In a rare unanimous decision, the United States Supreme Court resolved a circuit court split over the proper framework to determine standing to bring false advertising claims under the Lanham Act.

Lexmark International, Inc., a notable manufacturer of laser printers, also sells the only style of toner cartridges that work with those printers. To restrict third parties from refurbishing used Lexmark toner cartridges to sell in competition with Lexmark, Lexmark developed a microchip to disable their cartridges after the toner runs out.  Lexmark intended to require customers to return cartridges to Lexmark for replacement of the toner and microchip. To that end, Lexmark introduced a “Prebate” program on each of its toner cartridge packages, which advised the consumer that by opening the package, the customer consented to return the empty toner cartridge to Lexmark in exchange for a 20% discount.

Static Control Components, Inc. replicated the Lexmark microchip, which it sold to third parties to allow the refill and resale of used Lexmark cartridges. In response, Lexmark sent letters to most of the companies in the toner cartridge remanufacturing business, incorrectly advising them that it was illegal to use Static Control’s products to refurbish Lexmark’s toner cartridges. Lexmark also sued Static Control, alleging that Static Control’s microchips violated the Copyright Act, 17 U.S.C. §101 and the Digital Millennium Copyright Act, 17 U.S.C. §1201. The copyrights in question related to Lexmark’s software contained in the toner cartridge microchips.

Static Control filed a counterclaim alleging that Lexmark engaged in false advertising under § 43(a) of the Lanham Act. Static Control claimed that the Lexmark “Prebate” program purposefully misled consumers to believe that they were legally bound by the terms stated on the Lexmark package and, therefore, were required by law to return Lexmark’s toner cartridges to Lexmark. Static Control further asserted that the letters Lexmark sent to the remanufacturing businesses falsely advised that it was illegal to use Static Control’s products to refurbish Lexmark’s toner cartridges. Static Control contended that Lexmark materially misrepresented “the nature, characteristics, and qualities” of Static Control’s and Lexmark’s products. Static Control further maintained that Lexmark’s misrepresentations injured Static Control by diverting sales and harming its business reputation.

The U.S. District Court for the Eastern District of Kentucky granted Lexmark’s motion to dismiss Static Control’s false advertising claim, holding that Static Control lacked “prudential standing” to bring the claim, relying on a multifactor balancing test set forth in Associated General Contractors of America, Inc. v. Carpenters, 459 U.S.519 (1983). The District Court found that there were “more direct plaintiffs in the form of remanufacturers of Lexmark’s cartridges” and that Static Control’s injury was “remote” because it was a mere byproduct of the “supposed manipulation of consumers’ relationships with remanufacturers.” The District Court further held that Lexmark’s “alleged intent [was] to dry up spent cartridge supplies at the remanufacturing level, rather than at the [Static Control] supply level, making the remanufacturers Lexmark’s intended target.”

The U.S. Court of Appeals for the Sixth Circuit reversed the dismissal of Static Control’s claim. In doing so, the Sixth Circuit identified three competing approaches to determine whether a plaintiff has standing to sue for false advertising under the Lanham Act: (1) the multifactor assessment outlined in Associated General Contractors, observed by the Third, Fifth, Eighth and Eleventh Circuits; (2) the categorical test, which only permitted Lanham Act suits by an actual competitor, followed by the Seventh, Ninth and Tenth Circuits; and (3) the “reasonable interest approach,” recognized only by the Second Circuit, under which a Lanham Act plaintiff had standing if the claimant could demonstrate a reasonable interest to be protected against false advertising, with a reasonable basis to believe that the interest was likely to be damaged by the false advertising. The Sixth Circuit applied the Second Circuit’s reasonable-interest test and concluded that Static Control had standing because it “alleged a cognizable interest in its business reputation and sales to remanufacturers and sufficiently alleged that th[o]se interests were harmed by Lexmark’s statements to the remanufacturers that Static Control was engaging in illegal conduct.”

The United States Supreme Court granted certiorari to decide “the appropriate analytical framework for determining a party’s standing to maintain an action for false advertising under the Lanham Act.” The Supreme Court rejected all three prior tests developed and applied by the circuit courts in favor of a two-prong “zone-ofinterests” inquiry grounded in principles that, according to the Court, are traditionally applied to statutorily created causes of action.

The Supreme Court relied on the well-settled rule of law that a statutory cause of action is presumed to extend only to a plaintiff who falls within the “zone of interests” protected by the statute invoked, and whose injury is proximately caused by a violation of the statute. The Court highlighted that the Lanham Act has an express purpose to protect persons engaged in commerce from unfair competition, defined in common law as injuries to business reputation and present or future sales. To come within the “zone-of-interests” in a § 43(a) false advertising claim, a plaintiff must allege an injury to a commercial interest in business reputation or sales. A plaintiff suing for false advertising must also show that the reputational or economic injury “flows directly from the deception wrought by the defendant’s advertising,” which occurs when the “deception of consumers causes them to withhold trade from the plaintiff.” With these principles in mind, the Court found that Static Control came within the class of plaintiffs authorized to sue under § 43(a) because its alleged injuries of lost sales and damage to business reputation fell within the “zone of interests” protected by the Lanham Act. The Court concluded that Static Control should have a chance to prove its case of false advertising against Lexmark in the District Court.

The Supreme Court has clearly delineated a two-prong pleading requirement for a plaintiff to adequately allege a cause of action for false advertising under § 43(a) of the Lanham Act. The plaintiff must allege (and eventually prove): (1) an injury to a commercial interest in sales or business reputation that is (2) proximately caused by the defendant’s misrepresentations. It is no longer necessary for the plaintiff to prove that it is a direct competitor of the defendant to be able to bring a false advertising case. The Lexmark decision clarifies an important area of intellectual property law that has been inconsistently handled by the federal courts since the introduction of the Lanham Act in 1946. The Lexmark decision also addresses the scope of false advertising liability, which is particularly important to keep in mind when using print, internet and social media advertising.

Source: Lexmark International, Inc. v. Static Control Components, Inc., U.S. Supreme Court, No. 12-873, March 25, 2014