On March 25th, the Supreme Court issued its long-awaited opinion regarding the test for standing in false advertising cases under Section 43(a)(1)(B) of the Lanham Act.Strangely enough, this was the Court’s first opinion in a Lanham Act false advertising case, perhaps because false advertising litigation only began to emerge in the 1980s, even though the statute itself is more than a half-century old.  In any event, the wait was well worth it as the Court scrapped a competing jumble of standing tests that had been adopted by the circuit courts in favor of a broad, statute-based test that confers standing on parties beyond those who are direct competitors.

The Lexmark Case

Lexmark manufactures and sells laser printers as well as toner cartridges for those printers.  While Lexmark designed its printers to work only with its own cartridges, a significant market grew up around so-called remanufacturers, who obtained used Lexmark cartridges, refurbished them, and resold them in competition with Lexmark’s cartridges.  To combat this practice, Lexmark introduced a “Prebate” program, whereby its customers obtained discounts on Lexmark cartridges if they agreed to return the used cartridges to Lexmark.  To enforce its Prebate agreement, Lexmark developed a microchip that disabled the cartridge after it ran out of toner.

Static Control was neither a cartridge manufacturer nor a remanufacturer.  Rather, it made components that allowed manufacturers to remake Lexmark cartridges.  To combat Lexmark’s microchip, Static Control developed its own microchip that mimicked the microchip in Lexmark’s Prebate cartridges.  Thus remanufacturers who purchased Static Control’s microchip were able to refurbish and resell used Prebate cartridges.  As Justice Scalia observed, “Lexmark did not take kindly to that development."2

Lexmark sued Static Control for violations of Copyright Act and the Digital Millennium Copyright Act.  Static Control counterclaimed for false advertising under the Lanham Act.  Lexmark’s alleged false advertising was two-fold: (1) advising its customers that the Prebate terms were legally binding; and (2) sending letters to remanufacturers?Static Control’s customers?advising them that it was illegal to use Static Control’s products to refurbish Lexmark’s Prebate cartridges.3

The District Court granted Lexmark’s motion to dismiss the Lanham Act claim on the ground that Static Control lacked “prudential standing” because the real targets of Lexmark’s false advertising, and the parties most directly injured, were the remanufacturers.4 The Sixth Circuit reversed, and adopted the Second Circuit’s false advertising standing test, which essentially asks whether the plaintiff has a “reasonable [commercial] interest” in being protected from the false advertising in question.  Under that standard, standing was clearly established.5

The Prior Standing Tests

The Supreme Court’s decision to accept certiorari was a welcome one, as no less than three vastly different tests for standing had been adopted. 

  1. The “Direct Competitor” Test

Three circuits ? the Seventh,6 Ninth7 and Tenth8? conferred standing only on direct competitors.  As the Supreme Court stated, while this standard provides a clear bright-line rule, it “categorically” prohibits suits by noncompetitors and “distort[s] the statutory language.”9 This approach was clearly at odds with the broad language of Section 43(a)(1), which permits lawsuits “by any person who believes he or she is or is likely to be damaged” by a violation of the statute.

  1. The “Multifactor” Test

Four circuits - the Third,10 Fifth,11 Eighth12 and Eleventh13 Circuits - applied a multifactor balancing test taken from the Supreme Court’s decision in an antitrust case.14 Among the five factors taken into account under this approach, the most important are (i) whether plaintiff’s alleged injury is the type the Lanham Act was intended to protect; (ii) the directness or indirectness of the alleged injury; and (iii) the proximity of the plaintiff to the allegedly wrongful conduct.  The Supreme Court stated that this approach was a “commendable effort to give content to an otherwise nebulous inquiry,” but concluded that the approach “can yield unpredictable and at times arbitrary results.”15

  1. The “Reasonable Interest” Test

The Second Circuit ? which is the birthplace of much of the body of law relating to false advertising ? had long held that false advertising standing is available to any commercial plaintiff who can show that it has “a reasonable interest to be protected against the alleged false advertising.”16  The Fourth Circuit also adopted this test, although in dicta.17 The Sixth Circuit adopted this test in its Lexmark decision, holding that Static Control had standing under § 43(a) because its reputation and sales were harmed by Lexmark’s allegedly false statements to remanufacturers.18 The Supreme Court criticized this test because “it lends itself to widely divergent application” and can be read as requiring “only the bare minimum of Article III [constitutional] standing.”19

The Supreme Court’s Decision

The Court presented an extended, and somewhat academic, discussion of the doctrines of “constitutional standing” (the “case or controversy” requirement of Article III of the Constitution) and “prudential standing” (under which courts may decline to hear cases even though the “case or controversy” requirement is satisfied).  Lexmark had argued that, under a “prudential standing” analysis, Static Control lacked standing to pursue a false advertising claim.  But the Supreme Court ruled that the “prudential standing” analysis is inapplicable to cases where, as with the Lanham Act, the statute itself identifies those who may sue.  Thus the only question in the case was whether the cause of action created by Section 1125(a) of the Lanham Act extended to Static Control.20

Accordingly, the Court had to decide whether Static Control fell within the class of persons covered by the broad language of Section 43(a)(1)?which creates a cause of action for “any person who believes that he or she is likely to be damaged” by the defendant’s false advertising. To address that question, the Court stated that Static Control must satisfy two criteria: (1) the “zone of interests” test and (2) the “proximate cause” test.

  1. Zone of Interests

This element requires only that the plaintiff’s interests “fall within the zone of interests protected by the law invoked.”21 As the Court noted, this test is not “especially demanding.”22  The Court examined the legislative history of the Lanham Act and concluded that Congress intended to protect “persons engaged in commerce” against unfair competition.23  While this clearly excludes consumers from invoking the Lanham Act (a unanimous conclusion of every circuit court that has considered the question), the Court stated that it would also exclude a commercial entity whose complaint was that it was misled into purchasing shoddy goods.  But otherwise, any plaintiff who can allege injury to “a commercial interest in reputation or sales” satisfies this test.24

  1. Proximate Cause

This element requires that the plaintiff’s injuries be “proximately caused” by the violation of the statute, i.e., whether the alleged injury “has a sufficiently close connection to the conduct the statute prohibits.”25 This means that:

[A] plaintiff suing under §1125(a) ordinarily must show economic or reputational injury flowing directly from the deception wrought by the defendant’s advertising; and that that occurs when deception of consumers causes them to withhold trade from the plaintiff.26

Applying these two criteria to Static Control’s complaint, the Court first found that Static Control readily satisfied the “zone of interests” requirement, as it was an entity engaged in commerce whose business was allegedly damaged by Lexmark’s advertising.27 As to the “proximate cause” requirement, the Court recognized that this was not a “classic” false advertising case where the parties were direct competitors.  However:

[A]lthough diversion of sales to a direct competitor may be the paradigmatic direct injury from false advertising, it is not the only type of injury cognizable under §1125(a).28

Here, Static Control satisfied the “proximate cause” test for two reasons.  First, its reputation was directly harmed by Lexmark’s claim that Static Control’s business was illegal:

[W]hen a party claims reputational injury from disparagement, competition is not required for proximate cause; and that is true even if the defendant’s aim was to harm its immediate competitors, and the plaintiff merely suffered collateral damage.29

In addition, because its microchips were sold for the sole purpose of being used by remanufacturers, who used them to refurbish Lexmark cartridges, if Lexmark’s false advertising diminished the remanufacturers’ business, it “necessarily” injured Static Control as well.30  While this injury required an “intervening link of injury to the remanufacturers,” Static Control’s claim was that the remanufacturers’ loss of sales of refurbished cartridges was accompanied by a corresponding decline in their purchase of microchips from Static Control.31

Why it matters:  The Court ended its opinion by cautioning that it was merely holding that Static Control had “alleged an adequate basis to proceed” but that, to obtain relief, it would have to present “evidence of injury proximately caused by Lexmark’s alleged misrepresentations.”32 Despite this caveat, the Court’s decision serves as a ringing endorsement of the broad test for standing in false advertising cases exemplified by the Second Circuit’s “reasonable interest” standard.

The attempt to limit Lanham Act standing to direct competitors was always a cramped construction of the broad language of Section 43(a).  Now, the only requirement is that the plaintiff be able to articulate (and prove) a basis on which it can show that the false advertising in question has resulted in some discernible injury to its reputation or sales.  This is clearly the appropriate result, and should ensure that commercial plaintiffs who are impacted in any meaningful way by false advertising can seek redress under the Lanham Act.