of properly as mandatory requirements that must be met in every instance. Further, the Court found that the Associated General balancing test was subject to unpredictable and arbitrary results.

In the alternative, Lexmark argued for the more narrow bright-line direct competitor test, which provides a categorical rule prohibiting all false advertising suits by non-competitors. The Court summarily rejected this test because such a categorical rule reads too much into the Lanham Act's use of the term “unfair competition ” in 15 U.S.C. '1127 and determined it would be a mistake to infer that false advertising claims are limited to parties who are literal direct competitors in the marketplace.

The Court also rejected the reasonable interest test argued by Static Control, which requires a plaintiff to demonstrate: “1) a reasonable interest to be protected against the alleged false advertising; and 2) a reasonable basis for believing the interest is likely to be damaged by the alleged false advertising.” In declining to apply that test, the Court noted that it is too vague and “lends itself to widely divergent application,” requiring only the bare minimum of standing under Article III to sustain a false advertising claim. Further, the Court found that the relevant questions are not whether the plaintiff's protected interest is “reasonable” or whether there is a “reasonable basis” for the plaintiff's claim of harm, but whether the interest is one Congress intended to protect under the Lanham Act and whether the plaintiff's harm is proximately caused by the defendant's conduct.

Finally, the Court analyzed the facts before it and determined that Static Control had proper standing to bring its false advertising claim under '1125(a). First, it found that Static Control's injuries ' lost sales and damages to its business reputation ' are exactly the injuries contemplated by Congress under the Lanham Act because they are injuries to the commercial interests the Act is intended to protect. Second, it noted that, although the parties were not competitors, Static Control's injuries were proximately caused by Lexmark because its statements asserting that Static Control's business was illegal harmed Static Control's business reputation, an injury flowing directly from the audience's belief of the disparaging statements. Although the allegedly misleading statements made by Lexmark may have been intended to harm the business of its competing remanufacturers, Static Control alleged that it designed, manufactured, and sold microchips that were necessary for, and had no other purpose aside from, refurbishing Lexmark toner cartridges. The Court found that “any false advertising that reduced the remanufacturers' business necessarily injured Static Control as well[,]” and also that the causal link was not broken by the fact that Static Control was indirectly injured by the alleged actions of Lexmark. Because Static Control sufficiently alleged that its injuries were proximately caused by Lexmark's misrepresentations, the Court concluded standing was proper and Static Control was “ entitled to a chance to prove its case.”

Conclusion

In resolving the split of authority in favor of a clear, yet moderate, test for determining standing for false advertising actions under 15 U.S.C. '1125(a), the Supreme Court confirmed that a commercial injury is key to a claimant's right to bring a false advertising claim, and that the harm to an interest already protected under the Lanham Act is the only type of harm that can sustain an action for false advertising under the Act. The Court unquestionably declared that a party does not need to be a competitor of the defendant to bring a false advertising claim under the Lanham Act, confirming that the nature of the relationship between the defendant and the aggrieved party is secondary to the nature of the interest harmed by the defendant's misrepresentations.

Tiffany R. Brown is an associate in the Atlanta office of Kilpatrick Townsend & Stockton LLP's Intellectual Property Group, where she focuses her practice on trademark prosecution and litigation, and copyright and entertainment law.

Until the Supreme Court's recent decision in Lexmark International v. Static Control Components, Inc., 134 S.Ct. 1377, 2014 WL 1168967 (2014), courts were divided regarding the proper test to determine whether a plaintiff has standing to bring a false advertising claim under 15 U.S.C. '1125(a). Three separate approaches were previously applied among the circuits, the narrowest of which permitted only actual competitors to bring claims of false advertising, an approach that would have automatically barred Static Control from bringing a false advertising claim in this case, regardless of Lexmark's allegedly wrongful actions. The Supreme Court resolved the circuit split by rejecting the previously applied standards, and created a new, uniform “zone of interests” test for determining standing in false advertising cases brought under the Lanham Act.

In Lexmark, the Supreme Court granted certiorari to decide “the appropriate analytical framework for determining a party's standing to maintain an action for false advertisement under the Lanham Act.” The Supreme Court affirmed the Sixth Circuit's reversal of a district court's dismissal of Static Control's false advertising claim under the Lanham Act. In affirming the Sixth Circuit, the Supreme Court concluded that Static Control was within the class of plaintiffs authorized to sue under '1125(a) because: 1) its alleged injuries ' lost sales and damage to business reputation ' are the exact injuries and the sorts of commercial interests that the Lanham Act is designed to protect; and 2) Static Control adequately pleaded both that it had a commercial injury covered by the Act, and that such injury was proximately caused by Lexmark's misrepresentations.

Lexmark's Actions And the Parties' Relationship

Lexmark is a provider of printing and imaging products and software solutions worldwide. Specifically, Lexmark manufactures and sells laser printers and accompanying toner cartridges for its laser printers. Lexmark's laser printers and cartridges are designed to be used together and are not compatible with other comparable products on the market. As a result, only Lexmark cartridges can be used in Lexmark laser printers, and Lexmark dominates the market for cartridges for use with its printers. Remanufacturers do, however, compete with Lexmark in this area by acquiring and refurbishing used Lexmark cartridges and reselling them to customers, competing with Lexmark's market for both new and refurbished cartridges. To increase its market share for refurbished cartridges, Lexmark introduced its Lexmark Return Program cartridges. These cartridges are sold at a discount when compared to the prices of regular Lexmark cartridges, in exchange for the customer's agreement to use the cartridge only once and return it only to Lexmark for remanufacturing or recycling. The terms of the program were communicated to customers through “shrink wrap contracts.” To prevent competitors' refurbishing products and services from being used with its Lexmark Return Program cartridges, and to enforce the terms of the Return Program upon its customers, Lexmark placed a special microchip in each of its Return Program cartridges that disabled each cartridge once it was empty, unless and until the chip was replaced by Lexmark through its refurbishment program.

Static Control is the world's largest manufacturer and global distributor of parts and supplies supporting the laser toner remanufacturing industry. Static Control developed a microchip that mimicked the chip used in Lexmark's Return Program cartridges, allowing customers to use third party remanufacturers to refill Lexmark cartridges, even those containing Lexmark's preventative microchip. Static Control is not a direct competitor of Lexmark because the companies do not offer directly competing goods or services; however, Static Control is the market leader in making and selling the components necessary to remanufacture Lexmark cartridges, and creates a product that allows third party remanufacturers (who are direct competitors of Lexmark) to compete at a more efficient level by reselling Lexmark's Return Program cartridges.

Static Control alleged that in connection with its Return Program, Lexmark intentionally misled customers into believing that they are legally bound to return the Lexmark Program Return cartridges after a single use. Further, Static Control alleged that, in response to its microchip development, Lexmark “sent letters to most of the companies in the toner cartridge remanufacturing business” falsely informing those competitors that it was illegal to offer for sale refurbished Lexmark Return Program cartridges, and in particular to use Static Control products to refurbish the Return Program cartridges.

The Lower Court Proceedings

As a result of the microchip development, Lexmark sued Static Control in 2002 for copyright infringement, alleging, among other things, that Static Control's microchips violated both the Copyright Act of 1976 and the Digital Millennium Copyright Act (DMCA). Static Control filed counterclaims, alleging, among other things, false advertising under '1125(a) based on Lexmark's actions and statements toward end-user consumers and competitors regarding its Return Program, thereby damaging Static Control's business and reputation. Lexmark then filed a motion to dismiss Static Control's false advertising Lanham Act claim for lack of standing.

The district court granted Lexmark's motion, accepting Lexmark's argument for use of the multi-factor standing test applied by the Supreme Court in Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 535-546 (1983), to determine standing under 15 U.S.C. '1125(a). The district court pointed to the lack of direct competition between the parties as a basis for deciding in favor of Lexmark on the issue. The district court concluded that Lexmark's alleged intent was to prevent the supply of its cartridges to third-party remanufacturers, and therefore these remanufacturers were the intended target, rather than Static Control. As a result, the court found that there were “more direct plaintiffs in the form of remanufacturers of Lexmark's cartridges,” and deemed Static Control's injuries to be too remote, because there were merely a byproduct of Lexmark's supposed use of false advertising to manipulate the relationship between customers and remanufacturers.

The Sixth Circuit reversed the district court, finding that Static Control had standing to bring a false advertising claim under 15 U.S.C. '1125(a) because it “alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that these interests were harmed by Lexmark's statements to the remanufacturers that Static Control was engaging in illegal conduct.” In its analysis, the Sixth Circuit noted that three varied approaches have been applied among other circuit courts in false advertising cases, the first being the multi-factor test adopted from Associated General, applied by the Third, Fifth, Eighth, and Eleventh Circuits. The second and most restrictive test was the narrow categorical test applied by the Seventh, Ninth, and Tenth Circuits, which allowed only an actual competitor to bring a false advertising claim. The third approach, followed by the Second and Sixth Circuits, was the reasonable interest test under which a plaintiff had standing if it could demonstrate: “1) a reasonable interest to be protected against the alleged false advertising; and 2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising.”

The Supreme Court's Decision

In a unanimous opinion written by Justice Scalia, the Supreme Court articulated a new standard for determining whether a party has standing to bring a false advertising claim under the Lanham Act. After analyzing whether the standing issue was one of statutory or prudential standing, the Court framed the issue as a straightforward question of statutory interpretation. The Court ultimately held that the proper test for determining standing to bring a false advertising claim is the “zone of interests” test, and that to come within the zone of interests, “a plaintiff must allege an injury to a commercial interest in reputation or sales” and must show that this reputation-related or economic injury flows “directly from the deception wrought by the defendant's advertising” which “occurs when deception of consumers causes them to withhold trade from the plaintiff.”

The Supreme Court went on to explain why each prior test advocated by the parties was improper. Lexmark first urged the Court to adopt the multi-factor test derived from the Court's decision in Associated General. There, the Court identified five relevant considerations for determining whether a party has standing: 1) the nature of the plaintiff's alleged injury (whether it is a type of injury for which Congress intended to provide a private remedy); 2) the directness of the asserted injury; 3) the proximity of the party to alleged injurious conduct; 4) the speculative nature of the damages claim; and 5) the risk of duplicative damages or complexity in apportioning damages. The Court rejected this test because it treats both the requirement that the plaintiff's harm be within the relevant zone of interests and the requirement of proximate causation, as mere factors weighed in a balance, instead of properly as mandatory requirements that must be met in every instance. Further, the Court found that the Associated General balancing test was subject to unpredictable and arbitrary results.

In the alternative, Lexmark argued for the more narrow bright-line direct competitor test, which provides a categorical rule prohibiting all false advertising suits by non-competitors. The Court summarily rejected this test because such a categorical rule reads too much into the Lanham Act's use of the term “unfair competition ” in 15 U.S.C. '1127 and determined it would be a mistake to infer that false advertising claims are limited to parties who are literal direct competitors in the marketplace.

The Court also rejected the reasonable interest test argued by Static Control, which requires a plaintiff to demonstrate: “1) a reasonable interest to be protected against the alleged false advertising; and 2) a reasonable basis for believing the interest is likely to be damaged by the alleged false advertising.” In declining to apply that test, the Court noted that it is too vague and “lends itself to widely divergent application,” requiring only the bare minimum of standing under Article III to sustain a false advertising claim. Further, the Court found that the relevant questions are not whether the plaintiff's protected interest is “reasonable” or whether there is a “reasonable basis” for the plaintiff's claim of harm, but whether the interest is one Congress intended to protect under the Lanham Act and whether the plaintiff's harm is proximately caused by the defendant's conduct.

Finally, the Court analyzed the facts before it and determined that Static Control had proper standing to bring its false advertising claim under '1125(a). First, it found that Static Control's injuries ' lost sales and damages to its business reputation ' are exactly the injuries contemplated by Congress under the Lanham Act because they are injuries to the commercial interests the Act is intended to protect. Second, it noted that, although the parties were not competitors, Static Control's injuries were proximately caused by Lexmark because its statements asserting that Static Control's business was illegal harmed Static Control's business reputation, an injury flowing directly from the audience's belief of the disparaging statements. Although the allegedly misleading statements made by Lexmark may have been intended to harm the business of its competing remanufacturers, Static Control alleged that it designed, manufactured, and sold microchips that were necessary for, and had no other purpose aside from, refurbishing Lexmark toner cartridges. The Court found that “any false advertising that reduced the remanufacturers' business necessarily injured Static Control as well[,]” and also that the causal link was not broken by the fact that Static Control was indirectly injured by the alleged actions of Lexmark. Because Static Control sufficiently alleged that its injuries were proximately caused by Lexmark's misrepresentations, the Court concluded standing was proper and Static Control was “ entitled to a chance to prove its case.”

Conclusion

In resolving the split of authority in favor of a clear, yet moderate, test for determining standing for false advertising actions under 15 U.S.C. '1125(a), the Supreme Court confirmed that a commercial injury is key to a claimant's right to bring a false advertising claim, and that the harm to an interest already protected under the Lanham Act is the only type of harm that can sustain an action for false advertising under the Act. The Court unquestionably declared that a party does not need to be a competitor of the defendant to bring a false advertising claim under the Lanham Act, confirming that the nature of the relationship between the defendant and the aggrieved party is secondary to the nature of the interest harmed by the defendant's misrepresentations.

Tiffany R. Brown is an associate in the Atlanta office of Kilpatrick Townsend & Stockton LLP's Intellectual Property Group, where she focuses her practice on trademark prosecution and litigation, and copyright and entertainment law.