Lexmark International, Inc. v. Static Control Components, Inc., ___ U.S. ____, 2014 WL 1168967 (Mar. 25, 2014).
In the most recent decision in the over-a-decade long battle between Lexmark and Static Control, the Supreme Court announced that Static Control had standing to sue Lexmark for false advertising under the Lanham Act. To reach its decision the Court resolved the circuit split regarding the appropriate analytical framework for determining standing for false advertising claims, directing lower courts to apply the “zone-of-interests” test.
In an effort to control the market for replacement toner cartridges for its laser printers, Lexmark developed a “Prebate” program whereby it included with its toner cartridges an agreement, known as “skrinkwrap licensing,” pursuant to which buyers of the cartridges consented to returning to Lexmark the cartridge when empty in exchange for a 20% discount on a refill cartridge. To ensure compliance with the agreement, Lexmark included a microchip in each cartridge preventing the cartridge from being refilled, thus requiring the buyer to buy a new cartridge directly from Lexmark.
Although Lexmark is the only manufacturer of cartridges compatible with its printers, many businesses, called “remanufacturers,” refurbish Lexmark cartridges and sell them in competition with Lexmark. Static Control, a business specializing in making and selling component parts for the refurbishing of Lexmark cartridges, developed a microchip that mimicked Lexmark’s microchip, thus allowing remanufacturers to continue to refurbish the cartridges despite Lexmark’s microchips.
In 2002, Lexmark sued Static Control for copyright infringement and violation of the Digital Millennium Copyright. Static control counterclaimed for false advertising, alleging that Lexmark’s Prebate program purposefully misled consumers into believing that they were legally bound to return their toner cartridges to Lexmark and that Lexmark sent letters to remanufacturers falsely advising those companies that it was illegal to use Static Control’s products to refurbish Lexmark cartridges.
Reasoning that Static Control’s alleged injury was too remote, the district court held that Static Control lacked standing to assert a false advertising claim and accordingly granted Lexmark’s motion to dismiss. The Sixth Circuit reversed, applying the Second Circuit’s “reasonable-interest” test to hold that Static Control had demonstrated standing because its allegations showed that it had a cognizable interest in its business reputation and sales to remanufacturers and that those interests were harmed by Lexmark’s actions.
On appeal, the Supreme Court agreed that Static Control had standing, but held that the zone-of-interests test is the appropriate tool for determining whether a party has standing to bring a false advertising claim. According to the Court, to demonstrate standing, a party must allege an injury to a commercial interest (1) in reputation or sales (2) that is proximately caused by violations of the statute, i.e., that the “harm alleged has a sufficiently close connection to the conduct that the statute prohibits.”
The Court expressly rejected other proffered tests, explaining that the Conte Bros. balancing test, crafted by the Third Circuit and subsequently adopted by the Fifth, Eighth, and Eleventh Circuits, was “slightly off the mark” because it treated the injury and proximate cause requirements as factors to be balanced and also improperly required plaintiffs to quantify their losses with sufficient certainty to recover damages, despite the fact that plaintiffs might be entitled to injunctions or disgorgement of profits even if they are not entitled to damages. The Court likewise rejected a categorical rule that would allow only direct competitors to sue for false advertising, holding that such a rule would provide a bright line “at the expense of distorting the statutory language.” Finally, the Court explained that the “reasonable interest” test employed by the Sixth and Second Circuits also was inadequate because it was vague and “len[t] itself to widely divergent application.”
Having articulated the relevant principles to be applied to Static Control’s claim, the Court held that Static Control’s alleged injuries of “lost sales and damage to its business reputation” were “precisely the sorts of commercial interests the Act protects.” Further, the Court found that because Static Control alleged that Lexmark had disparaged its business and products and that it designed, manufactured, and sold microchips that were necessary for, and had no other use than, refurbishing Lexmark toner cartridges, it had sufficiently alleged proximate cause.